Select Committee on Public Accounts Fifth Report


FIFTH REPORT

The Committee of Public Accounts has agreed to the following Report:—

THE DRAFT SOCIAL SECURITY (INHERITED SERPS) REGULATIONS 2001[1]

INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

1. In July 2000 the Committee of Public Accounts reported on the Department of Social Security's failure from 1986 to advertise and provide correct information to the public on important changes to the State Earnings Related Pension Scheme (SERPS), which reduced the pension rights of widows and widowers from April 2000. As a result of this failure, many thousands of people are likely to have made decisions about their future pension provision based on an incorrect understanding about the pension that would be inherited by their spouse after their own death.[2]

2. The Committee also examined how the measures announced by the Government in March 2000 would provide adequate redress to those who had been misled. These measures were introduced to delay the change in the law further until October 2002, and to set up a scheme to preserve the right to full inheritance of SERPS for life, for those who could show that they had been misled. Further details of this Inherited SERPS Scheme are at Annex 1. We were concerned that many of those affected would not hear about the scheme, or would find it difficult to understand. We also expected the Department to ensure that decisions would be taken without excess bureaucracy, while ensuring that risks of fraudulent claims were adequately managed; and that efforts to contain the administrative cost of the scheme did not lead to an unduly early cut-off date, at the expense of equity and fairness to those misled.[3]

3. In response to representations from Members of Parliament, Select Committees, the Social Security Advisory Committee and others, the Secretary of State for Social Security announced new proposals for inherited SERPS in November 2000. These aim to give full protection to existing pensioners; to give younger people adequate notice of the change to the SERPS rule; and to provide transitional arrangements for those approaching retirement age. People who have evidence that they were misinformed by the Department would have access to the usual departmental procedures for dealing with cases of maladministration.[4]

4. When he announced the new proposals, the Secretary of State stated that he would consult on the draft regulations in the usual way. The Department wrote to the Committee of Public Accounts, among others, on 20 December 2000 seeking comments. This report therefore sets out the Committee's views on how far the draft Social Security (Inherited SERPS) Regulations 2001 address issues we raised in our previous report, and whether there are any new areas of concern.[5] We examined:

  • whether the proposals are equitable;

  • whether costings of the proposals are soundly based;

  • whether the Department will adequately publicise the changes; and

  • the management of the risks of implementation.

5. The Committee's general conclusions and recommendations are that:

  • the proposals should address the concerns expressed by the Committee that many of those affected would not hear about the Inherited SERPS Scheme or would find it difficult to understand, and that those who had already retired would not be able to make alternative arrangements; however

  • the Department will need to ensure fair and equitable treatment for those seeking redress under the compensation arrangements; and

  • we expect the Department to ensure that the proposals are widely publicised and to pay close attention to the successful implementation of the changes.

6. Our specific conclusions and recommendations are as follows:

On whether the proposals are equitable

      (i)  We welcome the proposals, in that they should address our earlier concerns that many of those affected would not hear about the Inherited SERPS Scheme and would find it difficult to understand, and that those who had already retired would not have been able to make alternative arrangements (paragraph 16).

      (ii)  The proposals also provide some comfort to those approaching state pension age, who are likely to have less opportunity to make adjustments to their existing pension arrangements the closer they are to retirement. Nevertheless the success of the proposals will depend on the extent to which those within the taper are in practice able to secure appropriate top-up provision should they so wish, and without incurring disproportionate costs. For example, will someone who is four years away from retirement be able to obtain cover through life assurance to provide a guaranteed sum on death, equivalent to 20 per cent of their pension, and at what cost? We would therefore expect the Department to have assessed the likely impact on those affected of the rates of inheritance proposed for each age banding (paragraph 17).

