The Department for Work and Pensions failed to explain the detrimental impact ending contracting out had on increases for those with a guaranteed minimum pension, the Parliamentary and Health Services Ombudsman concluded.
According to The Times, the ombudsman found the government body was “not open and accountable” about how savers with GMPs stopped receiving inflation top-ups after a new state pension was introduced in 2016.
The ruling followed a complaint about the issue, though members who lost out due to this change will not be entitled to compensation.
In a decision, the ombudsman criticised the DWP for failing to follow its own service standards, customer charter and communications strategy. The department was supposed to raise awareness of the impact of any periods of contracting out and make information “complete, consistent, clear and accurate”.
According to The Times, the ombudsman said: “The DWP failed to fully acknowledge and explain negative impacts of pension reforms to those with large periods of contracting out, due to reach state pension age shortly after April 2016.”
The DWP now has three months to report back to the Parliamentary Ombudsman, specifically on what action its officials will take to ensure that affected individuals receive appropriate communication from the DWP about their state pensions.
A DWP spokesperson said: “We are considering the impact of the ombudsman’s findings.”
Contracting out meant defined benefit schemes could opt out of the state earnings-related pension scheme, so individual members would not be tripling up on pension benefits by building up a basic state pension, Serps, and an earnings-related occupational pension.
Between 1978 and 1997, the employer and employee would be allowed to pay a reduced rate of national insurance contributions and the worker would no longer build up rights under Serps if their scheme offered a guaranteed minimum pension.
Schemes were not required to increase the GMP accrued between 1978 and 1987 in line with inflation. But benefits accrued between 1988 and 1997 were indexed, up to a maximum of 3 per cent a year.
But when the new state pension was introduced in 2016, contracting out ended and Serps was scrapped. Inflation increases for private sector schemes were also stopped - though they continued for public sector workers.
David Everett, partner at LCP, said this was a "particularly complex" aspect of the transition from the old to the new regime, under which no-one was meant to lose out.
He said: “But even those who will be adversely affected during the course of their retirement should experience some mitigation, by virtue of the fact that all of their single-tier pension will certainly increase with earnings, and since April 2016 has benefitted from the triple lock.”
Steve Webb, director of policy at Royal London, was pensions minister when the new state pension was announced.
He noted that it is a very difficult task for the government to find out who the affected individuals are.
He said: “There is no sort of central database of people with pre-1988 unindexed GMPs, you cannot send everybody a letter. [But] once the legislation was through, probably more could have been done to communicate to people.”