Department for Work and Pensions Accounts 2019–20 Contents

Conclusions and recommendations

1.In response to the COVID-19 pandemic, the Department successfully processed millions of new benefit claims and will need to be prepared for probable further increases in unemployment. Since March 2020, the Department has had to respond rapidly to the impact of the COVID-19 pandemic. As measures to address the virus affected people’s incomes, there was a large spike in the number of new claims for Universal Credit, with an increase in the number of people on Universal Credit from 2.9 million in February to 5.6 million in August, and a peak of over 100,000 new claims a day at the end of March. In response to this challenge, the Department says that it: temporarily redeployed around 10,000 staff to focus on Universal Credit; brought additional staff into the organisation from other departments and external recruitment; introduced several easements to controls to manage demand, and to support vulnerable people during lockdown; and put in place new automation and ways of working. As a result, the Department’s preliminary statistics show that 89% of new claims were paid on time and in full from 1 March 2020 to 26 May 2020. Unemployment is now expected to rise, and the Department is likely to face further surges in demand for benefits as HM Revenue and Customs employment support schemes come to an end.

Recommendation: The Department should ensure that it learns from its experience and successes of spring 2020 to be ready for future challenges.

2.Even before COVID-19, fraud and error overpayments were at their highest ever rates, with around £1 in £10 of Universal Credit paid incorrectly. The estimated overpayment rate, excluding State Pension, now stands at 4.8% (£4.5 billion) of benefit expenditure of £93.1 billion for 2019–20; this is the Department’s highest ever estimated overpayment rate. The Department does not currently have a target rate of fraud and error, although it has now publicly committed to setting one once it has established a clear baseline. We look forward to the Department finally setting fraud and error targets after several recommendations to do so by this Committee in recent years. Of all measured benefits, Universal Credit has the highest estimated overpayment rate - 9.4% (£1.7 billion) for 2019–20 - and it has an estimated underpayment rate of 1.1% (£0.2 billion). Fraud and error in Universal Credit is set to increase significantly in 2020–21. As a rough estimate, a doubling in caseload alone (ignoring the effect of easements to controls) could cause around £1.9 billion of additional fraud and error in Universal Credit.

Recommendations: The Department needs to show sustained progress in reducing fraud and error. It should set annual targets, by risk and benefit, against which its progress can be assessed, based on its expectation of the intended impact of its counter fraud and error initiatives over time. These should be set out and reported against in its Annual Report and Accounts for 2020–21.

For Universal Credit, the Department should set out its plan for year-on-year reductions in fraud and error, assessing performance against short-term, achievable targets.

3.COVID-19 will lead to further increases in fraud and error. The Department has an opportunity to learn from the impacts of its control easements. In addition to any rise in the level of fraud and error caused by an increase in benefit caseload, the Department acknowledges that the easements to controls it has made to respond to the pandemic will also increase fraud and error. It has therefore produced a range of estimates of the amounts potentially at risk which has been shared with HM Treasury. In order to analyse the effect on fraud and error of specific control easements, the Department says that it is using tools such as predictive analytics and that it is monitoring its level of staff referrals over time (a staff referral is produced when a staff member suspects the details of a claim are incorrect). The Department reports that due to the redeployment of staff to tackle the surge of claims and the difficulties of sampling in lockdown, it will not be able to review cases to produce an estimate of fraud and error in 2020–21 in the usual way. However, it accepts that “it is vital that we do our absolute best” to have an overall estimate of fraud and error in its Annual Report for 2020–21, where it also “aims” to report the fraud and error cost of its easements to controls.

Recommendations: The Department should report both the total level of fraud and error in the benefit system and the impact of its easement of controls on fraud and error, accompanied by both narrative and evidence, in its Annual Report and Accounts for 2020–21. This impact should be clearly distinguished from other fraud and error impacts of COVID-19 e.g. due to the increase in caseload.

The Department should use information obtained from the process of easing and restoring controls to assess the cost-effectiveness of controls.