      (iii)  We recognise that the proposals, in providing automatic protection in full or part, should also go some way in addressing the risks of both low take-up and fraud or abuse which appeared inherent in the earlier scheme. However the draft regulations do not provide details of the proposed compensation arrangements, and it will be essential for the Department to set clear criteria for eligibility for compensation. These should take full account of the differing ways in which people may have made decisions on the strength of incorrect information about their future entitlement (recognising that for some people the decision will have been to take no action), and also the costs for individuals in remedying their position. We also expect the Department to continue to recognise that the onus of proof rests with them to demonstrate that an individual was not misled by their advice (paragraph 18).

      (iv)  The Department accepted our previous recommendation on the importance of people being able to claim redress even after most claims have been received. We remain convinced that, to achieve equity and fairness for all those who may suffer loss as a result of misleading advice from the Department, people are not prevented from seeking compensation by an arbitrary cut-off date (paragraph 19).

On whether the costing of the proposals is soundly based

      (v)  We recognise that the expected costs of providing redress will have increased as a result of providing automatic additional protection to those who will have reached or are approaching retirement age in October 2002. This increase will have been offset by excluding some people who may have gained entitlement to 100 per cent inheritance under the terms of the Inherited SERPS Scheme but will no longer be eligible for such protection. We expect the Department to have made a robust assessment of costs, including the likely costs of compensation, based on actuarial advice. We also look forward to seeing the results of their analysis of the costs of different options in due course (paragraph 22).

On whether the Department will adequately publicise the changes

      (vi)  The publicity requirements for the new proposals differ in some respects from those we identified for the earlier scheme because of the automatic protection now afforded to those who will have reached state pension age by October 2002. The main groups who now need to be reached are those who are not fully protected by the new proposals and who may be eligible for compensation, and those of working age who are unaware of the changes (paragraph 27).

      (vii)  We welcome the steps already taken and the measures proposed to give people better information in future. The new rules are likely to have a profound effect on many people's future financial security and it is therefore essential that all those affected are informed quickly so that they may make alternative plans. We remain concerned whether the measures proposed will be sufficient to achieve this. We expect the Department's detailed plans to take full account of the results of their earlier research on the likely success and costs of writing to all those affected. The Department should also consider seeking the help of voluntary agencies, Inland Revenue and/or employers in distributing information about the new arrangements (paragraph 28).

      (viii)  The Department are doubtful about their capacity to keep up to date records of addresses for SERPS contributors. However, it appears to us that the success of using annual pensions statements to give people more information about their pensions is likely to depend on achieving significant improvements in the accuracy of their records. We recommend that the Department take positive action to assess what measures are needed to enable them to communicate information reliably and effectively to SERPS contributors (paragraph 29).

On managing the risks of implementation

      (ix)  In implementing the new proposals the Department will need to manage the risks involved carefully and should pay close attention to the recently published National Audit Office Report on Supporting Innovation: Risk Management in Government Departments.[6] That report recommends that Departments should have in place a corporate and systematic process for evaluating and addressing the impact of risks in a cost effective way and have staff with the appropriate skills to identify and assess the potential for risks to arise. The Report set out six essential requirements that need to be in place if risk management is to be effective:
  • risk management policies and management should be clearly communicated to all staff;

  • senior management need to support and promote risk management;

  • the department's culture should support well thought through risk taking and innovation;

  • risk management should be embedded in management processes;

  • the management of risk should be closely linked to the achievement of objectives;

  • risks associated with working with other organisations should be assessed and managed (paragraph 33).

      (x)  Successful implementation of the new proposals will depend in part on changes to NIRS2 system procedures and software. Given the long history of problems with NIRS2, we consider it essential that the Department works closely with the Inland Revenue and Accenture to ensure that all necessary changes are successfully delivered in good time before the new proposals come into effect in October 2002 (paragraph 34).

ARE THE PROPOSALS EQUITABLE?

