Background
Jump to
The state earnings-related pension scheme (SERPS)
1. Additional pension, more commonly known as SERPS, is the earnings-related part of the state retirement pension. It is paid to employees who paid Class 1 national insurance contributions on earnings between the lower and upper earnings limit for such contributions in one or more tax years since 6 April 1978, and who reached state pension age on or after 6 April 1979. SERPS was given effect by the Social Security Pensions Act 1975. Under the provisions in that Act, widows and widowers were to receive the full additional pension earned by their spouses (subject to a maximum amount if they were entitled to an additional pension derived from their own contributions). However, section 19(1) of the Social Security Act 1986 (the 1986 Act) replaced that inheritance entitlement, instead providing that widows and widowers would inherit only one-half of the amount of additional pension payable to their spouse if the spouse were to die after 5 April 2000.
The four individual complaints investigated
2. I received 344 individual complaints in total referred to me by 170 Members of Parliament. Their common basis was that the planned future reduction in a surviving spouse's future pension entitlement had not been referred to in DSS and BA leaflets purporting to explain that entitlement until April 1996, ten years after the 1986 Act had been passed; nor had DSS and BA staff drawn the future reduction to the attention of those making enquiries about pensions. Those who complained to me said that they had made financial provisions for the future of their spouse on a misinformed basis. They contended that, if they and their spouse had been made aware of the trueposition, they would have made different provision, more advantageous to themselves, which would have better secured the financial position of the survivor.
3. I selected for investigation four out of the many complaints referred to me, because I considered them to be a suitable sample which would allow me to establish the facts and whether there had been maladministration by DSS that had led to injustice. My investigations began in May 1999 once I had received comments on the four complaints and the matters giving rise to them from the Permanent Secretary of DSS. I have not put into this report every detail investigated by me and my staff; but I am satisfied that no matter of significance has been overlooked.
4. I summarise below the accounts of their particular circumstances giving rise to the complaints of the four individual complainants, whom I call Mrs A, Mr L, Mr N and Mr R, respectively.
- Mrs A, whose complaint was referred to me by the Rt Hon Paddy Ashdown MP, said that her husband had been told by the local BA office in 1996, the year he was due to receive his state pension, that she would receive a full widow's pension plus his SERPS pension if he died before her. She had only discovered the impending change in the SERPS inheritance rules from a press report in November 1998. Mrs A said that because her husband had retired he was no longer in a position to bear the cost of making alternative provision to compensate for the reduction in SERPS entitlement which she could expect to suffer if he died before her on or after 6 April 2000.
- Mr L, whose complaint was referred to me by Mr Nicholas Hawkins MP, said that he had made a written enquiry of BA's pensions and overseas benefits directorate in Newcastle upon Tyne on 11 January 1995, requesting an estimate of his wife's pension should he die before her. The pensions and overseas benefits directorate had given an estimate in writing on 13 February, showing that 100 per cent of the additional pension entitlement could be inherited, and had made no mention of the forthcoming reduction to 50 per cent.
- Mr N, whose complaint was referred to me by Mr John Whittingdale OBE MP, said that in November 1995 at age 61 he had been made redundant. He had made an enquiry of DSS, but had not been told about the future changes to SERPS. He had decided to retire and take an enhanced occupational pension with a slightly enhanced widow's pension which, together with the state benefit, would have made what he had considered to be adequate provision for his wife, who is eight years younger than he is. That consideration had been based on the understanding that his wife would inherit his SERPS entitlement in full. It was too late for him to reverse the decision to retire, or to change his occupational pension to secure for his wife a larger widow's pension.
- Mr R, whose complaint was referred to me by Mr Nigel Waterson MP, said that he had made enquiries of DSS between 1989 and 1993, but had not been told about the future changes to SERPS. On that basis in 1990 and 1993 he had made decisions to purchase single life annuities. He had lost the opportunity to purchase a joint annuity to cover a pension for his wife, should she survive him. Mr R said he had also written to DSS on 14 November 1996 pointing out that the 1996 editions of DSS leaflets dealing with pensions differed from earlier editions in referring to the halving of the SERPS inheritance entitlement. By his account, DSS's reply (no copy of which is available) had confirmed the forthcoming change in April 2000 to the SERPS inheritance provisions and had said that the leaflets did not give a full exposition of the law. Through the Member, Mr R had pressed a complaint that he had not been given advance notice of the changes to SERPS. In reply to the Member, the then Minister of State for Social Security had said on 3 April 1997 that it was not possible to cover all eventualities which might result in a change to an individual's potential benefit entitlement, but that the department made every effort to publicise significant legislative changes.
The National Audit Office's examination and report
5. The National Audit Office (NAO) have examined details of this matter and the wider lessons for the department. Their report examines the events leading up to the decision to defer the legislation and the establishment of the inherited SERPS scheme; what action DSS have taken since October 1998 to deal with the problem; and whether DSS now have effective arrangements in place to prevent a repetition of these events. The NAO examination has had a different purpose from my investigations. Even so, my staff and those in NAO have been able actively to cooperate in our respective reviews of relevant DSS files and in conducting interviews with DSS staff to establish the sequence of events. My staff have also co-operated with NAO in ensuring that our examinations and investigations have complemented, not duplicated, each other. I am grateful to the Comptroller and Auditor General and to NAO staff for their co-operation.
Background to the relevant legislation
6. In June 1985 the then Government published a Green Paper on proposed reforms of the nation's existing social security system. The Green Paper proposed a new structure, the basis of which was said to be the then Government's intention to create a social security system which directed help better to those in need. The objectives also included a simpler benefit system with more sensible rules, a soundly based social security system which the country could afford, and a modern, computerised service. The Green Paper covered the proposed reform of help for people with low incomes and other benefits, as well as pensions. Amongst other measures, it proposed the abolition of SERPS in order to reduce what were felt to be unacceptably escalating costs of the existing scheme, then expected to rise to £20,000 million a year in the 21st century. After consultation, the proposals were modified. A White Paper outlining revised proposals was published in December 1985. The proposed reform by then was substantially to modify SERPS rather than to abolish it. An underlying aim of the proposals was said to be to encourage individuals and their employers to make alternative provisions to SERPS through occupational pension schemes and personal pension plans.
7. The proposals in the White Paper were incorporated into what became the 1986 Act. The 1986 Act introduced fundamental reforms to the social security system, including the introduction of a social fund scheme and the replacement of supplementary benefit by income support. The changes affecting SERPS were:
i) starting with those reaching state pensionable age on or after 6 April 1999, the provision which based an employee's SERPS entitlement on his or her best 20 years of earnings was phased out, with earnings instead to be averaged over the employee's whole working life;
ii) over the period 6 April 2000 to 6 April 2009, the way in which entitlement to additional pension accrued was to be scaled down from an accrual rate of 25 per cent of reckonable earnings to 20 per cent;
and, the focus of this report,
iii) the rate of SERPS that could be inherited by a surviving spouse was to be cut from 100 per cent to 50 per cent, in line with what was said to be the normal practice for contracted-out occupational pension schemes, with effect from 6 April 2000 in respect of deaths occurring on or after that date.
