DfC Resource Account 2021-22 - Report

Introduction

1. The Department for Communities (the Department) is responsible for housing, urban regeneration, community development, social security and child maintenance. The annual budget for the Department is £8.4 billion, of which approximately £7.1 billion is spent on benefits.
2. The Department administers £6.6 billion of benefits directly with a further £0.5 billion of housing benefits administered by the Northern Ireland Housing Executive (the Housing Executive) and Land and Property Services (LPS).
3. This Report reviews the results of my 2021-22 audit of the Department’s accounts and sets out:
   • the reasons and context for my qualified regularity audit opinion in relation to the material level of estimated fraud and error in benefit expenditure;
   • a high level comparison of fraud and error rates with Great Britain; and
   • progress on Housing Association inspections.

Key findings

Estimated Fraud and error in benefit expenditure

 

4. I have qualified my opinion on the regularity of the Department’s financial statements due to the material level of estimated fraud and error in benefit expenditure. I exclude State Pension from my qualified opinion because the estimated level of fraud and error in this benefit is much lower than in other benefits, being £9.6 million in expenditure of £2.6 billion (see Figure 1).

 

5. Estimated overpayment and underpayment rates for benefits now stand at 4.6 and 0.4 per cent respectively of benefit expenditure, excluding State Pension, and are at the highest rate for several years (see Figure 2). In terms of value this represents £209 million in overpayments and £20 million in underpayments. Of this overpayments figure, 60 per cent (£124 million) relates to overpayments arising from Universal Credit.

 

6. The level of estimated fraud and error in housing benefit expenditure, included in the Department’s financial statements, is material and forms part of my qualification. As this

benefit is paid to claimants out of the Housing Executive accounts and the LPS Statement of Rate Levy Account, I also qualify my regularity audit opinion on these accounts in respect of the level of estimated fraud and error in housing benefit expenditure.

 

Progress in Housing Association inspections

 

7. Last year I raised concerns about the gap in assurances available to the Accounting Officer in the absence of a regular programme of Social Housing Development Programme inspections. These inspections provide the Accounting Officer with assurance over how the Housing Association Grant is used and how Registered Housing Associations’ (RHAs) comply with both the Housing Association Guide and NI Public Procurement Policy. I welcome the considerable progress the Department has been making towards resuming a full programme of inspections.

 

8. As part of its regulatory role the Department is required to assess all RHAs annually against set standards. Since 2017 this requirement has been met for all RHAs except for Woodvale and Shankill Community Housing Association due to an ongoing Judicial Review raised against the Department. I accept that the Department continues to follow legal advice but am concerned that this Association did not have adequate Department scrutiny for a number of years. I note that, following recent legal advice, annual assessment within this Association has now re- commenced.

Qualification of the Comptroller and Auditor General’s audit opinion on the regularity of benefit expenditure (excluding State Pension)

9. I have qualified my opinion on the regularity of the Department’s financial statements due to the material level of estimated fraud and error in benefit expenditure, except for expenditure on State Pension where the estimate is significantly lower.

 

10. I am required under the Government Resources and Accounts Act (Northern Ireland) 2001 to report my opinion as to whether the financial statements give a true and fair view. I am also required to report my opinion on regularity, that is, whether in all material respects the expenditure and income have been applied to the purposes intended by the Northern Ireland Assembly and the financial transactions conform to the authorities that govern them.

 

11. Legislation specifies the entitlement criteria for each benefit, and the method to be used to calculate the amount to be paid. Where fraud or error results in the payment of a benefit to an individual who is not entitled to that benefit; or a benefit is paid at a rate that differs from the amount specified in legislation, the over or under payment does not conform to the Assembly’s intention and is irregular.

 

12. In my opinion, the estimated value of overpayments and underpayments due to fraud and error in benefits, other than State Pension, remains material and the qualification of my audit opinion reflects this. The Department’s accounts have been qualified for a number of years due to material levels of overpayments and underpayments in benefit expenditure. The nature and reasons for these levels of fraud and error vary every year.

 

Measuring fraud and error

13. Benefit payments are susceptible to intentional error by claimants (customer fraud) and, also to unintended error by claimants (customer error) and the Department (official error). The Department is reliant on claimants’ accurate and timely notification of changes of circumstances and the complexity of benefits can cause confusion and genuine error, especially for those with means-tested entitlements.