7. In 1986 legislation was introduced to halve the amount of State Earnings-Related Pension that could be inherited by a surviving spouse. The change was due to come into force in April 2000. However between 1986 and 1999 the Department of Social Security did not adequately publicise or provide the public with correct information on the change. As a result, many thousands of people are likely to have made decisions about their future pension provision based on an incorrect understanding about the pension that would be inherited by their spouse after their own death.[7]

8. In March 2000, the Secretary of State for Social Security announced that the change in the law would be deferred until October 2002, and that an Inherited SERPS Scheme would be set up to preserve the right to full inheritance of SERPS for those who could show that they had been misled.[8] Following consultations on the scheme, the Secretary of State for Social Security announced in November 2000 new proposals for inherited SERPS.[9]

9. The proposals introduce new rules that will apply from 6 October 2002 on the amount of SERPS that a surviving spouse may inherit on the death of their spouse. The draft regulations propose that:

  • nobody who is widowed before 6 October 2002 will be affected by the new rule. They will continue to inherit up to 100 per cent of their deceased spouse's SERPS;

  • if someone is due to reach state pension age before 6 October 2002, when they die their surviving spouse can inherit up to 100 per cent of their SERPS;

  • if someone is due to reach state pension age after 5 October 2002 but before 6 October 2010, when they die their surviving spouse will inherit a maximum of between 90 per cent and 60 per cent of their SERPS. The exact amount will depend on when in this period the deceased person was due to reach state pension age, as set out in Figure 1 below;

  • if someone is due to reach state pension age on or after 6 October 2010, when they die their surviving spouse will inherit up to 50 per cent of their SERPS.[10]



Figure 1 : The transitional arrangements for inheritance of SERPS for those  approaching state pension age

Max % SERPS entitlement for surviving spouse (1)
Date when contributor reaches state pension age
Date of birth of contributor:
  
  
Men
Women
100%
5.10.2002 or earlier
5.10.1937 or earlier
5.10.1942 or earlier
90%
6.10.2002-5.10.04
6.10.1937-5.10.39
6.10.1942-5.10.44
80%
6.10.2004-5.10.06
6.10.1939-5.10.41
6.10.1944-4.10.46
70%
6.10.2006-5.10.08
6.10.1941-5.10.43
6.10.1946-5.10.48
60%
6.10.2008-5.10.10
6.10.1943-5.10.45
6.10.1948-5.07.50
50%
6.10.2010 or later
6.10.1945 or later
6.07.1950 or later

Notes:

      (i)  1. These percentages are the maximum that a surviving spouse can inherit because when adding together a person's own SERPS entitlement and inherited amount of SERPS, the sum cannot be more than the prescribed maximum payable to a surviving spouse.

      (ii)  2. The phasing-in period overlaps at the end with the start of the taper that leads to equalisation of state pension age. This means that the 60 per cent band will be the widowers of those women who are 60 between 6 October 2008 and 5 July 2010, rather than 5 October 2010.

Source: Appendix 1, page xv


10. We have considered the equity and fairness of the proposals against recommendations we made in our previous report, on:

  • who would be eligible in principle for the Inherited SERPS Scheme; and

  • how the Department would ensure that all those eligible would claim whilst preventing fraud and abuse.

11. In our earlier report we pointed out that, when the change on the halving of inherited SERPS was first decided, Parliament had felt that 14 years was an appropriate period to allow for beneficiaries to make adjustment. While recognising that the Department planned further research, we emphasised the importance of knowing the likely take-up and cost of all options available, including deferring the change indefinitely for those who were either already retired or close to retirement. We also stated that the Department should think again about the fairness of excluding from the scheme those who were never aware of the change and therefore took no action.[11]

12. The Secretary of State for Social Security told Parliament that the new proposals were designed to give adequate notice of the change to SERPS rules, as no one would be affected by the policy change until 6 October 2002. They also safeguard the position of those over state pension age who cannot do anything to restore their position, by providing full protection for all pensioners; and they provide transitional arrangements for those approaching state pension age, with changes being phased in on a sliding scale for those within ten years of state pension age to allow them to make alternative arrangements. The package is expected to provide protection for over 1.5 million widows and widowers over the next 10 years.[12]

