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Sixth Report Session 1998-99

Volume 2
OCTOBER 1998 - MARCH 1999

The full report of selected cases

Summary of selected cases

DEPARTMENT OF SOCIAL SECURITY

Case No. C.1299/95

Delayed payment of contributions to a personal pension scheme

9.1 Mr P complained that the Contributions Agency (CA) of the Department of Social Security (DSS) delayed payment of minimum contributions to his personal pension scheme, leading to a loss in value of the investment, and that CA inadequately compensated him for that loss.

9.2 My investigation began in February 1996 once the Ombudsman's predecessor had obtained comments from the then Chief Executive of CA, after the Member's referral of the complaint. I have not put into this report every detail investigated by the Ombudsman's staff, but I am satisfied that no matter of significance has been overlooked. Annex A lists the abbreviations used and their meanings.

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Background

9.3 Since 1 July 1988 an employee has been able to join a personal pension scheme in preference to remaining within the State Earnings Related Pension Scheme (SERPS) or joining or remaining within an occupational pension scheme. If an employee does so he or she must pay full rate National Insurance Contributions (NICs) as if payments were being made into SERPS but part of the payments, known as minimum contributions, is paid each year by DSS into the employee's chosen pension scheme. At the end of the tax year, employers send the Inland Revenue (the Revenue) a return (form P14) for each employee giving details of the earnings on which tax and NICs have been deducted and of the NICs paid in that year. The employee receives similar notification from his employers on form P60. After receiving the form P14, the Revenue transfer details of NICs payments to DSS where they are processed by computer and credited to the employee's National Insurance Recording System (NIRS) account. Once the details have been recorded on NIRS, CA's contracted-out employments group (COEG) are responsible for making any payments of minimum contributions direct to the employee's personal pension scheme provider.

9.4 CA are responsible for maintaining accurate records of NICs on NIRS which can produce a report (report RD18) giving a full record of a person's NICs account. NIRS automatically generates a deficiency notice if a contributor has paid insufficient NICs in a tax year to make that year qualify for benefit purposes. At the time of the events complained about, CA's contribution queries group (contribution queries) were responsible for dealing with the enquiries that arose from those deficiency notices. If a person disputed the information shown on a deficiency notice, contribution queries attempted to trace the missing NICs. If they needed more information they asked the person's employers to complete an enquiry form to show the amount of NICs paid by the employee. That information was then confirmed either through CA's tracing and posting procedures or by asking the Revenue to complete a special trace form to show the details that would have been shown on the form P14 (paragraph 9.3). If as a result there was sufficient information to confirm the NICs, they could be treated as having been paid, a practice known as "deeming". Contribution queries constructed a posting voucher so that the deemed NICs could be credited to NIRS.

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9.5 Before NICs details are credited to a person's NIRS account, NIRS automatically checks the ratio between the amount of earnings on which the employee was liable to pay NICs and the amount of NICs actually paid. If the ratio is outside a prescribed tolerance, or the earnings information is not included, a ratio check failure occurs, and NIRS produces a check failure report (report RD28). At the time of the events complained about, reports RD28 were transmitted to CA's posting check group (posting checks), who were responsible for resolving ratio check failures. The contribution queries and posting checks groups have since merged.

9.6 DSS operate a special payments scheme to compensate those who have suffered an actual financial loss as a result of error by the Department or one of their agencies. Under the scheme a special payment is considered if there has been a clear and unambiguous departmental error and the person has suffered measurable financial loss as a result. Compensation may also be awarded when, as a result of clear and unambiguous departmental error, statutory payments to personal pension schemes have been unduly delayed. Compensation only becomes payable if the delay exceeds a specified period intended to reflect normal processing times. At the time relevant to Mr P's complaint, that period was known as the "fallow" period. For the purposes of payments to personal pension schemes two "fallow" periods are used, reflecting the greater volume of work in the first half of the tax year. For returns received from the Revenue between 6 April and 31 October, CA consider the case to have been delayed if not processed by the following 5 April. For returns received between 1 November and 5 April, the case is considered to have been delayed if not processed within six months from the date of receipt. Where compensation is payable it is calculated using simple interest rates supplied by the Treasury and based on average building society rates. A deduction of six per cent is made from the total special payment awarded, to take account of the average administration fee which pension providers levy on lump sum payments of contributions before they are credited to the scheme. Before 1997 there was no provision for a payment for losses in investment income in the event of departmental delay, since that was regarded as a speculative rather than an actual loss. Following a review of the scheme, for cases where minimum contributions were paid after 1 January 1997 CA will consider paying topping up compensation if the person who has suffered financial loss can show that the appropriate personal pension scheme to which he or she has contributed performed better than implied by the use of simple interest rates. CA's technical services section (technical services) administer the DSS's special payments scheme in respect of CA's customers.

