Contractor to clean up £8bn DSS blunder

A private-sector firm is to handle compensation claims over the Government's £8bn widows pensions blunder as ministers are not confident that they would be handled efficiently in-house.

In the first appointment of its sort, the yet-to-be-chosen contractor will perform tasks traditionally carried out by civil servants, processing claims from up to 20 million people and distributing state funds to deserving cases.

"We will need to consult on exactly what the claims process will be and we will then tender for private contractors to arrange the helpline and other aspects of the process," a Department of Social Security spokesman confirmed. "The full details of what the contractor will do will be decided when the whole process is finalised."

Front runners for the £60m plus contract are likely to be IT groups Capita and EDS, which already have a long track record working for government departments in other, arguably less sensitive, areas.

Persistent clerical errors at the sprawling DSS over a period of 12 years are behind a fiasco that could cost taxpayers over £8bn in compensation - one of the biggest mistakes in the history of the civil service, which is exacerbating already tense relations between ministers and officials. There is even talk the DSS could be dismantled after its Benefits Agency merges with the Employment Service later this year.

The DSS failed to publicise 1986 changes to Serps to halve the amount paid to widowed spouses. Implementing the new rules was delayed so people could make other financial arrangements. In a damning report, the National Audit Office branded the repeated failure over the years to give out information about the changes as an "extraordinary lapse".

Its investigators were also aghast at the DSS's primitive technology and inability to list people affected by the failures.

Alastair Darling, the Social Security Secretary, described his department's failings as "inexcusable", and he is known to be intent on preventing any further errors.