13. Given the Department's failure to inform SERPS contributors about the original change and the difficulty people would have in proving that they had been misled, we welcomed the Department's acceptance that, in devising the Inherited SERPS Scheme, the onus was on them to prove that claimants were not misinformed. We were however concerned that the evidence requirements created a risk that the dishonest might benefit, while the honest might miss out. And we suggested that the Department should resolve the extent and nature of evidence that applicants would need to provide to support their claim that they were misled and should consider the way in which they satisfied themselves that claims were acceptable. We also concluded that, in the interests of equity and fairness, people would need to have a way of continuing to claim, even when the bulk of claims had been received.[13]

14. In abandoning the Inherited SERPS Scheme announced in March 2000, the Secretary of State told Parliament that he had become increasingly convinced that such a scheme would not work in the way intended and would not provide a fair and just solution to the problems. The Department could not be sure that it would reach all those who had been misinformed, particularly the very elderly and vulnerable, and it would be very difficult to safeguard the scheme against fraud and abuse.[14] Under the new proposals those who are eligible for full protection or the transitional arrangements will not have to fill in a claim form as the Department will calculate their spouse's benefit automatically.[15]

15. The Secretary of State also announced that people who had acted on wrong advice from the Department and whose position was not resolved by the new rules, would be able to claim compensation through the Department's normal procedures for maladministration.[16] The Department expected these to be a very small number of people.[17] The draft regulations modify the primary legislation in the Social Security Contributions and Benefits Act 1992 and therefore do not cover the detailed eligibility criteria for such compensation, the terms of payment and the timescales in which claims will be accepted.[18]

Conclusions

16. The Committee welcomes the proposals, in that they should address its earlier concerns that many of those affected would not hear about the Inherited SERPS Scheme and would find it difficult to understand, and that those who had already retired would not have been able to make alternative arrangements.

17. The proposals also provide some comfort to those approaching state pension age, who are likely to have less opportunity to make adjustments to their existing pension arrangements the closer they are to retirement. Nevertheless the success of the proposals will depend on the extent to which those within the taper are, in practice, able to secure appropriate top-up provision should they so wish, and without incurring disproportionate costs. For example, will someone who is four years away from retirement be able to obtain cover through life assurance to provide a guaranteed sum on death, equivalent to 20 per cent of their pension, and at what cost? We would therefore expect the Department to have assessed the likely impact on those affected of the rates of inheritance proposed for each age banding.

18. We recognise that the proposals, in providing automatic protection in full or part, should also go some way in addressing the risks of both low take-up and fraud or abuse which appeared inherent in the earlier scheme. However the draft regulations do not provide details of the proposed compensation arrangements, and it will be essential for the Department to set clear criteria for eligibility for compensation. These should take full account of the differing ways in which people may have made decisions on the strength of incorrect information about their future entitlement (recognising that for some people the decision will have been to take no action), and also the costs for individuals in remedying their position. We also expect the Department to continue to recognise that the onus of proof rests with them to demonstrate that an individual was not misled by their advice.

19. The Department accepted our previous recommendation on the importance of people being able to claim redress even after most claims have been received. We remain convinced that, to achieve equity and fairness for all those who may suffer loss as a result of misleading advice from the Department, people are not prevented from seeking compensation by an arbitrary cut-off date.

IS THE COSTING OF THE PROPOSALS SOUNDLY BASED?

