Fraud and error in the benefits system - Work and Pensions Committee Contents

2  The scale of fraud and error and the Government's response

The three categories of incorrect benefit payments

7. In official DWP estimates, incorrect benefit payments are categorised into three groups:

·  Official error, due to "inaction, delay or a mistaken assessment by DWP, a local authority or HMRC";

·  Claimant error, in which "claimants make inadvertent mistakes with no fraudulent intent"; and

·  Fraud, when claimants "deliberately seek to mislead DWP or local authorities which administer benefits on DWP's behalf to claim money to which they are not entitled."[3]

8. DWP's annual estimates for each type of incorrect payment are extrapolated from the results of a survey of a randomly selected sample of benefit claims in payment. The survey "combines data collated from DWP administrative systems and local authority owned Housing Benefit systems with data collected from the claimant during an interview." The estimates are produced to the high standard required of National Statistics; a random selection of results are re-checked by an independent team of experts, for example. [4]

9. DWP publishes a short statistical summary of its findings—four pages covering the 2012/13 estimates—which sets out the headline results broken down by the three incorrect payment types and the four core benefits which form the basis of DWP's estimates (Income Support; Jobseekers Allowance (JSA); Pension Credit; and Housing Benefit). Alongside the short summary it publishes a detailed statistical report which sets out trends in incorrect benefit payments; breaks down the data for each benefit further, for example by claimant age and gender; and provides methodological information and other background material.[5]

The scale of benefit fraud and error

10. Of the total £5.1 billion of incorrectly paid benefits in 2012/13, an estimated £1.6 billion was underpaid and £3.5 billion overpaid. Of the £3.5 billion of estimated overpayments: £700 million was due to official error (0.4% of total benefits expenditure); £1.6 billion was due to claimant error (0.9%); and £1.2 billion was due to fraud (0.7%).[6]

11. There is a large disparity between the official estimate of benefit fraud and the public perception. In 2013, an Ipsos Mori survey found that the general public believed that 24% of benefit payments are fraudulently claimed, some 34 times greater than the level indicated by the official statistics.[7]

Fraud and error risk factors

12. The main causes of fraud and error in the benefits system are well understood. The predominant causes are: complexity, for example where entitlement to one benefit is linked to that of others; and means-testing of claimants' income and financial assets. There are also well-known risks around accurate reporting of household make-up; entitlements for lone parents often differ from those for parents living with a partner, for example.[8]

13. The National Audit Office's (NAO's) analysis shows that incorrect reporting of income creates by far the greatest risk of incorrect payments, accounting for £907 million of overpayments (42%) across the four main benefits in 2012/13. The next three highest value factors in the four main benefits were:

·  Claims made as a single person where the claimant is living with a partner (£268 million, 13%);

·  Claims made by people subsequently found to be "abroad or untraceable" (£232 million, 11%); and

·  Claims made on the basis of incorrectly reported savings (£176 million, 8%). [9]

14. The current system therefore relies, to a large extent, on claimants accurately, and in a timely fashion, informing the administering department, agency or authority of relevant changes in their circumstances. This is not easily achieved. In 2010 the Government concluded that:

    Many customers claim multiple benefits and credits, administered by more than one organisation. They have to report changes of circumstance to different parts of DWP, HMRC, as well as other government agencies and local authorities, and aren't always aware who needs to be told what information, and when.[10]

15. The Government has stated that the introduction of Universal Credit will reduce complexity in the benefits systems by integrating a number of benefits into one household payment calculated and administered by DWP. It believes that this "simplification", accompanied by the use of real-time information on earnings (RTI) drawn from HMRC PAYE income tax data, will contribute significantly to reducing fraud and error (see chapter 3).

The DWP/HMRC joint fraud and error strategy

16. In October 2010 the Government published a joint DWP/HMRC strategy, setting out proposed actions to reduce fraud and error in benefits and Tax Credits. The strategy document acknowledged that levels of fraud and error had "plateaued" since 2005/06 (see key DWP and HMRC targets, below). It therefore identified the need for "new and radical" measures, in which it would take an "uncompromising" and "zero tolerance" approach.[11]


17. Given that official estimates indicate nearly twice as much error as fraud in the benefits system, we were concerned that the Government's approach announced in 2010 appeared to place the emphasis on addressing fraud. In the strategy document, Lord Freud, DWP Minister for Welfare Reform, and David Gauke MP, Exchequer Secretary to the Treasury and departmental Minister for HMRC, highlighted the Government's intentions to:

