Could a state pension scandal happen again?

In arguably one of the biggest benefits scandals of modern times, thousands of pensioners have been underpaid their state pension, some for many years.

The error mainly affects older women; the biggest group involved is those who paid the ‘reduced stamp’ and rely on their husband’s National Insurance (NI) record to calculate their own state pension. If their husband reached state pension age (SPA) after 2008 these women may have been underpaid. But others are affected as well including those who, when their husband died, didn’t see a corresponding increase in their state pension.

The DWP uncovered their error back in March 2020. Since then, they have been trying to put the situation right. They have checked thousands of pension records and so far identified 131,000 people who have been underpaid, and repaid them a staggering £805 million, an average of £6,000 for each pensioner.

But that’s not the end of the story. There are still a group of people who are missing their money. Some haven’t responded to DWP giving the right information, but it’s now coming to light there’s another group that DWP have just missed and instead of reaching out to them, DWP is expecting them to contact the Pension Service.

What this shows, in alarming clarity, is just how complicated the state pension system is.

Sure, the single state pension put in place in 2016 is straightforward for those yet to retire, but the complex web of previous rules and regimes that went before it is a nightmare to follow. People don’t understand it, and what is clear from this benefits debacle is the DWP is struggling to untangle the rules as well.

Constructs such as the reduced stamp or contracting out of the additional state pension have created a complicated regime that only a few really understand. The DWP even stopped including the ‘contracted-out pension equivalent’ (COPE) figure on state pension forecasts purely because of the lack of comprehension and questions it raised.

As time goes on and generations who lived under these rules retire, these weird and wonderful facets of the state pension will eventually be lost. But could this situation arise again?

If we keep the single state pension as it is, then no. But the chances of us keeping the same rules for another 60 years are slim. And it’s when two different regimes collide that we see much of the confusion arising.

The state pension appears to be in a somewhat precarious position. Government after government has blindly committed to a triple-lock guarantee on increases, at the same time as kicking the thorny question of a rise in state pension age into the long grass. At some point, something will have to give.

As the population continues to age, and the ratio of working age people to retired declines, the UK is going to have to have these hard conversations. It could result in new ways to increase the state pension or a higher state pension age. But it may mean a new form of state pension creating yet another regime.

If you ask a random sample of people under, say, 35 years of age, many will express scepticism that the state pension will exist for their later years.

Planning for retirement is tricky. We need frank conversations now about the future of the state pension, if nothing else, to give these generations some certainty in planning their financial future.

If the state pension can’t continue in its current form, let’s be honest and say so.