20. The Department estimated that the Inherited SERPS Scheme (covering a 2½ year deferral period and a preserved rights scheme) would cost £8.2 billion. But this was a planning assumption based on successful claims covering 30 per cent of SERPS expenditure, or five million people, and they expected to have a better view on costs after conducting more research. We were therefore concerned that Parliament would be asked to approve a scheme without knowing the likely take up or cost of all the options available.[19]

21. The Department have estimated the cost of the new proposals to be £12 billion to 2050[20]— some £4 billion higher than the costs of the Inherited SERPS Scheme but lower than the Department's estimate of £13.4 billion for a 14-year deferral of the policy.[21] The assumptions made in the costings, and the costs of alternative options, such as varying the taper arrangements, have not yet been published. In their response to our earlier report the Department did however agree that this Committee and Parliament would be provided with all available information before being asked to approve the scheme.[22]

Conclusions

22. We recognise that the expected costs of providing redress will have increased as a result of providing automatic additional protection to those who will have reached or are approaching retirement age in October 2002. This increase will have been offset by excluding some people who may have gained entitlement to 100 per cent inheritance under the terms of the Inherited SERPS Scheme but will no longer be eligible for such protection. We expect the Department to have made a robust assessment of costs, including the likely costs of compensation, based on actuarial advice. We also look forward to seeing the results of their analysis of the costs of different options in due course.

HOW WILL THE DEPARTMENT ENSURE THAT THE CHANGES RECEIVE ADEQUATE PUBLICITY?

23. In our earlier report we concluded that for the Inherited SERPS Scheme to be successful, the 20 million SERPS contributors would need to know about it, fully understand the issues involved, and have simple claim forms. In reaching this view we noted that work by the Financial Services Authority showed that only a very small percentage of the public actually understood even the basics of pensions. We were also very concerned that the Department's records were so flawed that they could not communicate with people who had contributed to SERPS. People were not obliged to notify the Department of changes of address, and the Department estimated that one third of the details they had were incorrect.[23]

24. We believed that, before ruling out writing to everyone eligible, the Department should obtain better information on the proportion of people affected and to whose attention the issue would be properly drawn and the costs, if :

  • letters were sent to all addresses held on record by the Department;

  • an advertising campaign was launched; or

  • both options were pursued.[24]

The Department promised to carry out research on the best way of reaching people, including these options.[25]

25. In announcing the new proposals the Secretary of State proposed to:

  • write to all those people who had already been in touch with the Department to inform them about the changes;

  • give widespread publicity about the changes to all those who could be affected;

  • use the annual pension statements due from the end of 2001 to give people more information about their pensions and set out individuals' pension forecasts.[26]

26. The draft regulations provided to us do not comment on the results of the Department's research or provide details about the methods the Department intend to use to publicise the changes to SERPS inheritance or the availability of compensation.

Conclusions

27. The publicity requirements for the new proposals differ in some respects from those we identified for the earlier scheme because of the automatic protection now afforded to those who will have reached state pension age by October 2002. The main groups who now need to be reached are those who are not fully protected by the new proposals and who may be eligible for compensation, and those of working age who are unaware of the changes.

28. We welcome the steps already taken and the measures proposed to give people better information in future. The new rules are likely to have a profound effect on many people's future financial security and it is therefore essential that all those affected are informed quickly so that they may make alternative plans. We remain concerned whether the measures proposed will be sufficient to achieve this. We expect the Department's detailed plans to take full account of the results of their earlier research on the likely success and costs of writing to all those affected. The Department should also consider seeking the help of voluntary agencies, Inland Revenue and/or employers in distributing information about the new arrangements.

29. The Department are doubtful about their capacity to keep up to date records of addresses for SERPS contributors. However, it appears to us that the success of using annual pensions statements to give people more information about their pensions is likely to depend on achieving significant improvements in the accuracy of their records. We recommend that the Department take positive action to assess what measures are needed to enable them to communicate information reliably and effectively to SERPS contributors.

