Pensioners barred from inflation protection worth more than £20,000 under the new state pension have won a victory over the Government after the Parliamentary Ombudsman found it guilty of maladministration.
The Parliamentary Ombudsman found the Department for Work and Pensions (DWP) was ‘not open and accountable’ about the detrimental impact the ending of indexation for people with Guaranteed Minimum Pensions (GMPs) would have.
The cover-up means around 50,000 pensioners with GMPs will be worse off as a result of the introduction of the new state pension, many of whom are unaware they are affected.
In 2016 the Government said it will continue to price protect the GMPs of members of public sector contracted-out pension schemes. But private sector pensioners have been left in the lurch.
The DWP has been ordered to report back to the Parliamentary Ombudsman on how it is going to make sure people can find out if they are negatively affected. But the decision stops short of ordering compensation for the pensioners who have missed out.
The case centres around the abolition of ‘contracting-out’, the system introduced in 1978 that saw employers and employees in occupational pension schemes pay a reduced rate of National Insurance. In return, employees gave up their entitlement to additional state pension. Instead, schemes had to provide a minimum level of pension to replace this.
GMP accrued between 1978 and 1987 was not required to be indexed for inflation increases while benefits accrued between 1988 and 1997 were indexed up to a maximum of 3 per cent a year. Before the new state pension was introduced in 2016, the DWP would make up any shortfall between the GMP and the additional pension they would have got if they had not been contracted out. The DWP would recalculate this shortfall every year meaning the amount they paid would increase.
The introduction of the new state pension in 2016 means the GMP element of the affected pensioners’ pension is effectively frozen, whereas it was formerly subject to inflation increases.
Retired IT manager Stephen Kenny, who is one of several pensioners hit by the loss of GMP indexation who has succeeded in his complaint to the Parliamentary Ombudsman, estimates he is set to lose around £22,000 in inflation protection, based on his projected life expectancy.
Mr Kenny said: “I was contracted out from the very beginning, so I will lose out considerably. The biggest losses are for the benefits built up between 1978 and 1987, when there is no indexation at all for my GMP.
“To add insult to injury, civil servants are having theirs topped up by the Government.”
Martin Smart, who retired from his job in publishing 10 years ago, believes the DWP has been trying to cover its tracks, said: “I have been writing letters to find out what is going on but the DWP has never admitted that people like me were going to lose out.
“Doubtless some of the women hit by accelerated increases in state pension age, the Waspi women, will also have been impacted, adding insult to injury.”
The Parliamentary Ombudsman criticised the DWP for failing to follow its own service standards, customer charter and communications strategy, where it had said it would build awareness of the impact of any periods of contracting out and would make information ‘complete, consistent, clear and accurate’.
In the determination the Parliamentary Ombudsman said: “our view is that… the DWP failed to fully acknowledge and explain negative impacts of the pension reforms to those with large periods of contracting out and who were due to reach State Pension Age shortly after April 2016.”
Not all people with GMPs will lose value under the new rules. People may be able to build up additional entitlement to the new state pension, but those who were close to state pension age when the new system was introduced on 6 April 2016 will not have time to do so.
The case could be seen as giving a green light to calls for a broader review of communication of the people who feel the Government has played down bad news relating to changes to state pension.
The Women Against State Pension Increases (Waspi) campaign has fought the rapid increase in state pension age for women. Other losers from the change to the new state pension include those who never contracted out and who would have gone on to build up combined basic and additional pension of more than the £168.60 per week payable under the current system.
A spokesperson for (Waspi) said: “Waspi is not surprised to hear of another example of the DWP’s poor communication of reforms to State Pension policy. WASPI women are all too aware of the lack of communication with some women receiving no notice at all that the State Pension age was rising. It is clear that the DWP’s maladministration of changes have had a detrimental effect on many and the burden of righting these wrongs should not fall to those who have lost out. We are calling on the Government to do the right thing and compensate all those suffering losses as a result.”
A DWP Spokesperson said: “We are considering the impact of the Ombudsman’s findings in this case.”