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Investigation

9.7

1989

On 30 May COEG wrote to Mr P to say that they had received notice from him of his wish, with effect from 6 April 1987, to begin payment of minimum contributions to a company (to whom I refer as company A) providing personal pension schemes.

9.8

1992

On 4 December contribution queries sent Mr P a deficiency notice (paragraph 4) as no NICs had been recorded on his NIRS account for the tax year 1990/91. The notice said that voluntary payments totalling £231.40 were needed to make good the deficit. Mr P disputed that statement on 15 December.

9.9

1993

CA have not been able to find the original documents but a file note of 11 August 1994 records that on 14 February 1993 contribution queries asked Mr P's employers to complete an enquiry form (paragraph 9.4), which they did, showing that Mr P had paid NICs of £1,470.36 for 1990/91. The file note also records that on 29 March 1993 contribution queries tried unsuccessfully to identify Mr P's missing NICs on a list showing NICs that had been received but not allocated. On 23 May contribution queries called for the records of two people who worked for the same employers as Mr P to check whether their NICs for 1990/91 had been processed successfully. Contribution queries also placed a marker on Mr P's NIRS account so that they would be notified if and when any 1990/91 NICs were recorded. The file note of 11 August 1994 also records that on 23 August 1993 contribution queries asked the Revenue to send any relevant information they held. According to the file note a completed special trace form (paragraph 9.4) was returned by the Revenue on 26 August 1993 showing that Mr P's employers had sent the end-of-year return to the Revenue on 4 December 1991, but that it had shown only the combined total of employee and employers NICs: £4,368.53.

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9.10 On 1 October contribution queries constructed a posting voucher for "deeming" NICs of £1,470.36 to be credited to Mr P's NIRS account. Contribution queries used the information his employers had supplied on the enquiry form, apparently without the normal further confirmation (paragraph 9.4). They entered Mr P's earnings as nil. Because of that the voucher prompted a ratio check failure. Although CA have been unable to find the resulting check failure report RD28 (paragraph 9.5), they have said that it would have been generated and sent to posting checks. Meanwhile, a firm of financial advisers acting for Mr P had written to DSS's office at Newport on 30 September. They said that company A had told them that DSS had no proof of Mr P's earnings for 1990/91. They enclosed a copy of Mr P's form P60 (paragraph 9.3), and asked why the minimum contributions payment had not been made. The Newport office redirected that letter to CA's Nottingham office which acknowledged it and forwarded it to COEG in Newcastle where it arrived on 13 October. COEG sent for an account report RD18 (paragraph 9.4) on 22 October which confirmed that there had been a ratio check failure. On 18 November COEG asked for a copy of Mr P's form P14 and were sent a copy of the 1 October posting voucher.

9.11

1994

On 23 January contribution queries received a check failure report RD28. The posting voucher was removed from Mr P's NIRS account the following day. On 12 February COEG requested another account report RD18. It showed that the posting voucher of 1 October had been removed, but had not yet been replaced. Contribution queries completed a second posting voucher on 2 March using the information supplied by the Revenue. No separate amount was shown for Mr P's individual NICs and his earnings figure was again shown as nil. That posting voucher must also have caused a ratio check failure (paragraph 9.5), but CA have not been able to find the report RD28.