MANAGING THE RISKS OF IMPLEMENTATION

30. We recognised in our earlier report that the Department were developing an overall risk management strategy as a response to the inadequate attention given to identifying and managing the risks involved in the change in arrangements for inherited SERPS. We looked to the Department to ensure that in designing a workable scheme the risks involved in the Inherited SERPS Scheme could be managed.[27]

31. As outlined above,[28] the new proposals bring particular risks in managing the compensation arrangements and in ensuring that the new arrangements are adequately publicised. In addition, NIRS2, the Inland Revenue's National Insurance Recording System, plays a key part in the administration of pensions and successful management of system changes will be essential in implementing the new proposals. The system will need to be updated so that it can correctly calculate individuals' SERPS entitlements, including the different rates of inheritance that apply under the transitional arrangements. The system will also need to be capable of issuing each year the individual pension statements that form an important part of the Department's publicity for the changes.[29]

32. We have examined on several occasions previously the problems experienced in implementing the new National Insurance Recording System. In our report in June 1999, for example, we expressed particular concern about delays to the implementation of NIRS2, about the impact of these delays on the citizen, and about the time and resources it would take to clear backlogs of work.[30] In our report in August 2000 on the National Insurance Fund we recognised the considerable progress in implementing NIRS2, but were concerned that the system would not reach 'steady state' until April 2001.[31]

Conclusions

33. In implementing the new proposals the Department will need to manage the risks involved carefully and should pay close attention to the recently published National Audit Office Report on Supporting Innovation: Risk Management in Government Departments.[32] That report recommends that Departments should have in place a corporate and systematic process for evaluating and addressing the impact of risks in a cost effective way and have staff with the appropriate skills to identify and assess the potential for risks to arise. The Report set out six essential requirements that need to be in place if risk management is to be effective:

  • risk management policies and management should be clearly communicated to all staff;

  • senior management need to support and promote risk management;

  • the department's culture should support well thought through risk taking and innovation;

  • risk management should be embedded in management processes;

  • the management of risk should be closely linked to the achievement of objectives;

  • risks associated with working with other organisations should be assessed and managed.[33]

34. Successful implementation of the new proposals will depend in part on changes to NIRS2 system procedures and software. Given the long history of problems with NIRS2, we consider it essential that the Department works closely with the Inland Revenue and Accenture to ensure that all necessary changes are successfully delivered in good time before the new proposals come into effect in October 2002.


1  It is understood that these draft Regulations are intended to be laid before Parliament on or about 26 February 2001 Back

2  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), paras 1, 5 Back

3  ibid, paras 2, 5 Back

4  House of Commons Official Report, 29 Nov 2000, Cols 966-967 Back

5  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)) Back

6  C&AG's Report (HC 864 (1999-2000)) Back

7  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), para 1 Back

8  ibid, para 2 Back

9  House Of Commons Official Report, 29 Nov 2000, Col 966 Back

10  Appendix 1, page xv Back

11  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), paras 52, 59 Back

12  Appendix 1, page xv Back

13  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), paras 53-54, 58 Back

14  House of Commons Official Report, 29 Nov 2000, Col 966 Back

15  Letter from the Secretary of State for Social Security to Members of Parliament, 29 Nov 2000 (not reported) Back

16  House of Commons Official Report, 29 Nov 2000, Col 967  Back

17  Appendix 2, page xvii Back

18  Appendix 1, page xv Back

19  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), Figure 1 and para 52 Back

20  Appendix 1, page xv Back

21  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), Figure 1 Back

22  Cm 4901 Treasury Minute on 34th Report of Session 1999-2000, para 7 Back

23  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), paras 48-49, 55-56 Back

24  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), para 57 Back

25  Cm 4901 Treasury Minute on 34th Report of Session 1999-2000, para 12 Back

26  House of Commons Official Report, 29 Nov 2000, Col 967 and Appendix 2, page xvii Back

27  34th Report of the Committee of Public Accounts (HC 401 (1999-2000)), para 30 Back

28  Evidence, paras 18, 28-29  Back

29  C&AG's Report (HC 320 (1999-2000)), paras 1.30-1.32 Back

30  22nd Report of the Committee of Public Accounts (HC 182 (1998-1999)), paras 8-9  Back

31  31st Report of the Committee of Public Accounts (HC 350 (1999-2000)), para 24 Back

32  C&AG's Report (HC 864 (1999-2000)) Back

33  ibid, paras 12, 1.2, 3.2  Back


 
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