Report

by the Comptroller
and Auditor General

Department for Work & Pensions

Introduction of the new state pension

HC 724 Session 2016-17 3 November 2016

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Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 1 November 2016

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office

28 October 2016

This report looks at the implementation of the new state pension by the Department for Work & Pensions and HM Revenue & Customs and whether it delivered value for money.

© National Audit Office 2016

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The National Audit Office study team consisted of:
Richard Baynham, David Betteley, Jade Butler, Mark Edward, George French, Ian Hart and Charlotte Orr, under the direction of Max Tse.

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Key facts

Summary

1 On 6 April 2016, the government introduced the new state pension. From this date, everyone who reaches state pension age will have their entitlement calculated using the new rules. The Department for Work & Pensions (the Department) calculates each person’s entitlement based on qualifying years of national insurance contributions. The Department’s transitional arrangements ensure that – for everyone who qualifies for the new state pension – their contributions to 6 April 2016 will be worth at least as much as they would have been under the previous system.

2 Introducing the new state pension lessens the long-term cost to government. In 2015-16, the state pension and pensioner benefits cost £117 billion (6.3% of GDP), including £89 billion on the state pension itself. The Department forecasts that in 2060 pensioner benefits will have risen to 7.6% of GDP, around 0.5% of GDP less than had the previous system continued. The government is also increasing the national insurance contributions that some employers and employees pay. It expects to raise an additional £2 billion in contributions in 2016-17.1

3 Because spending on state pension will increase at a slower rate, most people will receive less than previously projected in the long term. In 2060, 76% of people will receive, on average, £15 a week less. But people will be affected very differently depending on their circumstances. For example, self-employed people, low earners and some people who took time out of the labour market to look after children are likely to get higher rates of state pension. But other people may lose out; for example, those who do not have the minimum number of qualifying years, and some people who were in contracted-out defined benefit pension schemes who are close to state pension age in April 2016.

4 While the new state pension reduces direct government support, it aims to encourage people to save for their retirement by simplifying the rules and letting them know what they will get from the state. The government’s intention is that this will help people to plan for retirement from a younger age and to save in other ways. For example, while the new state pension eliminates the earnings-related additional state pension entitlement, the Department is expanding private saving through automatic enrolment of workers into employers’ pension schemes.

5 Two departments are responsible for processing state pension claims:

the Department pays the state pension and sets wider pensions policy. It has been responsible for communicating the changes and ensuring people receive the payments to which they are entitled.

HM Revenue & Customs (HMRC) collects national insurance contributions and is responsible for calculating each person’s initial state pension entitlement. HMRC is working with occupational pension scheme providers to ensure records of people’s employment and pension history are correct.

Scope of this report

6 The effective introduction of the new state pension is important in its own right and as a core part of wider pension reforms. The new system changes the way state pension is calculated. People rely on government to get this calculation right and administer payments efficiently. More broadly, as the government encourages people to take greater responsibility to save privately for their retirement, it needs to increase awareness of likely retirement incomes and support long-term retirement planning. This report therefore covers:

the objectives of the new state pension;

the Department’s implementation of the new state pension;

the Department’s processing of new state pension claims; and

the effectiveness of the communication campaign.

7 This is one of a series of National Audit Office reports tracking the progress of pension reforms and wider pension liabilities.2 We plan to produce further reports to evaluate the Department’s progress in implementing pension reforms.

Key findings

Implementing the new state pension

8 The Department introduced the new state pension one year ahead of the date originally proposed. The 2013 white paper stated that the government would not introduce the new state pension before April 2017.3 In March 2013, the government announced it would bring this forward to April 2016, introducing higher national insurance contributions one year earlier than originally planned (paragraphs 2.2 to 2.4).

9 The Department met its deadline by making the minimum necessary changes to its IT systems. It recognised the risks of introducing the new state pension. From July 2013, it focused on adapting existing IT systems and deferred the development of a more ambitious digital solution that offered operational efficiencies and new customer services. The Department completed the system changes to allow the uninterrupted payment of state pension from the ‘go-live’ date in April 2016. It performed well against its identified critical success factors and the project was within budget, costing £57 million up to March 2016 (paragraphs 2.5 to 2.8 and 2.10).

10 The Department has not yet introduced a new digital claims service. It originally intended digital services to be available from April 2016. These would allow people to check a statement of their state pension entitlement, make a claim and report changes in their circumstances. The Department prioritised the digital pension statements service and introduced this in February 2016. The new digital service for making a claim is now due in April 2017 but the change of circumstances service is not expected before 2018 (paragraph 2.9).

11 The Department is now expecting to make much smaller operational savings than originally planned from the new state pension. It reduced the expected operational savings from £341 million to £73 million. The Department’s decision to de-scope the project accounted for £157 million of this reduction. It reduced benefits by a further £80 million to reflect lower than expected efficiency savings. The costs of implementing the project are now expected to exceed the operational benefits by £25 million (paragraph 2.11).

Processing new state pension claims

12 The departments are likely to maintain the accuracy of state pension payments. The calculation of entitlement is based on the same national insurance data as the old system. The rule changes make the calculation simpler. HMRC routinely checks the completeness of national insurance contributions. Both departments comprehensively tested the changes to the systems for processing state pension claims, and the Department’s quality checking shows low levels of error on new state pension payments. The two departments have worked together to identify risks to data quality, but the flow of data between the two departments for new state pension is not supported by a formal data assurance agreement. This increases the risk that future responsibilities for data assurance are unclear (paragraphs 3.2 to 3.9).