4.The Department cannot demonstrate that it is doing everything that is cost-effective to tackle fraud and error. The National Audit Office’s work in 2019–20 on the Department’s strategy to tackle fraud and error showed that the Department could do more to understand the cost-effectiveness of individual controls. The Department’s recent efforts to improve those controls have focused on using its technology and putting more investment into data and data analytics which it hopes will allow it to prevent fraud and error before it enters the system. The impact of these technologies is still unproven: the Department’s Risk and Intelligence Service (RIS) was launched in April 2018 and the Department reported that it was using ‘increasingly sophisticated data and analytical tools’ to tackle fraud and error; however, the estimated rate of overpayments continues to rise. The Department is investing in technology which will enable it to tailor its interventions based on its risk assessment of a claim. However, we are concerned about the potential for discrimination and bias against claimants based on their protected characteristics e.g. age, sex, race etc.

Recommendations: The Department needs to be able to monitor and report on the impact and cost effectiveness of each of its fraud and error initiatives and in particular on the impact of its investment in new technology.

The Department should monitor and report any discrimination or bias caused by using artificial intelligence and machine learning on different claimant groups.

5.The Department has made slower progress on some causes of fraud and error; this is sometimes due to legislative and regulatory restrictions. There are specific risk areas such as capital, living together, self-reported and self-employed earnings where the Department admits it is harder to tackle fraud and error, in part due to the lack of access it has to timely, accurate data. In 2019–20, measured capital fraud and error across all measured benefits rose by £380 million (73%) to £910 million; the largest increase in value for any individual risk type. The Department is seeking to expand its use of data in this area and has performed some initial work on tackling capital risk using data from banks, which it says gave “really good results”. Although the Department has powers that allow it to ask for the information that it needs when it is doing an individual compliance investigation, it does not have legal access to the same level of information for the controls it uses to prevent and detect fraud and error. The Department must balance tackling fraud and error risk against what is feasible within the legislation around data privacy.

Recommendation: The Department should review the regulatory regime around its fraud and error activities and communicate to parliament where it believes additional powers or other changes to legislation would improve controls for specific fraud and error risks.

6.As at 31 March 2020, the Department was owed £5.3 billion from benefit overpayments, benefit advances and Tax Credits debt. This number continues to increase rapidly. As at 31 March 2020, the Department was owed: benefit overpayments of £2.6 billion; benefit advances of £1.0 billion; and Tax Credits debt of £1.8 billion. This represents a significant annual increase of 39% (£1.5 billion) on the £3.8 billion owed as at 31 March 2019, and the amount owed to the Department is expected to increase further as Universal Credit expands and it takes on more Tax Credits debt from HM Revenue & Customs. The amount owed to the Department will have also risen when the Department temporarily suspended most debt recovery in March 2020 as direct response to the COVID-19 pandemic (it only reintroduced the recovery of new overpayments in late September). Although the Department claims that “there are cases where things are written off, but they are exceptional cases”, the reality is that around £290 million of non-recoverable benefit overpayments were written-off in 2019–20, with an additional £7 million relating to customer fraud also written-off. Furthermore, the Department accepts it will not be able to recover a significant portion (44%) of its existing benefit overpayments and Tax Credits debt, recognising a £1.9 billion impairment in its accounts.

Recommendation: The Department should set out clearly in its Annual Report and Accounts, starting 2020–21: the methods open to it to recover debt; the efficacy of each of these methods on recovering different types of debt; and its expectation of its recovery of different types of debt which are accumulating due to overpayments and be clear about the resources required to deliver on its targets.

7.The people that are being overpaid and underpaid are amongst those least likely in society to be able to pay the money back or absorb an underpayment. The nature of means tested benefits means people entitled to receive the benefits are already those in society with the lowest incomes and savings. Even within this group, those with the least are affected the most by having to repay debts: for instance, Universal Credit claimants with the lowest incomes face larger deductions to repay debts (including advances) applied to their first Universal Credit payment. These deductions can be substantial and are more likely to be so for low income claimants; 45% of Universal Credit claimants on low incomes have 20% or more of their personal allowance deducted in the first assessment period, compared to 27% across all claims.

Recommendations: The Department should do more to understand the impact that both overpayments and underpayments have on claimants and ensure that vulnerable claimants are treated with care when dealing with error on the claim.

As the Department investigates the impact of its COVID-19 response, it should consider systemic causes of underpayment and act quickly to assess and address these issues. We would like to hear from the department how it intends to do this.

Published: 18 November 2020