Almost 95,000 former public sector workers will have their pensions cut, or increased by less than the value of inflation, as the result of a £126m Whitehall blunder, the government announced today. Around £1236m has been overpayed since 1978.

Why does the problem date back to 1978?

State pensions were given a substantial makeover that year. The idea was to add a second pension to the basic state pension, which had been around since 1948. This was a pension geared to an individual's earnings over a working life. The new pension was called Serps - the state earnings related pensions scheme. The problem arose with calculating benefits for those "contracted out" of Serps.

What does contracting out mean?

Employers pay an extra slice of National Insurance to fund Serps (now renamed state second pension or S2P). Occupational pension schemes can "contract out" - opt out of - Serps on behalf of their members (the employees). The idea is they invest the money to achieve a better return than would be provided by the Serps scheme. Occupational schemes that do contract out on behalf of their members must offer employees a benefit equivalent to Serps, known as the guaranteed minimum pension. Contracting out is to be abolished in 2012.

So why does the problem only affect those in public service?

The government discovered overpayments made to members of its own schemes. Others in non-government contracted out schemes may also have been overpaid - or underpaid - but no one has admitted this. Those who have been potentially overpaid - including teachers, NHS workers, the civil service and military personnel - are all in central government schemes. It does not involve local government workers as councils operate separate schemes.

What exactly went wrong?

Nobody knows exactly (or is not telling), but it seems there were errors in the annual updating or indexation of the pension benefits. These are revalued each year in line with rising prices.

Who is involved?

About one in 20 of those in the government schemes who have retired since 1978 - a total of 95,000 people.

How much was overpaid?

Around £126m over the past 30 years. This works out at an average of £1,300 a pensioner or £3.70 a month over that period, but exact amounts will vary depending on when an individual retired and how much they were earning over the years. Higher earners such as judges and top civil servants could have been overpaid much more than clerical workers or cleaners.

How much will my pension fall by?

Those affected will be contacted by letter over the next few days. It may take more time to calculate amounts as these will vary from person to person.

Will the government claw back the overpayments?

No. Recovery has been ruled out as "not cost-effective". In addition, many pensioners who may have been overpaid have died.

I have not got a letter yet. Does that mean I am not affected?

No. But most of those who were overpaid should hear by Christmas. If you are not contacted by then you can assume your pension is in the clear.

Does the problem affect people retiring in every year since 1978?

No one knows because the scheme adminstrators, HM Revenue & Customs and the Department for Work and Pensions are still investigating why the problem arose. But it seems likely that the 95,000 are spread across retirement years and salary levels.

I am receiving a widow's pension. Will my pension be cut?

As widow and widower's pensions are based on the entitlement of the late spouse, those involved will face a lower retirement income.

Have you had a letter detailing your pension overpayments? If so contact money@guardian.co.uk.

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