13 HMRC is checking its national insurance data with pension schemes but take-up of the service, and therefore progress, is slow. The introduction of the new state pension has allowed HMRC to bring forward the reconciliation of records that was previously done at the point of retirement. This will allow HMRC and pension schemes to check the accuracy of their records and provide people with a more accurate initial assessment of the state pension they have built up at April 2016. Pension schemes representing 14.2 million individual memberships (77% of all deferred and pensioner memberships) have registered with HMRC. Initial take-up of the service by pension scheme administrators was slow. By August 2016, HMRC had confirmed just 1.7% of deferred and pensioner memberships. HMRC also forecasts that it will receive 55% more queries than originally expected. It still aims to complete this work by December 2018 but may need extra resources to do so (paragraphs 3.10 to 3.14).

14 There has been some deterioration in the time taken to process claims. This relates partly to the introduction of the new state pension but also reflects wider demands on operational staff since April 2016. The Department’s performance in processing claims began to recover in August 2016. The Department has previously achieved high levels of customer satisfaction and low levels of under and overpayments in processing state pension claims. Data on performance against these measures will be available in 2017 (paragraphs 3.15 to 3.18).

The communication campaign

15 The communication campaign raised awareness of the changes to the state pension. The Department focused on people within 10 years of state pension age and aimed to dispel common misconceptions. Based on our evaluative framework, we found the Department managed the campaign well, continuously monitoring its customer research and adapting its approach. The campaign improved general awareness of the changes to the state pension (paragraphs 4.2 to 4.6).

16 The Department’s attempts to improve people’s understanding of their state pension have had limited success so far. Recognising the variation in people’s circumstances and the difficulty of tailoring messages, the Department’s campaign aimed to increase people’s understanding of their new state pension entitlement. Since September 2014, some 2.1 million people of all ages have checked their state pension entitlement. But in April 2016, 25% of working age people knew how changes to the new state pension will affect them and 18% knew what their state pension was likely to be. Before February 2016, only people within 10 years of state pension age could request a pension statement and these people have a better understanding of how they are affected (paragraphs 4.7 to 4.9).

17 The Department did not directly contact groups of people affected by the rule changes. The rule changes mean some people will gain while others lose out. In response to a report by the Work and Pensions Committee, the Department will write to over 100,000 people who are unlikely to reach the minimum number of qualifying years. However, it rejected calls to write to other groups likely to lose out because it could not accurately identify the people affected and did not think contacting people directly was an effective approach. Instead, it sought to reach these groups through its communications campaign. Our recent report highlighted a lack of clear information for people with guaranteed minimum pensions, and that it has been difficult for them to find information on how the reforms affect them (paragraphs 4.6 and 4.10 to 4.13).4

18 The current new state pension communications campaign is not likely to be a major factor in increasing people’s saving for retirement. One of the Department’s objectives of its state pension reform was to prompt people to take action and plan for their retirement from a younger age. There is no evidence yet that the new state pension has encouraged people to save more for their retirement. The Department recognised that the campaign on its own was unlikely to shift behaviours substantially in the short term. Its approach to changing behaviours largely relies on the success of automatic enrolment in increasing savings, rather than on simplifying the state pension (paragraphs 4.14 to 4.17).

Conclusion on value for money

19 The Department has successfully managed the introduction of the new state pension. It introduced the changes one year ahead of its original plans, allowing the government to increase national insurance revenues and bring forward long-term changes to improve the sustainability of state pension spending. In implementing the programme, the Department reduced risks by decoupling plans for new digital services and working with HMRC to conduct extensive testing of systems used to calculate entitlement. The cost of the programme is within budget and operational performance has largely been maintained. So far, the Department’s implementation of the new state pension represents value for money.

20 Pensions reforms are long-term endeavours and the Department will need to tackle two important areas to achieve value for money as the reforms develop. First, the Department’s focus on policy delivery has reduced the scope for operational savings and postponed the introduction of digital services. The Department has yet to reintroduce its original plans for a more fundamental digital transformation of pension administration. Second, achieving the longer-term objectives of the new state pension will depend on how it interacts with wider reform of the pensions system. The new state pension tackles concerns about state pension affordability but increases the need for people to make their own retirement provision. It is not yet clear whether the simplification of the state pension will improve understanding of retirement savings and how this will affect wider pension reforms supporting private saving.

Recommendations

21 Now that the new state pension has been introduced, the Department has opportunities to achieve operational efficiencies and improve people’s understanding of their future pension planning. The recommendations are intended to help the Department respond to these challenges and achieve the longer-term objectives of the new state pension.

a The Department should develop proposals to evaluate the new digital services to fully understand their impact on administrative savings and customer service.

b As new information becomes available, the Department should exploit opportunities to test its systems, validate data quality and ensure its quality assurance framework addresses the cause of errors. The Department should also work with HMRC to establish a formal data assurance agreement for new state pension data.

c The Department should increase its emphasis on changing people’s behaviours towards their future retirement provision and tackle the barriers to saving. Building on its communication campaign, the Department should develop a broader strategy covering the range of pension reforms and explore the benefits of:

increasing the transparency of information provided to claimants by promoting its online service for people to find out more about their state pension entitlement and considering how best to inform people of their state pension ‘starting amount’ (ie their state pension entitlement as at 6 April 2016);

working with other government departments to use existing channels to provide information more directly to people – such as HMRC’s personal tax statements and the government’s pensions dashboard – and better educate people on the need for retirement planning; and

exploiting its engagement with charities, advice organisations, carers and the pensions industry to explore how to extend support to those who need it and ensure people directly affected by rule changes have clear information on the potential impacts.

