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National Insurance Fund Account 2002-2003

Head of the National Audit Office Sir John Bourn today reported to Parliament on the National Insurance Fund account for 2002-03. His examination indicates that, in total, the level of fraud and error in National Insurance Fund benefits was significantly less than one per cent of expenditure. Sir John was therefore able to give an unqualified audit opinion on the account.

In his report for 1998-99, Sir John noted that the Contributions Agency had introduced a special scheme to compensate individuals where their rebate payments had been made late as a result of difficulties and delays in implementing the National Insurance Recording System (NIRS2). The Inland Revenue and the Department for Work and Pensions concluded these compensation arrangements in April 2003. Total compensation costs were some £85 million.

In 1999-2000 the NAO identified cases of duplicate age-related Rebate payments made by the Inland Revenue to pension providers as a result of duplicate submission and processing of employers’ end-of-year returns. In October 2002, the Inland Revenue recovered some £62 million of overpaid rebates. Because of the downturn in the investment market during the time between the Inland Revenue’s making the rebate overpayments and their being recovered, individual pension scheme members may have suffered losses to their pension funds. The Inland Revenue are aiming to compensate them where appropriate, settling as many cases as possible before the end of March 2004.

Individuals have to pay or be credited with sufficient National Insurance contributions each tax year for that year to qualify for benefit or basic state pension purposes. The former Contributions Agency used to send Deficiency Notices to individuals who had not contributed enough. However, they suspended this practice after 1995-96 in order to focus resources on priorities during the early years of the new NIRS2 system. In 2003, the Paymaster General decided to run a catch-up exercise by writing to everyone due a deficiency notice for the six years up to 2001-02. The production of Deficiency Notices is planned to resume as an annual exercise from late 2004.

The Inland Revenue and the Department for Work and Pensions operated an Integrated Recovery Programme to resolve difficulties following the implementation of NIRS2. Additional costs were some £67.9 million. The Inland Revenue and DWP considered that, without this extra funding, there would have been a significant risk that they would have failed to cope with the amount of new work coming into the National Insurance Contributions Office and this would have presented a continuing problem, unrelated to the introduction of NIRS 2. The recovery programme also enabled them to introduce more durable business processes, deal with the increase in work they were experiencing, clear work automatically, and provide a basis for longer term process and business improvements.

In some instances, the Inland Revenue receives end of year information from employers about NI contributions paid by employees which cannot be matched to the relevant contributor records. This is the result of inaccurate information received from employers on End of Year submissions. If, despite all reasonable effort by the Inland Revenue to trace and update contributor records, the NI contribution records cannot be matched, these cases are kept permanently on non-matched Suspense Files in case the individual queries the completeness of their record. These files now contain over 100 million items relating to the last 29 years. If non-matching items could be traced, possibly 3 million of them could have an impact on benefit payment. In 70 per cent of cases it was likely to be less than £2 a week. A small percentage might be as much as £250 a year.

The Inland Revenue have introduced a number of initiatives over the years and the number of non-matching items has been reduced from eight per cent of returns in 1997-98 to four per cent in 2002-03. Plans to determine how best to reduce further the number of non-matched items include electronic submission of information by employers, better checks on the quality of employees’ personal details and research into those employers who have most commonly had errors on their end of year returns.

"The Inland Revenue continue to face challenges in maintaining individuals’ National Insurance contribution records, upon which large amounts of the public’s benefit entitlement depend. The quality of the contributions information received from employers remains a particular and enduring difficulty that various measures are addressing."

Sir John Bourn

Notes for Editors


In 2002-03 the NIF received some £60.9 billion and paid out some £58 billion, mostly in benefits and personal pension contributions, closing the year with a balance of £26.5 billion – up by £2.9 billion from the previous year. National Insurance contribution rates are set at levels intended to meet expected benefit expenditure each year and to maintain a working balance. The benefits paid out of the NIF in 2002-03 included Retirement Pension and Bereavement Benefit (£45,363 million), Incapacity Benefit (£6,786 million) and contribution-based Jobseeker’s Allowance (£505 million).


The Government Actuary reported in 2003 that, subject to various caveats and assumptions, the balance on the Fund would be expected to continue to increase in future, both in absolute terms and as a multiple of annual expenditure. The projected balance would grow from its current level of some 50 per cent of annual benefit expenditure to around 90 per cent by 2010-11.


Press notices and reports are available from the date of publication on the NAO website at Hard copies can be obtained from The Stationery Office on 0845 702 3474.


The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 800 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.


PN: 05/04