9.12 On 22 March company A telephoned COEG about Mr P's missing NICs and the delayed minimum contributions payment. COEG asked contribution queries to instruct posting checks to treat Mr P's case as urgent. COEG then telephoned company A to explain what was happening and, at company A's request, contribution queries telephoned Mr P to explain that his account was being corrected. According to the file note of 11 August 1994, on 13 April contribution queries sent their papers to posting checks asking them to "clear" the ratio check failure. COEG called for an account report RD18 on 21 April. The report confirmed that the second posting voucher (paragraph 9.11) had caused a ratio check failure. According to the file note of 11 August, contribution queries received a letter from Mr P on 1 June saying that he would take legal action if matters were not resolved by 14 June. Contribution queries asked posting checks for a progress report, but posting checks said they could not find the papers and their computer was not working.

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9.13 On 11 July solicitors acting for Mr P (the solicitors) wrote to posting checks saying that, through no fault of his own, Mr P might well have lost benefits from his pension. They asked for confirmation that the missing NICs would be credited and backdated. COEG replied on 5 August promising a full explanation of the delay as soon as possible. Meanwhile, contribution queries had called for another account report RD18 which they received on 4 August. It showed that Mr P's NICs for 1990/91 had been credited. COEG wrote to Mr P on 5 August telling him that the minimum contributions totalling £1,338.41 had been sent to company A.

9.14 On 25 August the solicitors wrote to COEG saying that they considered CA had had enough time in which to provide a full explanation. The solicitors asked for a reply by return of post. COEG telephoned the solicitors on 9 September to say that the case for compensation was being considered. They referred the case to technical services on 3 October. On 16 November the solicitors wrote to COEG saying that they understood that a payment would be made to company A within two or three weeks. The solicitors asked CA to reimburse Mr P's legal costs of £246.75. Technical services awarded Mr P an ex gratia payment of £192.76 less six per cent administration charge (paragraph 9.6), producing a net sum of £181.19, for the delay in paying the minimum contributions. They notified Mr P and company A on 24 November, and the payment was made to company A on 28 November.

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9.15 On 6 December company A told Mr P that they had credited the minimum contributions payment of £1,338.41 to his policy as of 1 August 1994 and that the £181.19 ex gratia payment would be applied to his policy with effect from 1 December 1994. Company A explained that, had the minimum contributions been applied to Mr P's policy on 1 November 1991, a total of 906.7818 units would have been purchased. However, the minimum contributions had actually been applied to his policy on 1 August 1994, and at the prices then prevailing they had purchased only 712.6784 units. It would cost £374.04 to make up the shortfall of 194.1034 units at 1 December prices. Mr P wrote to technical services on 7 December to say that he had instructed the solicitors to take action if the question of his loss of £192.85 (the difference between £374.04 and £181.19), and the question of his legal expenses, was not resolved within 14 days. On 13 December technical services replied that the ex gratia payment had been made in line with DSS's special payments scheme (paragraph 9.6). The scheme's guidelines were under review and his case would be considered in the light of any changes made.

9.16

1995

Having heard nothing further, Mr P wrote to technical services on 6 February to say that he would be instructing the solicitors to commence proceedings for the sum of £192.85 to be paid to company A and for the sum of £246.75 to be paid to him for his legal expenses. Technical services sent interim letters to Mr P on 9 and 17 February to say that the matter was under consideration and on 3 March they wrote to tell him that CA would pay his solicitors' fees. They said that although his claim had been thoroughly reconsidered, no further compensation could be offered. They added that, despite what they had said in their letter of 13 December 1994, there had not been a review of the guidelines for the compensation scheme. On 15 March technical services paid the legal costs Mr P had requested, without admission of liability.

9.17 Meanwhile, on 14 March Mr P had served a county court summons on CA for the sum of £192.85 plus the court fee. The court action was dismissed on 23 June. According to the DSS solicitor's notes of the hearing, the judge expressed her sympathy for Mr P but ruled that his claim did not provide grounds for a court action and that the only remedy would be by way of judicial review. On 1 August the Member asked CA to comment on two points before he put a complaint to the Ombudsman. First, CA's calculations had been based on the average growth rate for such funds, whereas company A had achieved better than that. Secondly, CA had applied a six-month "fallow" period, assuming that there would ordinarily be a delay in paying minimum contributions. Technical services replied to the Member on 24 August. They said that there was no statutory requirement that CA pay compensation for delays. DSS's special payments scheme was not designed to compensate individuals for actual loss incurred, but was in respect of loss of use of monies. Technical services also said that the "fallow" period was intended to take account of necessary action and normal delays in making payments. Mr P remained dissatisfied and asked the Member to refer the complaint to the Ombudsman, which he did on 26 September.

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DSS's response to the complaint

9.18 In her comments to the Ombudsman's predecessor, the then Chief Executive of CA accepted that there had been significant delay in posting Mr P's 1990/91 NICs to his account. She apologised for that delay and for the fact that CA had not given Mr P the standard of service that he had a right to expect. She said that processing end-of-year returns was an enormous task. Delays could occur which in turn could delay payment of the minimum contributions to pension providers. The then Chief Executive went on to say that there were over 140 pension providers, and that to award compensation on the basis of actual loss would mean approaching individual providers to establish their normal investment pattern and details of the performance of the fund over the relevant period. She doubted if all providers could supply that information, and said that the resulting system would be difficult to operate and likely to produce inequitable results.

Later developments

9.19

1997

On 29 July the Member wrote to the Ombudsman's office enclosing correspondence in which Mr P claimed that, as a result of CA's delay, he had lost a terminal bonus from his pension provider in respect of the year 1990/91. With Mr P's permission, the Ombudsman's staff made enquiries of company A about the extent of the loss. Company A explained that the ex gratia payment of £181.19 paid in 1994 (paragraph 9.14) had purchased 94.0270 units with effect from 1 December 1994. The total number of units purchased for the 1990/91 tax year had therefore been 806.7054 (712.6784 purchased with the minimum contributions payment of £1,338.41 plus 94.0270 purchased with the compensation payment of £181.19). Company A also explained that the terminal bonus was payable only at the date of settlement of the benefits of the policy. It would then be based on a percentage of the value of the units at the unit price applicable at the time of settlement. The unit price changed approximately every other day but, for example, had been £2.443 on 7 September 1998. The percentage rate of the bonus varied according to the year of purchase of units, and the percentage rates for each purchase year could change several times during the life of the policy. If the minimum contributions for 1990/91 had been applied to Mr P's policy on 1 November 1991 and if the benefits had been settled on 7 September 1998, the units purchased would have attracted a terminal bonus of 30 per cent. The units for the 1990/91 tax year had actually been purchased in August and December 1994 and would have attracted a terminal bonus of 13 per cent if settled on 7 September 1998. 906.7818 units purchased on 1 November 1991 and "cashed" on 7 September 1998 would therefore have had a value, with 30 per cent terminal bonus, of £2,879.85 whereas 806.7054 units cashed on that day with a terminal bonus of 13 per cent would have had a value of £2,226.98, a shortfall of £652.87. Company A added that there would be an administration charge if they were to make up the shortfall in the number of units.

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Findings

9.20 Mr P's problems stemmed from CA's failure to credit his NICs for 1990/91 to his NIRS account. The routine destruction of the relevant papers and the passage of time has made it impossible to establish precisely how and why that error happened, although it is clear that Mr P's employers sent an end-of-year return to the Revenue.

9.21 It was not until December 1992 that the gap in the NIRS account was picked up and a deficiency notice was sent to Mr P. There followed a series of errors and delays, marked by a lack of coordination between COEG, contribution queries and posting checks. When Mr P contested the deficiency notice, contribution queries' search for the missing NICs got off to a promising start, but action seems to have come to a halt in May 1993. At that point contribution queries could have asked the Revenue for help, but they did not do so until 23 August (paragraph 9.9). There was a further delay before contribution queries began action to "deem" Mr P's NICs for 1990/91 as paid. Their first attempt on 1 October 1993 was procedurally incorrect in that they did not seek to confirm the information from Mr P's employers, and there was a ratio check failure because Mr P's earnings were shown as nil. As it happened, the day before that, Mr P's financial advisers had sent DSS's Newport office a copy of his form P60 as evidence of his earnings and NICs for 1990/91, because they had heard that there was a query (paragraph 9.10). The form P60 was forwarded to COEG but although COEG obtained an account report from NIRS, showing the ratio check failure, and a copy of the defective posting voucher, it is not clear what action, if any, they took. The record was not put right. There matters rested until February 1994 when COEG sent for another account report which showed that Mr P's earnings and NICs for 1990/91 had not been entered (paragraph 9.11). In March contribution queries made a second attempt to "deem" Mr P's NICs as paid. That fared no better than the first. They rightly took information from the Revenue's special trace form but that did not split the NICs between those paid by the employers and those paid by the employee, and the posting voucher again showed Mr P's earnings as nil, causing another ratio check failure. By that stage contribution queries, posting checks and COEG were all trying to sort out Mr P's NIRS account but in an uncoordinated way. There were flurries of activity when company A telephoned COEG on 22 March 1994 to ask what was happening and when contribution queries received a letter from Mr P on 1 June warning of legal action, but posting checks were unable to find the papers on that occasion (paragraph 9.12). By the time CA finally credited Mr P's NICs to NIRS in August 1994, some 18 months had elapsed since he had first disputed the deficiency notice. I criticise CA for that poor performance. The subsequent merger of the posting checks and contribution queries groups (paragraph 9.5) should help reduce the time taken to resolve similar cases in future.