1 The government forecasts the annual gross increase in national insurance contributions to be £5 billion. The cost to government, as an employer, of increasing national insurance contributions is £3 billion.

2 Comptroller and Auditor General, Evaluating the government balance sheet: pensions, Session 2016-17, HC 238, National Audit Office, June 2016. Comptroller and Auditor General, Automatic enrolment to workplace pensions, Session 2015-16, HC 417, National Audit Office, November 2015. Comptroller and Auditor General, Whole of Government Accounts, May 2016. Comptroller and Auditor General, Government interventions to support retirement incomes, Session 2013-14, HC 536, National Audit Office, July 2013.

3 Department for Work & Pensions, The single-tier pension: a simple foundation for saving, Cm 8528, January 2013.

4 Comptroller and Auditor General, The impact of state pension reforms on people with Guaranteed Minimum Pensions, Session 2015-16, HC 907, National Audit Office, March 2016.

Part One

The new state pension

1.1 On 6 April 2016, the government introduced the new state pension for people reaching state pension age from that date. This part sets out the main features of the new state pension and the objectives of the change.

About the new state pension

1.2 The new state pension is a benefit received by people reaching state pension age who have paid or been credited with sufficient national insurance contributions. It replaces a two-tier system, which combined a basic flat-rate pension, based on national insurance records, with an additional second state pension that was partially related to earnings. Figure 1 compares the new state pension with the previous system.

1.3 To qualify for the full new state pension, which is £155.65 a week in 2016-17, a person will need the equivalent of 35 qualifying years of national insurance contributions. Those with fewer than 35 years will receive a pro rata payment, provided they have at least 10 qualifying years.

1.4 To take account of a person’s national insurance contributions up to 5 April 2016 under the previous system, the government will calculate each person’s state pension entitlement as at 6 April 2016. This will be the person’s ‘starting amount’, to which he or she can add additional qualifying years.

1.5 The government’s aim is to ensure that – at the point of transition – everyone who qualifies for the new state pension will receive at least as much as they would have done under the previous system. To achieve this, the Department makes two calculations of a person’s entitlement up to the end of 2015-16: one using the new state pension rules and one using the previous rules. A person’s starting amount will be the higher of the two calculations.

Objectives of the new state pension

1.6 The new state pension is part of a long-term programme of pension reforms (Appendix Three, Figure 23). In 2004, the Pensions Commission reported on the adequacy of the pension system. It made a series of recommendations in 2005 to improve the structure of the system and successive governments have taken forward the reforms, including automatic enrolment, state pension age increases, and the new state pension. More recently governments have introduced further reforms such as more generous annual increases to the state pension, flexibilities in taking out pension savings, and lifetime individual savings accounts.

1.7 To varying degrees, the changes to the pension system address three objectives: making state pension spending financially sustainable; improving fairness; and increasing the adequacy of retirement incomes. The overall effect is to control state pension spending growth in the long term while simplifying the system and helping individuals to take greater personal responsibility for saving for retirement. Our previous report on government interventions to support future retirement incomes discusses in more detail the interactions between reforms and these objectives.5

1.8 The new state pension addresses these three objectives by reducing overall spending on state pensions by removing the earnings-related state pension component, increasing support to groups with traditionally low entitlement levels and simplifying the state pension system so that people find it easier to plan for retirement. Figure 2 summarises the problems that the new state pension is seeking to address and shows it:

Improves financial sustainability by reducing the growth of state pension spending. Spending on state pension and pensioner benefits was £117 billion in 2015-16 (including £89 billion on the state pension), equivalent to 6.3% of GDP. Without the new state pension the Department forecasts this would rise to around 8.1% of GDP in 2060, compared to only 7.6% under the new state pension. In addition, the new state pension will reduce spending on Pension Credit, and increase national insurance revenues.

Addresses concerns about fairness towards specific groups such as the self-employed. Unlike the previous system the new state pension treats self-employed people’s contributions in a similar way to other employees. The effect of the new state pension will depend on individual circumstances and the Department’s impact assessments have identified gainers and losers from the changes (Figure 3).

Encourages people to plan and save privately for retirement by simplifying the state pension and letting people know what they will get from the state. Our analysis confirms that the new state pension will reduce complexity (Appendix Two, Figure 20). However, transition will take many years, during which some complexity will remain. People retiring up to the 2060s are likely to have paid some national insurance under the previous system, so their state pension will not simply be based on the new rules. The Department will also need to maintain two pension systems, one of which for people who reached state pension age before 6 April 2016.

The business case for the new state pension

1.9 The Department’s business case is a short-term snapshot of the impacts of the new state pension up to 2022-23 (Figure 4). The effect of changes to pension entitlements is small over this period as the full effect of policy changes takes time to work through. The business case is dominated by large increases in national insurance contributions expected from the removal of reduced rates for contracting out.6 These are not overall savings to society (because increases in revenues to government are offset by matching costs to individuals and employers) but they do increase the affordability of state pensions to the state. The Department expects that the introduction of the new state pension will lead to small annual administrative savings, but once initial investment costs are also included, the programme’s operational costs exceed its operational benefits between 2012-13 and 2022-23.