·  Employ private sector firms on a payment by results basis, where appropriate, to ensure the full adoption of cutting-edge private sector fraud prevention techniques;

·  Redirect resource to the front line to prevent fraud and error from entering the system in the first place, through enhanced checks and tougher sanctions for those even attempting to defraud;

·  Ensure that anti-fraud activity is protected from cuts, including through the recruitment of over 200 new anti-fraud officers to sanction a further 10,000 fraudsters every year;

·  Remove the current silo-based approach to tackling fraud, by creating new integrated cross-departmental data-matching and fraud investigation services (see Single Fraud Investigation Service, chapter 4);

·  Introduce a system for rewarding members of the public who provide information that results in significant recovery of public funds;

·  Respond to the growing threat of organised fraud through a new Identity Fraud Unit and far tougher sanctions for those involved;

·  Introduce a new mobile regional fraud taskforce to investigate each and every claim in high fraud areas, to increase the certainty of detection;

·  Address the weakness of the current penalty regime by abolishing cautions as a penalty for fraud, increasing asset seizures, and introducing far tougher one-strike and two-strike penalties, and a new three-strike rule;

·  Clean up nearly 2 million claims to remove error; and

·  Increase the frontline support provided by "Big Society partners" to help educate and support customers to get it right first time.[12]

Of these ten measures, seven focus solely on benefit fraud, one is aimed at fraud and error generally, and only two appear to be specifically designed to combat error.

18. In response to our concerns that the Government's approach was putting insufficient emphasis on reducing error, Lord Freud told us that major initiatives to address official error included: simplification of the benefits system through the introduction of Universal Credit, including use of RTI; the Automated Transfer to Local Authority Systems, an IT system which since 2012 has provided local authorities with DWP data required to verify Housing Benefit claims (see chapter 3); and greater application of "data-sharing" (see chapter 5).[13] Mr Gauke stated that the Government's aim was to reduce losses to the Exchequer, whether through fraud or error. His view was that making a distinction between claimant error and fraud was not always straightforward; he highlighted that claimant error "covers a fairly broad spectrum in terms of the level of culpability on the part of the claimant".[14]

19. Whilst we understand that making a distinction between claimant error and fraud is not always straightforward, we believe that DWP could be clearer about the official estimated level of benefit fraud. We therefore recommend that DWP publish, on separate days, discrete statistical summaries of its estimated rates of a) fraud and b) official and claimant error in the benefits system, alongside its more detailed report, to reduce the risk of confusion or conflation of these statistics in media reporting and public perceptions about benefit fraud, and to emphasise the importance of actions to reduce error as well as fraud.

Reducing claimant error: clarity of claimant communications

20. In relation to claimant error, the largest of the three categories of incorrect payment, Lord Freud told us that DWP was trying, through marketing campaigns, to raise awareness amongst claimants of the importance of reporting relevant changes in circumstances and using a newly introduced £50 civil penalty in cases where people had inadvertently or negligently failed to do so.[15]

21. Lord Freud told us that a "core motivation" of the Universal Credit (UC) policy was to reduce the likelihood of claimant error by improving the clarity of DWP's communications with claimants, so that they better understood their benefit entitlements and their responsibility to report changes in circumstances. The Department recognised that "too much of our communication is too complex; there is too much jargon."[16] DWP was developing communications which use "plain English". Lord Freud stated that, once UC is developed and implemented, there would be "a clean, straightforward system, which both the claimant [and DWP staff] can understand".[17]

22. We wanted to know the extent to which the clarity of DWP's communication with claimants was being addressed within existing benefits as well as in the development of UC, particularly as we have recently expressed doubt about whether the implementation of UC can be achieved to the Government's planned timescale.[18] Lord Freud told us it was very difficult to achieve "coherent language" across DWP within the current system, as separate teams worked on the different benefits.[19]

23. Improving the clarity of DWP's communication with claimants will be a crucial factor in reducing claimant error—the most prevalent cause of incorrect benefit payments. Clear communication can help to ensure that claimants understand fully their benefit entitlements and the importance of reporting relevant changes in their personal circumstances. We welcome work being done to improve the clarity of DWP's communication with claimants, as part of the development of Universal Credit. However, as we highlighted recently, considerable uncertainties remain around the timescale for developing Universal Credit, which cast some doubt on whether it will be fully implemented in 2017.

24. We recommend that, wherever feasible, DWP introduce updated claimant letters, using plain English, for its existing benefits, drawing on its learning from the development of Universal Credit communications. We also recommend that DWP give special consideration to the clarity of claimant letters in relation to Employment and Support Allowance, which will be the last of the current benefits to fully transfer into Universal Credit.

