Letter from Permanent Secretary, Department
for Work and Pensions to Committee Chairman
1. I was pleased to have the opportunity
to share my thoughts about the way Fraud and Error is reported
in our Departmental Accounts when I appeared before the Committee
on 4 February; and I was particularly grateful for your invitation
to follow that up with a letter setting out my views in more detail
(Question 30).
2. I think it may help the Committee if
I separate the issue into three parts:
— How well or badly is the Department
doing in reducing the actual level of fraud and error?
— In what circumstances should the
Department's Accounts be qualified?
— The evidence that a 1% threshold
for qualification is unattainable.
LEVELS OF
FRAUD AND
ERROR
3. Since taking up my appointment, approaching
two and a half years ago, I have, as I think the Committee knows,
made bearing down on fraud and error one of my top priorities
one which Ministers in the Department fully share.
4. As evidenced in the NAC Report, the Department
has a well defined and successful strategy for tackling benefit
fraud—based on prevention, detection and deterrence. At
0.6% of benefit expenditure, fraud is at its lowest ever level,
down from 2% in 2000-01. We intend, nevertheless, to maintain
our focus and to seek to bring about further improvements as I
set out at the Committee.
5. With error at 1.6% in total, I accept
without question that we need to do more to reduce it. The 1.6%
is split equally between official error and customer error. Our
response to this has been to establish an Official Error Task
Force in January 2006 followed by the publication in January 2007
of our comprehensive error reduction strategy to tackle both customer
and official error. By September 2007, the Task Force had been
successful in identifying and correcting over £2 million
in weekly errors which would have continued had the Task Force
not intervened. Over the last year we have been implementing our
strategy to reduce error in all benefits, including Housing Benefit,
with a number of key initiatives already in place. These include
further error cleansing, enhanced checking procedures and IT enhancements
to stop error from occurring. The strategy aims to produce savings
of £1 billion over a five year period to 2012 by reducing
losses from both customer and official error.
6. The Department is also addressing problems
associated with complexity through its benefit simplification
agenda and the creation of a dedicated Simplification Unit. In
parallel we are engaged in a major customer focused Change Programme
which aims to provide our customers with a single point of access
to all our services thus easing their access to benefits and services
and helping to improve our administrative efficiency. In addition,
as I set out in my recent letter to you of 24 January,[10]
we have, in response to the Committee's own recommendations, thoroughly
reviewed and reduced the number of our leaflets on benefits to
make them more readily understandable to the public with the aim
of contributing to a reduction in customer error.
ACCOUNTS QUALIFICATION
7. The purpose and value of an audit opinion
is to inform the users of the accounts of the body concerned of
matters which are material in the context of the business in question.
Under Government accounting rules, our auditors are asked to provide
an opinion on the accounts from both a "true and fair"
and a "regularity" perspective the first of these tests
being one which applies equally to private sector accounts but
the second of which does not. In the discussions which the Department
has been having with the NAO there is common ground that the basis
of an opinion in respect of both "true and fair" and
"regularity" should reflect the context of the Department's
business and the expectations of the users of the accounts in
particular Parliament. This is essential if a qualification is
to convey information that meets the intentions and expectations
of the user.
8. For most of the last 18 years during
which the Department's accounts have been qualified, the test
that has been applied to qualification has been whether fraud
and error combined have exceeded a materiality threshold of 1%
of total payments. For example, in the then Comptroller and Auditor
General's Report on the DWP Resource Accounts for 2003-04 he said:
"I have indicated to the Department that to avoid qualification
it would have to reduce the level of estimated fraud and error
to below one per cent of gross expenditure, equivalent to just
over £1 billion in 2003-04".
9. More recently, however, the National
Audit Office have said that their assessment of what is material
for the purposes of reaching an opinion on the accounts is a matter
of judgement and includes both quantitative (value) and qualitative
(nature) considerations. The present Comptroller and Auditor General
has very helpfully set out for me the approach that he takes on
these issues based on a set of criteria for reporting materiality.
In that regard he has noted that the NAC might use a percentage
threshold, but are not bound to do so, and in any case may need
to report on errors significant by nature, regardless of size.
10. I very much welcome this approach which,
we believe, will enable us to work with the NAO to determine how
reasonable are the Department's measures to pay each benefit accurately,
to deter fraud in that benefit and how well we are doing in encouraging
customers to make accurate claims. In considering our performance
in context we believe, as an illustration of the benefit of such
an approach, that it will, for example, allow us to consider further
with the NAO the nature of customer error which, even if technically
irregular, is we believe fundamentally different in kind from
the other two components of total fraud and error; namely fraud
itself and official error. In respect of customer error, our view
is that if, at the point when a customer makes a claim for benefit,
or gives us details of a change of circumstances, he or she gives
us information which they believe to be true and which we have
no reason to disbelieve then, in accordance with our legal obligations,
we cannot do other than award entitlement on what we believe to
be the true facts.
11. More generally, in the light of the
approach which the current Comptroller and Auditor General has
now set out, and which I regard as a particularly welcome development,
it could be argued that it renders nugatory the question of whether
there has ever been, or ever will be, a realistic prospect of
the Department meeting a 1% test. Nevertheless, I believe that
it is worth setting out the evidence on this issue for the Committee
not least because this has been the basis on which the Department's
accounts have been qualified for most of the past 18 years.
THE EVIDENCE
THAT A
1% THRESHOLD IS
UNATTAINABLE
12. The evidence that a 1% threshold is
unattainable is based on two core arguments; first, the inherent
implausibility of such a threshold and, secondly, the weight of
comparator evidence from this country and abroad.
13. On the first, to come below a 1% threshold
would require us to bring the total of fraud, customer error and
official error, combined. below such a figure.
