Organisation we investigated: Department for Work and Pensions (DWP)
Date investigation closed: 30 August 2019
Complainants N and T complained that the DWP failed to communicate that the introduction of the new state pension system could have a negative long-term impact on people.
What we found
Our investigation focused on how DWP communicated with individuals in order to help them plan for their financial future.
DWP was aware the pension changes could negatively affect people with long periods of contracting out who were due to reach State Pension Age shortly after the new State Pension was introduced. However, DWP used flawed arguments, saying that negative impacts could be offset for those with long periods of contracting out who were due to reach State Pension Age shortly after April 2016. Despite what DWP argued, we considered:
- these individuals would not be able to make more NICs to offset any negative impacts
- as the triple lock applied to everyone, it would not offset any negative impacts for these individuals in comparison to other groups.
DWP failed to provide clear, accurate and complete information through its pension forecasts, impact assessments and other literature. This was despite being warned by both the National Audit Office and the Work and Pensions Select Committee that better communication was needed for those with long periods of contracting out.
DWP failed to make clear that some people could be worse off as a result of the pension reforms. This meant that some individuals were not aware that they might need to consider seeking independent financial advice and might need to make alternative provision for their retirement.
In Complainant N’s case, Complainant N recognised that DWP used flawed arguments. Whilst DWP’s actions did not prevent Complainant N from planning for their financial future, dealing with DWP’s inadequate responses to their concerns caused frustration.
In Complainant T’s case, DWP’s inadequate responses meant Complainant T was not aware until March 2015 that the pension reforms could have a negative impact on them. As Complainant T had retired before 2010, even if DWP had communicated properly it was unlikely they could have taken steps to make a substantive difference to their finances. However, the loss of a longer window of opportunity and the belief that they might have been able to make a difference to their financial situation was an injustice.
Before 2016, the state pension was in two parts, the basic state pension which everyone of State Pension Age got, and the second state pension, which was dependent on people making further National Insurance Contributions (NICs). Employers could also ‘contract out’ from the second state pension and give their employees a private Guaranteed Minimum Pension (GMP) instead. Contracting out meant both the employer and employee paid lower NICs.
When people with GMPs reached State Pension Age, DWP carried out an annual comparison to check if they were receiving the same as they would have done if they had not ‘contracted out’ of the second state pension. The aim was to ensure those with second state pensions and those with GMPs received roughly the same amount after they reached State Pension Age. This annual calculation meant that DWP essentially paid inflationary increases (indexation) to some people with GMPs.
In April 2016 those reaching State Pension Age had the basic and second state pensions replaced by the new State Pension. The amount people get from the new State Pension depends on their NICs. People who had previously ‘contracted out’ from the second state pension made lower NICs, so their starting amount was lower than those who had ‘contracted in’. Those who contracted out would continue to receive their GMP through their employer’s pension scheme.
However, DWP no longer compared the amount people received from their GMP with what they would have got if they had ‘contracted in’ to the second state pension.
Those reaching State Pension Age after April 2016 who had contracted out for long periods no longer benefited from inflationary increases from DWP. Those who did not contract out received annual inflationary increases on the additional NICs to their second state pension. This could amount to a person with a GMP receiving much less than they were expecting to over the course of their retirement, and less than they would receive had they not ‘contracted out’.
When communicating this change, DWP did not explain that people with long periods of contracting out could be significantly worse off. It instead chose to focus only on the benefits of the new State Pension and other separate pension changes. DWP said:
- that any negative impacts for those with GMPs would be offset by making further NICs, so that individuals could receive the full amount of the new State Pension
- an uplift announced to all pensions in 2011 (called the triple lock) would offset any negative impacts.
Complainants N and T both reached State Pension Age after the pension reforms took effect and began receiving the new State Pension. They had long periods of contracting out and, therefore, had large GMPs and lower NICs. The amount they received through the new State Pension was roughly the same as it would have been if they received the basic state pension (in place before 2016). However, they would no longer be entitled to inflationary increases, which they were likely to have received if the annual comparison between GMPs and the second state pension had continued to take place.
As a result, over the course of their retirement, Complainant N and Complainant T anticipated losing out on payment of many thousands of pounds from DWP that they would have received under the old system.
Putting it right
As a result of our findings, we recommended DWP should review and report back its learning from our investigations. In particular, it should ensure that its literature clearly and appropriately points out that some individuals who have large GMPs and reach State Pension Age in the early years may be negatively affected by the changes. It should explicitly tell people to check their circumstances and should provide details to the public about how they can do this.
We also recommended that DWP apologises to Complainants N and T for the frustration and inconvenience its actions caused and pay them £500 and £750 respectively.
DWP are due to comply with our recommendations by the end of February 2020.
This case summary is featured in the Ombudsman's Casework Report 2019.