 

14. The Department selects random samples from the total benefit caseload to test their financial accuracy and provide a measure of official error, and conducts benefit reviews that provide a measure of customer fraud and error. The Department estimates total fraud and error, set out in Note 23 to the accounts, by combining the results from these reviews. The fraud and error figures that are quoted are statistically determined central estimates (or mid-points) within a range. I am satisfied that the scope of this range is not material. We have reviewed and tested the Departments’ methodology for estimating fraud and error.

 

15. In order to facilitate the timetable for the production of the accounts, the Department’s testing of financial accuracy is reported on a rolling 12 month basis, not on a financial year basis. I am satisfied that this approach is reasonable and that the results produced are a reliable estimate of the total fraud and error in the benefits’ system.

 

16. Note 23 to the Accounts sets out which benefits were measured for financial accuracy and subject to benefit review this year. The level of fraud and error for the remaining benefits has been estimated using either the results of previous financial accuracy or benefit review exercises or by proxy values.

 

17. Benefit reviews, which estimate customer fraud and error, for both Disability Living Allowance (DLA) and State Pension have not been completed since 2008 and 2009 respectively. I acknowledge that DLA for working-age claimants is continuing to reduce as it is replaced by Personal Independence Payment and that the 2009 State Pension estimates for customer error and fraud were fairly low at 0.2 per cent and zero per cent respectively. However, the absence of complete up-to-date information on fraud and error rates in large benefits creates a risk that the Department is not targeting its activities to reduce fraud and error effectively.

 

18. The need for regular review has been illustrated following a number of pensioners contacting the Department for Work and Pension (DWP) in January 2020 to confirm the accuracy of their State Pension. In August 2020 DWP confirmed there was a significant issue and estimated that it had underpaid 134,000 pensioners over £1 billion, an average of £8,900 each. DWP’s review of all possibly affected cases is ongoing and since July 2020 the Department has been working with it to identify claimants, potentially underpaid in Northern Ireland. So far nearly 5,000 cases have been reviewed and £4.6 million in arrears has been paid out to NI claimants.

 

19. In January 2022 the Westminster Public Accounts Committee (PAC) concluded that DWP had been relying on a State Pension payment system that is not fit for purpose. The Committee noted that DWP’s assurance attention was focused elsewhere due to low annual error rates on State Pension and that there was a risk that similar, unidentified errors exist elsewhere in the State Pension caseload. The Committee made seven recommendations which included the need to consider if there are costs effective ways to upgrade State Pension IT systems, enhance administrative processes and improve the clarity and availability of information to claimants and the next of kin of deceased claimants.

 

20. I accept that the Department is reliant on DWP’s IT systems for processing benefit expenditure and that the Department intends to fully measure State Pension in its 2022 programme. While this is welcome, given the fact that the Department was apprised of this issue in March 2020, I am disappointed that it did not act with pace and include the review of State Pension in its 2021 programme.

 

21. It is reassuring that DWP’s full review of State Pension in 2021 showed that estimated overpayment rates continue to be low. However this benefits review exercise identified a further issue in respect of state pensions being underpaid to certain claimants. It is hoped that the Department’s full review of State Pension next year will provide similar assurance over overpayment rates in NI and help the Department better assess the impact of these state pension underpayments issues for NI claimants.

 

22. I am satisfied that the use of previous sampling exercises and proxy values is a reasonable measure of the level of estimated fraud and error in unmeasured benefits.

The estimated level of fraud and error in benefit expenditure

23. Fraud and error levels in State Pension benefit expenditure of £2.6 billion (2020-21: £2.4 billion) remain at an immaterial level, estimated at 0.4 per cent of expenditure for both over and underpayments (see Figure 1). As a result, I continue to exclude State Pension expenditure from my qualified opinion on the accounts.

Figure 1: Estimated total overpayments and underpayments due to official error in benefit expenditure due to fraud and error

*Percentage of benefits expenditure

24. Figure 2 shows the overpayment and underpayment rates as a percentage of benefit expenditure since 2017-18. The overpayment rate has tripled since then and is at its highest level to date. I note that the significant increase in overpayments this year is largely attributable to increasing customer fraud which has gone up from £99.5 million (1.5 per cent) to £138 million (1.9 per cent).

25. The Department considers that the increase in customer fraud this year is mainly due to the significant increase in Universal Credit (UC) fraud which has doubled in value again this year to

£101.7 million (2020-21: £51.8 million) with the overpayment rate increasing from 7.2 per cent to 11.2 per cent. Universal Credit was fully measured for the last two years and movements in overpayment and underpayment rates for estimated fraud and error are set out in Figure 3: