Capita expects to lose up to £40m over pension scheme fiasco

Outsourcing firm counts cost of failures that left retired UK civil servants without an income for months

Capita has revealed that the bill for cleaning up its mess at the crisis-hit civil service pension scheme could wipe up to £40m off annual profits – a day after its chief executive apologised to MPs for a “very poor service”.

The company had faced a grilling at a Commons committee hearing on Wednesday, with its chief executive, Adolfo Hernandez, repeatedly apologising for failures that have kept thousands of civil servants waiting for payments and retirement quotes.

The Guardian reported in January that newly retired civil servants were struggling to pay bills and buy food because delays at the pension scheme – contracted out to Capita – had left them without an income for months.

In a stock exchange update, Capita said that getting service levels at the pension scheme up to scratch would come at a price. It pointed to extra staff costs as well as penalties for missed targets. Taken together, this would wipe between £25m and £40m off annual profits, the outsourcing company said. The warning sent its shares down nearly 21%.

Hernandez said: “We recognise the service on the civil service pension scheme has not been good enough, we are working closely with the Cabinet Office on all aspects of the scheme, and this remains our number one priority.”

The government has withheld nearly £10m from Capita because of service shortfalls and the company is facing mounting calls to be stripped of the contract. More than 6,700 quotations for past retirement dates and 4,100 bereavement cases were outstanding at the end of last month.

Angela MacDonald, the HMRC deputy chief executive leading a taskforce to clear the backlog, told the Commons public accounts committee that the bill for the work done by civil servants parachuted in to help would be £12.5m.

Nick Thomas-Symonds, the paymaster general, told MPs the government intended to “recover every single penny of cost” from Capita. “I will not have a situation where public money is funding corporate failing,” he said.

When the extent of the problems at the scheme became clear, the government started offering interest-free “hardship loans” to the worst-affected people. MacDonald told the hearing that £15.6m had been lent to 2,700 members awaiting payments.

Catherine McKinnell, who is a Labour member of the accounts committee, told the hearing of a terminally ill pensioner who had been waiting for a quote since January. She said they had died at the weekend still without receiving the information.

A trio of Capita executives told the committee that the scheme, which has 1.7m members, had extremely complex rules and the processing of cases was being slowed down by missing data.

With government contracts key to the Capita business, Richard Holroyd, chief executive of its public service division, said he had considered resigning but decided against walking away because it would have left colleagues without the support they needed.

The extra money being thrown at the pension scheme debacle meant the company was making a loss on the contract, Holroyd said. But he added: “We can’t think about profitability … this is about restoring the service and rebuilding trust.”