State pensions blunder may cost £8bn

Compensation to holders of second state pensions who were wrongly advised by the Government over provisions for their retirement could cost the taxpayer more than £8bn.

Alistair Darling, the Social Security Secretary, announcing steps to deal with the massive blunder yesterday, said that " a number of people" could have been wrongly informed about their entitlement to SERPS.

Mr Darling said the planned halving of a widow or widower's entitlement to their spouse's SERPS would now be delayed until October 2002 - two and a half years later than originally envisaged. The errors happened mainly during the last Conservative government, when ministers failed to update pensions leaflets informing the public about the policy change.

Mr Darling said in a Commons statement that he would introduce "root and branch" reform, setting up a pensions directorate ensuring better services for older people. He gave an estimated cost of £2.5bn for compensation, although a report by the National Audit Office showed it could be more than £8bn.

People who felt they had been wrongly advised could contact the Department for Social Security and it would be up to officials to disprove a claim. Anyone widowed before October 2002 would still inherit their spouse's full SERPS entitlement. "As a matter of principle we believe that when someone loses out because they were given the wrong information by a Government department, they are entitled to redress."

Ministers had thought about deferring the change for another 14 years, but had decided to set up a "protected right scheme" instead. "We want to ensure that everyone who has been misled - and lost out - gets redress. Deferral alone does not solve the problem," he said.

The Inherited SERPS scheme will allow individuals to have their current rights to inheritance of SERPS preserved. To be eligible, people must be married, have paid National Insurance since 1978 and be able to show they have been wrongly advised after 1986.

Mr Darling said his decision to set up the pensions directorate was prompted by finding that there was "no clear line of accountability for ensuring that the policy changes were properly implemented". Pledging full responsibility for "clearing up the mess", he said the directorate would be responsible for all pensioner services.

David Willetts, the shadow Social Security Secretary, said: "I make no attempt to evade responsibility. Everyone involved must take their share of responsibility."