1.10 The level of new state pension payments reduces the need for an additional means-tested benefit and will help to reduce spending on Pension Credit – the existing means-tested top-up to the state pension.7 In February 2016, more than 2 million people claimed Pension Credit and the Department spent £6 billion in 2015-16. By 2030-31, it expects 1.3 million people will be eligible and the annual cost will fall to £3 billion. This is despite an expected increase in the number of people claiming state pension from 13.3 million in 2015 to 15.5 million in 2030.

5 Comptroller and Auditor General, Government interventions to support retirement incomes, Session 2013-14, HC 536, National Audit Office, July 2013.

6 From 6 April 1978 to 5 April 2016, providers of defined benefit occupational pension schemes could ‘contract out’ of the additional state pension. Under contracting-out arrangements, employers and employees paid a reduced rate of national insurance. In return, employees would not build up entitlement to the additional state pension, and the pension scheme would provide a minimum pension to replace this. In 2015-16, employees who were contracted out paid 1.4% less national insurance, and employers paid 3.4% less.

7 The Department has also removed the savings credit element on Pension Credit.

Part Two

Implementing the new state pension

2.1 In this part we examine how the Department for Work & Pensions (the Department) implemented the new state pension, including whether it introduced the programme on time and within budget, and managed the project effectively.

Implementation a year earlier than originally planned

2.2 In January 2013, the government committed to introducing the new state pension not before April 2017. In March 2013, it decided to bring forward implementation to April 2016. This means that everyone in employment will pay the same rate of national insurance contributions from 2016-17, raising an estimated additional £2 billion in this year.

2.3 The government’s 2012 digital strategy committed all departments introducing new major transactional services to adopt a ‘digital-by-default’ standard.8 The Department therefore initially set out to introduce the new state pension as a digital project involving new IT systems and changes to business processes.

2.4 The decision to bring implementation forward to April 2016 increased the risks faced by the Department. In July 2013, it mitigated the risks by developing a contingency plan to update legacy IT systems in case digital projects were delayed (Figure 5).

2.5 By April 2014, the Department was concerned that a digital service for claiming new state pension would not be ready by April 2016. In August 2014, it agreed with HM Treasury to split the new state pension programme and remove the digital services. It focused on its legislative commitment – to implement the new state pension by April 2016 – by updating existing IT systems and leaving business processes unchanged. The Department took forward its work on digital services through a separate programme which re-prioritised proposals and extended the implementation time frame.

Successful implementation by April 2016

2.6 The Department met its legislative deadline by introducing the minimum necessary changes to its IT systems to enable the continued payment of state pension payments from April 2016. The Department’s decision to split the programme reduced the risks. It has successfully introduced the new state pension without disruption to the live service, updating systems, completing staff training and ensuring that guidance was available to operational teams.

2.7 Our previous work has identified the characteristics of good practice in implementing welfare reform.9 We used our core management cycle to assess the Department’s performance (see Appendix Two, Figure 21). We found the Department had demonstrated good practice in:

mitigating project risks by developing a contingency plan, undertaking scenario analysis and involving operational teams in reviewing planning assumptions;

establishing a stable and experienced project team, and maintaining this over the life of the project; and

collaborating effectively with HM Revenue & Customs (HMRC) on policy, operations and communications.

2.8 The project team also performed well when measured against the project’s critical success measures (Figure 6). Internal audit and recent Infrastructure and Projects Authority reports were also positive. In June 2015, an internal audit report found the programme had effective management structures, risk management arrangements and controls.

Postponed digital claims service

2.9 The Department’s original ambition to introduce a comprehensive digital service by April 2016 has not been achieved (Figure 7). It is introducing digital state pension services incrementally, and plans to spend £3.1 million to extend the life of its legacy IT systems beyond 2018. It prioritised a new digital statements service – jointly developed with HMRC – to make it easier for customers to find out more about their state pension and national insurance record. This was introduced in February 2016. The Department has restarted work on a digital claims service and expects a basic product to be available from April 2017. It does not expect the change of circumstances service to be available before 2018.

Project spending within budget

2.10 Up to March 2016, the Department had spent £57 million compared with a budget of £93 million because of lower than anticipated IT and HMRC operational costs (Figure 8). The Department now expects to spend £95 million to March 2020. We found that the Department had challenged suppliers when agreeing the cost of amendments to legacy IT systems.

Predicted departmental benefits from the project have reduced

2.11 The Department initially forecast that introducing the new state pension would deliver operational savings of £341 million. This has now fallen to £73 million (Figure 9). Some £157 million of the reduction was because the Department decided to introduce the new state pension using legacy systems and defer the digital services. The Department further reduced the estimated benefits after it downgraded assumptions about staff savings and found a calculation error. The costs of implementing the project are now expected to exceed the operational benefits by £25 million.

8 Available at: www.gov.uk/government/uploads/system/uploads/attachment_data/file/296336/Government_Digital_Stratetegy_-_November_2012.pdf

9 Comptroller and Auditor General, Welfare Reform – lessons learned, Session 2015-16, HC 77, National Audit Office, May 2015.

Part Three

Processing the new state pension

3.1 In this part we consider the steps the Department for Work & Pensions (the Department) and HM Revenue & Customs (HMRC) have taken to assess the risks to the accuracy of people’s state pension payments. We also review the early impact on the Department’s performance in processing new state pension claims.

