Since April 1997, 330,000 people have been entitled to a rebate on their National Insurance contributions after contracting out of the State Earnings Related Pension Scheme (SERPS) and entering into a private money-purchase pension scheme instead.
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However, a long-running fault with the Department of Social Security's NIRS 2 computer system has meant that approximately 85 per cent of the payments - totalling £140 million - are still outstanding.
Instead of paying the refunds into people's private pension schemes however - thereby adding to their capital and increasing interest earned off their investments - the Treasury has kept the cash, paying interest at six per cent a year.
David Willetts MP, shadow secretary for social security, criticised the government for its "incompetence" and argued that by keeping the rebate money and offering a low investment return, it had caused over £36 million of investment to be "lost forever".