Progress towards fraud and error reduction targets

25. DWP's targets for fraud and error reduction tend to be related to the overall level of overpayments as a proportion of total benefits expenditure. Its current target, set in the 2010 strategy, is to reduce estimated overpayments to no more than 1.7% by April 2015.[20]

26. The NAO highlighted that there has been no statistically significant change in overall levels of benefit fraud and error since 2005/06—the overpayment rate has remained between 2.0% and 2.2%.[21]

Figure 1: Trends in DWP overpayments

Significant progress was made in the period from 2000/01 to 2005/06, during which the estimated overpayment rate fell from 3.2% to 2.1%; however, it should be noted that statistically significant change in the rate becomes more challenging as the rate falls.[22]

27. HMRC has made more recent progress in reducing Tax Credit fraud and error. The Tax Credit fraud and error rate of 7.3% in 2011/12, down from 8.1% in 2010/11, was the lowest since personal Tax Credits were introduced in 2003/04. However, HMRC missed its target, set in 2008, to reduce the rate to no more than 5% by April 2011.[23]

28. Although the NAO qualified its opinion on HMRC's most recent financial accounts because of the overall level of incorrect Tax Credits payments, its February 2013 report on Tax Credits fraud and error noted that HMRC's recent approach had been "successful" and "innovative" in some respects. It found that HMRC had developed around 40 separate measures since 2009 designed to address the six main risks of fraud and error in Tax Credits—inaccurate information about: partners; children; work and hours; childcare costs; income; and disabilities. It had achieved "notable" success in relation to three of the six risk categories: childcare costs; income; and disability, in which considerable gains had been made through a new approach to "data-sharing".[24] We consider whether the Government, and DWP in particular, could take a bolder approach to data-sharing, in chapter 5.

29. DWP has a good understanding of the causes of incorrect benefit payments and has devoted considerable effort and resources to fraud and error reduction. However, fraud and error rates have plateaued since 2005/06, with the estimated overpayment rate remaining between 2.0% and 2.2% of overall benefits expenditure. DWP will only meet the target set in 2010, to reduce the estimated overpayment rate to no more than 1.7% by April 2015, if it employs innovative approaches which are aligned with the known risk factors associated with each benefit.

3   NAO, Department for Work and Pensions: 2012-13 Accounts, Report by the Comptroller and Auditor General, December 2013, para 29 Back

4   DWP, Fraud and Error in the Benefits System National Statistics: Quality Statement, accessed 15 April 2014 Back

5   See web page, accessed 10 April 2014 Back

6   DWP, Fraud and error in the Benefit System: 2012/13 Estimates (Great Britain), January 2014 Back

7   Ipsos MORI survey, Perceptions are not reality: The top 10 we get wrong, accessed 10 April 2014 Back

8   DWP/HMRC, Tackling fraud and error in the benefit and tax credits systems, October 2010, chapter 2; NAO, Department for Work and Pensions: 2012/13 Accounts, Report by the Comptroller and Auditor General, December 2013, paras 28-47 Back

9   NAO (FAE0020) figure 5 Back

10   DWP/HMRC, Tackling fraud and error in the benefit and tax credits systems, October 2010, para 2.3; NAO, Department for Work and Pensions: 2012/13 Accounts, Report by the Comptroller and Auditor General, December 2013, paras 28-47 Back

11   DWP/HMRC, Tackling fraud and error in the benefit and tax credits systems, October 2010, p 3 Back

12   DWP/HMRC, Tackling fraud and error in the benefit and tax credits systems, October 2010, pp 3-4 Back

13   Q156 Back

14   Q158 Back

15   Q156. Back

16   Q245 Back

17   Q156; Q245 Back

18   Work and Pensions Committee, Fifth Report of Session 2013-14, Universal Credit implementation: monitoring DWP's performance in 2012-13, HC 1209 Back

19   Q247 Back

20   NAO, Department for Work and Pensions: 2012-13, Report by the Comptroller and Auditor General, December 2013, para 52 Back

21   NAO (FAE0020) figure 2 Back

22   DWP, Fraud and Error Measurement-Variance and Confidence Intervals, accessed 15 April 2014 Back

23   NAO, Tackling tax credits error and fraud, February 2013, para 3 Back

24   NAO, HM Revenue & Customs 2012-13 Accounts: Report by the Comptroller and Auditor General, July 2013, para 4.8; NAO, Tackling tax credits error and fraud, February 2013, paras 10; 2.15; 3.15 Back

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Prepared 15 May 2014