Data used to calculate state pension payments has not changed

3.2 People rely on the departments to calculate their state pension accurately. It can be difficult for people to check their entitlement as calculations can be complicated, particularly where people have gaps in employment, were in a contracted-out pension scheme or worked abroad.

3.3 The source data used to calculate state pension entitlement has not changed. Each person’s entitlement is based on their national insurance contributions, including credits they may have built up and any voluntary contributions. HMRC holds each person’s national insurance record and calculates the amount they are entitled to. The Department then makes any final adjustments before payment is made.

3.4 HMRC conducts automated and clerical checks to confirm the completeness and accuracy of the national insurance contributions into its National Insurance and PAYE system. In 2015-16, 96% (£86 billion) of national insurance contributions paid via employers were submitted through HMRC’s Real-time Information (RTI) system (Figure 10).10 Our financial audit work provides assurance that, once received into RTI, contributions are input accurately into HMRC’s systems.11

3.5 HMRC recognises that people’s national insurance contribution records can occasionally be incomplete or inaccurate because, for example, contributions may be recorded to the wrong account or credits are not allocated. HMRC believes the onus is on people to check their national insurance record. People have always had the option to do this and could request information from HMRC. In reality, this has been difficult for people to do. People have not been aware of this service and have found it difficult to interpret the information. The introduction of the online Check Your State Pension service in February 2016 has now made people’s state pension forecasts and national insurance records more accessible.

3.6 The Department does not review the accuracy or completeness of the underlying national insurance data used to pay state pension. It relies on HMRC to accurately record national insurance contributions and calculate each person’s initial state pension entitlement. It does not receive any specific assurances from HMRC on data quality. Although the departments have a general memorandum of understanding for the exchange of data, there is no formal agreement that refers to the calculation of state pension entitlement. The lack of a formal agreement increases future risks; for example that changes might be made to systems or processes without understanding fully the effect on data quality.

System changes were tested comprehensively

3.7 The departments made changes to 14 main IT systems used to calculate and pay state pension. They conducted extensive testing. This included assessing how their systems interacted by setting up a ‘shared environment’, testing a wide range of scenarios and reviewing live customer claims before making payments in April 2016. The testing was timely and provided the departments with assurance on the accuracy of new calculations.

3.8 The Department checks the accuracy of its processing and estimates the level of errors caused by administrative mistakes. In previous years, the level of error has been very low. In 2015-16, overpayments were just 0.1% of expenditure (£110 million) and underpayments were 0.3% (£260 million). Its testing does not, though, review the completeness of HMRC’s national insurance data or assess the risk of fraudulent claims. Neither department has undertaken a full assessment of the completeness of the historic national insurance records used to calculate people’s state pension entitlement, although HMRC conducts checks to ensure the completeness of data received from employers.

New opportunities to refine processing and increase transparency

3.9 In addition to introducing the new state pension, the departments have implemented initiatives which will improve data quality, make contributions information more readily available and strengthen monitoring. These include:

HMRC reconciling its national insurance data with defined benefit pension schemes that were contracted-out before 6 April 2016. It has not systematically recorded the number of changes made to national insurance records but a one-off review found that nearly 5% of 58,500 queries raised by schemes on pensioner members resulted in a change to members’ national insurance records. However, only 68 (0.1%) led to a change in the state pension award for the pensioner. In August 2016, the Department started to monitor changes made to state pension payments.

The new online service Check Your State Pension was introduced in February 2016. This provides people with more information on the calculation of their entitlement and the chance to check their contributions more easily.

The Department will publish its first estimate of the level of error in new state pension in May 2017.

Reconciliation of national insurance records

3.10 The Department is calculating everyone’s entitlement to state pension as at 6 April 2016 when the new system was introduced. It does this by calculating each person’s ‘starting amount’, reflecting contributions to April 2016. Future entitlement will then be built under new scheme rules. The completion of HMRC’s reconciliation exercise is important in ensuring that starting amounts are accurate.

3.11 HMRC’s Scheme Reconciliation Service aims to help pension scheme administrators reconcile data on their scheme membership with HMRC’s national insurance records. It was introduced in April 2014 and HMRC aims to complete reconciliation work by December 2018. Use of the service is voluntary. Initial take-up of the service was slow, with a low volume of queries from pension scheme administrators in the first 10 months. By August 2016, pension schemes representing 14.2 million individual memberships (77% of pensioner and deferred pension scheme members) had registered with the service. HMRC also plans to include a further 6.2 million active memberships from December 2016.12

3.12 HMRC has not always met its aim of responding to schemes’ queries within three months although its performance has improved since March 2016 (Figure 11). In September 2015, it established a customer relationship team to liaise with pension schemes. HMRC is also exploring ways of automating the way its handles simple membership queries to improve its response time. In August 2016, none of the outstanding queries were over three months old.

3.13 Progress in reconciling scheme data has been slow. As at August 2016, HMRC had received 1.6 million queries from schemes and processed 1.3 million of these. However, it had only confirmed 1.7% of all registered deferred and pensioner scheme memberships. In September 2016, HMRC reviewed the volume of queries received to date and forecast that it will receive 55% more queries than the 4.5 million originally expected. HMRC is considering the resources needed to complete scheme reconciliation by December 2018.