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9.22 Did CA pay Mr P adequate compensation for the late payment of the minimum contributions? I accept that the ex gratia payment of £181.19 that CA awarded him reflected the fact that the then current DSS special payments scheme limited compensation to that needed to make up for the loss of use of the money concerned, and did not provide for compensation for loss of investment potential (paragraph 9.6). I was pleased to see that CA had also reimbursed Mr P for his legal costs incurred in pursuing the matter (paragraph 9.16). However, company A have said that only 94.0270 units could be purchased with the £181.19 compensation at the time it was paid (paragraph 9.19), a shortfall compared to the number of units which would have been purchased at an earlier date had CA paid the minimum contributions to company A within a reasonable timescale. There was also a substantial potential loss of terminal bonus (paragraph 9.19). The approach which the Ombudsman considers correct is that a person who has suffered injustice due to maladministration should be put back in the position in which he or she would have been had the maladministration not occurred. Mr P has suffered a quantifiable financial loss because of CA's errors and delays. He stands to suffer a further quantifiable financial loss when his policy matures because his terminal bonus is likely to be lower than it would have been in the absence of maladministration by CA. Those losses have not been fully remedied by the compensation paid by CA. I therefore asked the present Chief Executive if CA would increase the compensation payment to cover the cost, including administration charges, of purchasing the extra units needed to make good the deficit in Mr P's personal pension scheme. I further asked if CA would give an undertaking to negotiate with company A the form and level of payment they needed to make to company A now, effectively to restore to Mr P's personal pension scheme the entitlement to the terminal bonus that would have accrued if CA had paid the minimum contributions on time. In reply the Chief Executive said that, given the exceptional circumstances of Mr P's case, an ex gratia payment was appropriate for the actual loss incurred by Mr P's personal pension scheme as a result of the delay by CA in paying minimum contributions to his pension provider. The Chief Executive said that company A had confirmed that, as at 9 December 1998, the actual loss incurred due to late payment had been £673.32. That sum took into account the potential loss of terminal bonus for the relevant years (calculated by reference to the number of extra units that the terminal bonus would have purchased on 9 December 1998 had the minimum contributions been paid on time), and the previous compensatory payment of £181.19. The Chief Executive said that the sum of £673.32 had been paid to company A on 14 December. He also offered his sincere apologies to Mr P for CA's failings in his case.

Conclusion

9.23 CA unduly delayed crediting Mr P's NICs to his NIRS account, which in turn delayed the minimum contributions payment to his personal pension scheme provider. That meant that pension units were purchased for Mr P later than they would otherwise have been, producing a shortfall and a potential loss of terminal bonus. The then Chief Executive apologised for the delay and the present Chief Executive added his apologies for CA's shortcomings. I pass on those apologies to Mr P through this report. CA initially awarded Mr P an ex gratia payment of £181.19 in respect of that delay, which purchased 94.027 units, and paid his legal fees of £246.75. After the Ombudsman's intervention CA paid company A an additional £673.32 to make good the shortfall in units and to compensate for the potential loss of terminal bonus. I regard that, together with the then and present Chief Executives' apologies, as a satisfactory outcome to a fully justified complaint.

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Annex A

Abbreviations used and their meanings

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Last updated: 19 April 2006