UK Retirees Face Pension Cuts Due to Overpayment Errors

Due to pension overpayment errors dating back four decades, tens of thousands of retired UK workers reportedly will face state pension reductions.

The revelation came after the errors were identified during the biggest data matching exercise involving retirement benefits in UK history, according to a report in the Financial Times. The review required thousands of public and private sector retirement pension plans to inspect the records of millions of workers who “contracted out” of a government plan that allowed them to accumulate additional state pension.

By contracting-out, employers and workers were allowed to pay reduced national insurance contributions, which lowered the state pension to which individuals were entitled. However, workplace retirement plans promised to replace part of employees’ state pension with a Guaranteed Minimum Pension (GMP) in return.

Although some of the overpayments date back 40 years, a recent UK High Court ruling found that defined benefit pension plans are not subject to a previously imposed six-year time limit to recover pension overpayments.

The review found discrepancies due to poor record keeping, errors, and missing paperwork. In one case, the Civil Service Pension Scheme, which has 1 million members, identified £22 million ($29.2 million) of overpayments relating to GMP errors.

Another review of GMP records for 500,000 workers in private sector retirement plans found between 10,000 and 15,000 of overpayments, with a similar number of underpayments, according to Willis Towers Watson. The over and underpayments ranged from £50 per year to more than £10,000 over a lifetime.

Steve Webb, who was the UK’s Minister of State for Pensions from 2010 to 2015, told the FT that when the state pension is worked out, a deduction is made to reflect the promises made by company pensions to replace part of a worker’s state pension.

“If it turns out that the value of those company pension promises is greater than previously thought, then the amount the state has to pay you is reduced,” said Webb.

Webb said it was possible that “tens of thousands of people”, including some who retired long ago, could face cuts to their state pension. “It’s a pound-for-pound reduction, so every extra pound of GMP is a pound off your state earnings-related pension until it’s reduced to zero.”

According to the FT report, the UK’s Department for Work and Pensions (DWP) said most inquiries raised as part of the GMP data-checking exercise did not affect the amount of an individual’s state pension. “However, where queries do result in changes, we are notified by HMRC [HM Revenue & Customs], and where the pension is in payment, review the award, and notify the individual of the change.”

The DWP said individuals “will not be expected to repay any overpayments,” however approximately 10,000 retired civil servants are expected to be told this year that their pensions will be reduced.

The data-checking exercise began in 2014, and is due to conclude in December.