3.14 HMRC has introduced other services to support pension schemes and improve its processing. In April 2016, it introduced an online guaranteed minimum pension checker, developed by HMRC and available publicly since April 2016 for use by pension schemes.13 By August 2016, the service had completed 972,000 checks, significantly above the 550,000 checks in 2016-17 HMRC had initially expected. HMRC also required employers to submit information on pension schemes in their RTI returns until March 2016, which improves its efficiency of processing.14

Processing of claims deteriorated in 2016

3.15 The Department expects to process 407,000 claims for the new state pension in 2016-17.15 This is fewer claims than in 2015-16, because the Department has accelerated equalising the state pension age. As a result, women born after 6 April 1953 will receive their pension later than previously planned.

3.16 The Department’s performance against its processing targets worsened between March and July 2016, even though it received 7% fewer claims than in the same period in 2015 (Figure 12). The Department says it had reduced capacity to process new state pension claims as the Pensions Directorate reallocated staff to cope with increased demand for its telephony services. This was partly because its online portal had not been updated to include the latest dates for state pension equalisation for women but also reflects an increased volume of enquiries relating to the new state pension. It restored the online service in July 2016 and processing performance has since improved.

3.17 The Department’s compliance with its rules for processing claims is well below target. It has identified the five critical points for complying with the overall process, and performance for these is also below target. The Department’s level of compliance with its processes has stayed at the same level since the introduction of the new state pension. It says that most performance issues do not relate to factors that affect the accuracy of calculating new state pension payments but, nonetheless, improving compliance will reduce the risk of errors. Historically, the Department has achieved low levels of over and underpayments. Data on performance since the introduction of the new state pension will be available from May 2017.

3.18 The Department also monitors how satisfied people are with the service they receive. Rates for 2016-17 are not yet available, but Department performance has been strong in the past with 97% of state pension claimants satisfied in 2015-16.

10 Cash based figures for Great Britain only. Contributions via employers (Class 1) will include contributions from employers and employees on a cash basis with deductions made for statutory sick pay and statutory maternity pay which are reimbursed by the Department.

11 Our financial audit is conducted in line with auditing standards and financial reporting requirements.

12 Based on 18.4 million deferred and pensioner members in defined benefit pension schemes reported in: Office for National Statistics (2015) Occupational Pension Schemes Survey, 2014.

13 This service gives previously contracted-out schemes an instant and indexed account of their guaranteed minimum pension liabilities for individual memberships.

14 This enables HMRC to automatically close contracted-out records up to April 2016 without schemes having to send termination notices.

15 The Department also expects to process an additional 30,000 state pension deferred claims under old rules in 2016-17.

Part Four

Communicating the changes to the state pension

4.1 Improving understanding of the state pension is one of the Department for Work & Pensions’ (the Department’s) objectives to encourage retirement saving. In this part we examine the effectiveness of the Department’s communication campaign. We assess its management of the campaign and whether this raised awareness of state pension changes, improved people’s understanding of their personal implications and prompted people to take action.

The campaign showed many aspects of good practice

4.2 Communicating the impact of pension reforms is not straightforward. The government has introduced various reforms to promote private saving for retirement, particularly through automatic enrolment. The simplification of the state pension aims to improve people’s understanding of their long-term retirement income, and support a behavioural shift towards greater responsibility for saving. But pension rules are complicated, people face many options and it is not easy to generalise about the impact of policy changes on individuals, given the number of factors that affect their entitlement.

4.3 The Department’s communications campaign began in November 2014 and used a multichannel approach, including radio and digital advertising, press, social media, the GOV.UK website and stakeholder engagement. The Department’s objective was to increase people’s awareness and understanding of the new state pension, prompt them to find out more about their entitlement and take action to improve their retirement income.

4.4 Because of the limited time before the new state pension was launched, the Department initially targeted people within 10 years of state pension age. In the year up to February 2016 these were the only people who could request a new state pension statement. The Department developed a phased approach and focused on dispelling common misconceptions, such as all people would immediately receive the full flat-rate.16 The Department continuously monitored the impact of the campaign, refocusing its communication channels and tailoring its messages. It intends to target a wider audience with later phases of the campaign after April 2016. Our full assessment of the Department’s campaign, which cost £3 million, is in Appendix Two, Figure 22.

Awareness of changes to the new state pension has improved

4.5 The Department’s campaign has improved general awareness about the new state pension, especially among people closest to retirement (Figure 13). In April 2016, 77% of those within 10 years of state pension age were aware of planned changes.

4.6 The campaign did not include unsolicited mass mailings of people affected. In November 2014, the Department tested a direct mail campaign to explain the new state pension. It concluded that a large-scale direct mail campaign was unlikely to engage target groups. Around a third of recipients accurately remembered receiving the letter. These people showed greater general awareness of the new state pension, and were slightly more likely to seek further information. But they did not show a greater understanding of the new system, including how much the new state pension would be or where to go to find out more.

Many people do not understand how the changes affect them

4.7 The Department’s expectation is that people who understand their pensions – including what they will get from the state – will plan for their retirement from a younger age. General understanding of changes to the state pension has improved since June 2014, particularly among people within 10 years of the state pension age. For example, in April 2016, two-thirds of working age people knew there was a link between national insurance and the state pension received, and that under the new system people would need a minimum number of years to get a state pension.17

4.8 But many people still do not understand how they are directly affected by the new state pension, meaning they are less likely to act as the Department intends. Survey results show 25% of working age people know how the change will affect them, including around half of those within 10 years of retirement (Figure 14). In April 2016, fewer than half of people within 10 years of their state pension age knew what their state pension is likely to be, and for all working age people, 18% knew (Figure 15).