14. In respect of fraud the recent NAO Report
noted that, "having reduced estimated levels of fraud
to 0.6% of benefit expenditure, it is likely that the Department
will find it increasingly difficult to secure significant further
year on year reductions". If that is so—as I believe
it is—then it follows that error, both official and customer
combined, would have to fall below 0.5% compared with its present
level of 1.6% for the Department to fall below a 1% threshold.
15. I am in no doubt that the figure of
1.6% can, and should, be reduced. At the same time we have, by
common consent, a benefit system of huge complexity, involving
the payment of over 40 different benefits at more than 300 different
benefit rates to some 20 million people at any one time, and in
a society in which people's backgrounds are now more varied and
their lives now change in terms of their status, employment, location
and incomes at a faster rate than, almost certain a any time in
our history. Against that background, the suggestion that error,
both customer and official combined, can be reduced to less than
½ p in every £1, is, in my view, simply not credible.
16. That conclusion to come to the second
core argument is borne out by the comparator evidence both from
this country and abroad.
17. During our discussions at our recent
hearing, Members were interested in the approach adopted in countries
with similar systems to ours. Indeed it is interesting to note
that other countries where levels of fraud and error are comparable
to ours take approaches to qualification quite different from
ours.
18. The most authoritative evidence of this
position comes from the NAO's own Report, International Benchmark
of Fraud and Error in Social Security Systems, (HC 1387, 2005-06,
20 July 2006). This sought to measure levels of benefit fraud
and error in nine major industrialised countries: Australia, Canada,
France, Ireland, the Netherlands, New Zealand, Sweden, the USA
and the UK. It found that many of these countries simply do not
measure fraud and error in their benefit systems. Of those that
do none has overall levels of fraud and error lower than our own.
The overall conclusion of the report was that the Department has
levels of social security fraud and error which are similar to
those in comparable countries, but has a better understanding
than other nations of the problems and is doing more to tackle
them.
19. We also appear to benchmark favourably
against private sector comparators. According to a recent research
paper by the Association of British Insurers,[11]
the estimate of total general insurance fraud in the context of
the size of the general insurance market in 2006 was 5% of net
written premiums. This is a less exacting measure than the percentage
of payments made, the basis that is used in determining DWP's
level of fraud. While as noted in paragraph 7 above, the tests
applied by their respective auditors are different, it is nevertheless
noteworthy that no major insurer has had its accounts qualified
as a result of experiencing this level of fraud.
20. In terms of the private sector more
generally, research carried out for the Department by McKinsey
in November 2005 found that the best practice financial institutions
typically achieve "leakage" of 2%-3%. The research went
on to say that comparison between the Department and financial
institutions was valid and potentially useful as, like large scale
financial institutions including banks and insurance companies,
the DWP is required to manage a complex and variable web of financial
payments efficiently and effectively.
21. It should also be noted, when making
comparisons, that the Department is also particularly rigorous
in its approach toward estimating the level of fraud and error.
Estimates are prepared annually for the Resource Accounts and
are conducted to Office of National Statistics standards. During
2007-08, the Department has significantly increased the timeliness
of the data used to produce the estimate. Historically, the estimate
has been based on previous year data. However, for the 2007-08
Resource Accounts we will incorporate six months of in-year data
for the first time, We have also introduced an improved quality
assurance regime and continued to refine the estimates for smaller
benefit streams. For CSRO7 we plan to introduce further changes,
most notably to increase the range of benefits subject to continuous
measurement.
CONCLUSION
22. I was candid with the Committee in giving
my view that, irrespective of our best efforts to date and our
continuing commitment in the years to come, I regard it as impossible
that we will ever get total fraud and error below 1%. That is
why I said that, in my view, qualification had become, over nearly
20 years, an annual ritual which was not helpful to those who
sought genuinely to understand the true financial position, regularity
and performance of the Department. Nor has it been remotely helpful
to me and my top team in terms of motivating our staff. Targets
within an organisation which are seen as stretching, but ultimately
achievable, are generally highly motivating. Targets which are
seen as simply out of reach are, by contrast, highly-demotivating
and, as a result, tend to lead to worse rather than better performance.
23. All of this said, I believe that we
do now have a real opportunity to establish with the NAO a basis
for supporting an opinion which fully reflects the context of
the benefits we deliver and the diverse customer base that we
serve. Such an approach could, I believe, provide an opinion which
fully reflects the context aligned with Parliament's intentions;
drive appropriate behaviours; but not in any way compromise value
for money or customer service. In that context I should like to
re-iterate two key points:
— first, that I and the DWP remain
totally committed to tackling error and driving it down while
continuing to maintain the focus on reducing fraud; and
— secondly, that we remain fully committed,
equally, to continuing to provide robust estimates of overall
fraud and error.
24. In terms of the way forward, I am pleased
to say that we have been discussing these issues very fully with
the Comptroller and Auditor General both with Sir John Bourn before
his retirement and more recently with Tim Burr. A good understanding
of the issues has been reached on both sides. As a result a clearer
understanding of our audit approach has resulted and we now have
a better-informed relationship. I also accept, without question,
that it is for the Comptroller and Auditor General to take an
independent view on each set of accounts on which he is required
to reach an opinion. I hope, however, that in reaching that judgment
he, as well as the Committee, will find the considerations which
I have set out in this letter to be helpful.
25. I would, of course, be happy to discuss
these issues further with the Committee. In the meantime I am
copying this letter to the Chair of the Work and Pensions Select
Committee; the Comptroller and Auditor General; the Permanent
Secretary to the Treasury; and to my own Secretary of State.
Sir Leigh Lewis KCB
13 March 2008
10 Information provided, not printed. Back
11
Association of British Insurers Research Paper 4-General Insurance
Claims Fraud, October 2007. Back
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