4.9 The Department’s campaign sought to prompt people to find out more about their state pension entitlement, initially focusing on people closest to retirement. From September 2014 to January 2015, the Department made paper state pension statements available to people five years from state pension age, and from February 2015 to March 2016, it extended this to people within 10 years. Between September 2014 and March 2016, the Department issued 801,000 state pension statements (equivalent to 11% of people over 55 years old). Since April 2016, the Department made paper statements available to all ages and has issued a further 282,000. In February 2016, the Department launched an online service to allow people of all ages to check their forecast state pension entitlement. By the end of August 2016, over one million people had used the digital service (Figure 16).

4.10 The Department’s campaign has been criticised in both the press and Parliament for not clarifying complex changes, or providing people with personalised explanations of what the new state pension means for them.18 We reviewed 224 newspaper articles regarding the new state pension published between November 2014 and July 2016. Just under 60% were critical of the reform, particularly about confusion over the effect of the changes on people.19 A number of factors may affect understanding of pension reforms and only some of the articles referred directly to the communications campaign.

4.11 In March 2016, we reported that the there has been a lack of clear information for people with guaranteed minimum pensions about the impact of state pension reform, and that those likely to lose out had not been able to find the information they need.20 In March 2016, the Work and Pensions Committee also challenged the Department’s decision not to target its communications campaign at subgroups likely to lose out under the new state pension. The Department has since agreed to write to over 100,000 people within nine years of state pension age and whose national insurance record suggests that they will not meet the 10 years minimum qualifying period for the new state pension. The Department plans to evaluate whether this one-off exercise has been effective in encouraging these people to act.

4.12 The Department rejected the Committee’s recommendation to write to two further groups adversely affected by the new state pension. These were:

people, largely women, who are no longer able to derive pensions based on their spouse’s national insurance record;21 and

people reaching state pension age from 6 April 2016 who are eligible for guaranteed minimum pensions which the government will no longer uprate through the state pension to take account of inflation.22

The Department said that it could not accurately identify who might be adversely affected in order to write to them. The Department has, instead, sought to reach these groups through working with stakeholders and its existing communications campaign, to prompt people to request state pension statements and consult the GOV.UK website.

4.13 There remain misconceptions about the new state pension. For example, about 60% of people think that if someone retires after April 2016, having worked for 35 years or more, they will always get the full amount of state pension. In fact, the amount they receive will depend on their National Insurance record, taking account of any periods when they were contracted-out.

People are not yet saving more for their retirement

4.14 The Department’s objective is that the new state pension will encourage people to plan for their retirement. It is still early days, but there is no evidence yet that people have actively begun to save more towards their pension (Figure 17). Around 45% of working age people have taken some action in the last six months in relation to pensions or retirement, mainly through speaking to others. Eleven per cent said they have started saving or are saving more.

4.15 One reason people do not save for a pension is lack of knowledge about their future retirement income. The communications campaign has sought to address this. But the Department acknowledges that a communications campaign alone is insufficient to prompt behaviour change. The Department has identified that there are many other reasons why people do not save for pensions. These include lacking the money to invest, because of other financial commitments; showing inertia about starting a pension; and lacking confidence to make financial decisions (Figure 18).

4.16 The Department has not yet tackled all of the barriers that discourage people from saving for their retirement, although other pension reforms help. For example, the government estimates that, by 2019-20, people will save an extra £17 billion a year in workplace pensions through automatic enrolment. As eligible workers do not need to do anything to become a member of a workplace pension through automatic enrolment, the reform builds on evidence of inertia in people’s savings decisions to encourage more people to save for retirement. The government estimates that, by 2018, 10 million workers will have started saving, or will be saving more, because of automatic enrolment.

4.17 The Department plans to spend £7 million on state pension communications between 2016 and 2020. Now it has introduced the new state pension, it recognises the need to adapt its communications campaign to achieve the project’s long-term objectives. The Department aims to raise awareness of the importance of checking state pension entitlement among a wider audience. To help with this, it intends to align its campaign with its Pension Wise and automatic enrolment campaigns. The Department also intends to highlight planned rises in state pension age, and specifically the date people can start to claim their state pension.

16 In 2016-17, 13% of people reaching state pension age will receive the full flat-rate pension of £155.65 per week, 32% will receive more as a consequence of additional state pension built up under the previous system. The remaining 55% will receive less than £155.65, mainly because they do not have 35 qualifying years or have been members of contracted-out pension schemes. The proportion of people receiving the full flat rate will rise steadily over time, exceeding 80% by 2030.

17 For all working age people, knowledge of the link between national insurance and the state pension, and knowledge that people would need a minimum number of qualifying years to get a state pension, increased from 58% in June 2014 to 66% in April 2016. For those within 10 years of the state pension age, knowledge of the link between national insurance and the state pension increased from 68% to 84%, and knowledge that people would need a minimum number of qualifying years to get a state pension increased from 73% to 81%.

18 Work and Pensions Committee, Communication of the new state pension, Eighth Report of Session 2015-16, HC 926, March 2016.

19 Of the 224 we reviewed: 131 (58%) were negative; 80 (36%) were neutral; and 13 (6%) were positive about the reform.

20 Comptroller and Auditor General, The impact of state pension reforms on people with Guaranteed Minimum Pensions, Session 2015-16, HC 907, National Audit Office, March 2016.

21 The Department told the Work and Pensions Committee that an effective, targeted direct mail approach is not available, because it was not possible to identify who all the affected people may be. The Department said this is because it cannot predict whether someone will be widowed in the future, and it does not have accurate information about a person’s marital status. The Department concluded that it should supplement its approach of encouraging people to seek personalised information on their state pension through raising awareness and working with stakeholders. For example, it said that it had worked with Age UK, to develop comprehensive fact sheets, and had placed information in media likely to be consulted by the affected groups. Work and Pensions Committee, Communication of the new state pension: Government Response to the Committee’s Eighth Report of Session 2015-16, First Special Report of Session 2016-17, HC 229, June 2016, paragraphs 20-23.

22 The Department told the Work and Pensions Committee that it estimated that by 2020 around 25% of these people who have reached state pension age will lose, with an average loss of £2 per week, whereas 75% of people with a pre-1988 guaranteed minimum pension will gain from the new state pension by, on average, £4 a week. It said it was not planning any specific measures to raise awareness among this cohort other than its existing communications campaign. Work and Pensions Committee, Communication of the new state pension: Government Response to the Committee’s Eighth Report of Session 2015-16, First Special Report of Session 2016-17, HC 229, June 2016, paragraphs 24-25.

Appendix One

Our audit approach

1 This study looked at the implementation of the new state pension by the Department for Work & Pensions (the Department) and HM Revenue & Customs (HMRC) and whether it delivered value for money. We reviewed:

the objectives of the new state pension;

the Department’s implementation of the new state pension;

the Department’s performance in processing new state pension claims; and

the effectiveness of the communication campaign.

2 Our audit approach is summarised in Figure 19. Our evidence base is described in Appendix Two.

Appendix Two

Our evidence base

1 We reviewed whether the Department for Work & Pensions’ (the Department’s) implementation of the new state pension project was value for money by analysing and evaluating evidence collected between May and September 2016. We assessed performance to date in implementing the new system, and identified the risks and challenges the Department faces in the future to achieving the policy objectives.

2 Our audit approach is outlined in Appendix One. Our evaluative criteria draw upon various National Audit Office frameworks and previous reports. We used these evaluative frameworks to identify the evidence we needed to make a balanced, informed judgement on the performance of the Department. We agreed the use of the frameworks with the Department.

3 We considered how the Department will meet its objectives for the new state pension by:

reviewing documentation that sets out the policy intention and design of the new state pension to understand how far the project meets these objectives and the impact of the changes on particular groups of people;

interviewing staff at the Department and HM Revenue & Customs (HMRC);

reviewing third party reports and meeting with the Pensions Policy Institute, the Pensions and Lifetime Savings Association and Citizens Advice to ascertain their views on the new state pension;

using our in-house economics expertise to review the Department’s impact assessments; and

comparing the changes to the new state pension against seven principles set out in our November 2005 report Dealing with the complexity of the benefits system to assess whether the new state pension reduces complexity. Our assessment is summarised in Figure 20.23

4 We assessed the Department’s performance in implementing the project by:

comparing the original scope and timetable for implementing the new state pension with what was delivered in April 2016 to understand how these had changed, including the implications of removing the digital services from the project;

comparing business cases between May 2014 and May 2016 to see how costs and benefits have changed;

comparing costs to-date with budget;

reviewing performance against the project’s critical success factors, drawing upon internal audit and Infrastructure and Projects Authority reports, to understand how the Department compared against a range of evaluative criteria; and

using the National Audit Office’s core management cycle to assess the Department’s performance against the characteristics of good practice associated with implementing welfare reform. A high level summary of the findings is in Figure 21.

5 We assessed the Department’s and HMRC’s performance in processing new state pension claims by:

identifying the changes to the systems which support payment of the new state pension. Where changes were made to IT systems, we reviewed the extent to which HMRC and the Department adequately tested these to ensure the accuracy of pension calculations;

drawing on our financial audit of HMRC and the Department’s systems to establish the level of assurance that could be placed on their systems and underlying data sources;

interviewing HMRC staff, and reviewing documents and performance information to assess progress in reconciling national insurance records with pension schemes; and

reviewing operational data to assess performance and how this has been affected by the introduction of the new state pension.

6 We assessed the effectiveness of the Department’s communication campaign by:

reviewing its communications strategy and supporting documents to understand the Department’s approach;

reviewing data from the Ipsos MORI tracking survey to assess the impact of the communications campaign;

collating data on the number of state pension statements that have been issued;

reviewing press coverage of the communications campaign, including 224 press articles on the new state pension published between November 2014 and July 2016;

reviewing third party evidence to ascertain their views on the introduction of the new state pension, including the Work and Pensions Committee’s report and supporting evidence from its inquiry on communicating the new state pension; and

assessing the communications campaign against seven key questions set out in the National Audit Office’s framework ‘Auditing the use of behavioural insights’. Our assessment is summarised in Figure 22.

23 Comptroller and Auditor General, Dealing with the complexity of the benefits system, Session 2005-06, HC 592, National Audit Office, November 2005.

Appendix Three

Major developments in pensions policy

Appendix Four

State Pension Delivery Programme

1 The new state pension is one of several projects within the Department for Work & Pensions’ State Pension Delivery Programme (Figure 24). Collectively, the Department intends these projects to fulfil changes to the state pension brought about by the 2011 and 2014 Pension Acts.

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