Who deserves compensation?
- 8 Feb 07, 10:21 AM
Who should the taxpayer help? Which innocent victims of mis-fortune should we compensate?
In part two of this mini-series, I鈥檒l talk about Bernard Matthews - the wealthy turkey farmer whose birds have been culled and who stands to be compensated (reported in one newspaper to be at least 拢2.5 million). But before that, here in part one, let me talk about pensioners.
I鈥檝e been outside Parliament today, reporting on the predicament of a group of demonstrators.
They were there, because they had saved in their company pension schemes, had believed (partly on the basis of falsely-reassuring government literature) that their pension was 鈥済uaranteed鈥, and had found that when their company went insolvent, they were left with a fraction of what they thought they were going to get.
There has been a small amount of compensation for them, but nothing like enough for them to live life as they had reasonably expected to live it.
A legal obligation?
They want government to do more 鈥 and argue that it has a duty to help, as maladministration was to blame for their position. In particular, as government leaflets had mis-advised them on the safety of their pension, and as the Parliamentary Ombudsman has ruled that they should get help, they argue the government has a legal obligation to sort the problem out.
I鈥檓 not sure.
Suppose the government issued a leaflet telling us 鈥淚t鈥檚 always safer to wear a seat-belt鈥, when in fact very occasionally wearing a seat belt causes injury. Would we expect the government to 鈥渃ompensate鈥 the small number of victims for whom the seat-belt was a problem? Probably not.
It might help them, but not because the road safety information was flawed.
A moral obligation?
But even if one does dismiss the idea there鈥檚 a legal case for support 鈥 and it鈥檚 the high court judges who will ultimately decide the merits on that score 鈥 you can still make a case for more government help anyway.
After all, wouldn鈥檛 we want that help if the same misfortune befell the rest of us? Would taxpayers really resent spending money on a pensions bail-out?
Indeed, to reinforce this view, one can even view the state as a kind of giant insurance policy to help people out in the event of mis-fortunes that were not easily insurable privately. That鈥檚 a lot of what the state does. Indeed, it鈥檚 why we have a benefits system.
Why not extend that to some ad hoc help for people suffering such a drop in expected income?
Moral hazard
The counter-argument says that if we go round helping people too much, then they become careless about looking after themselves. In other words, you can screw up people鈥檚 incentives, by giving them too much insurance.
In economics jargon, the problem is called moral hazard. People who are helped in the event of mis-fortune take less care to prevent themselves being unfortunate. It鈥檚 a ubiquitous phenomenon.
- People (like me) ride motorbikes in the knowledge that our hospital bills will be paid by someone else.
- Teenagers allow themselves to miss the last train home, knowing that mum or dad can pick them up.
- Americans build coastal cities below sea-level in the knowledge that the government will help them when the flood protection breaks. (er, this may not be such a good example.. ED).
You get the idea.
Moral hazard is a a real issue in the design of public policy.
But it pretty clearly 诲辞别蝉苍鈥檛 arise in the case of the unlucky pensioners - who did after all, not behave recklessly in saving for themselves. They behaved responsibly.
And that鈥檚 why it is important that in this case that government leaflets told them they were doing the right thing.
It鈥檚 not that everything said in a leaflet immediately imposes on the taxpayer an obligation to underwrite the full losses incurred from a mistake. It鈥檚 that the leaflet proves the victims were not to be blamed in any way at all. The leaflets prove they were doing the 鈥渞ight thing鈥.
It鈥檚 thus hard to argue that bailing them out would discourage people from being prudent in future.
And so, what is normally an important argument against government reaching out and helping people all over the place, does not appear to apply in this case.
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I'm Evan Davis, the former 91热爆 economics editor.
I've now moved on to a new job, presenting Radio 4's Today programme. Evanomics will continue to exist in some form, as yet undecided.
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Comments Post your comment
Evan - when you look at the Bernard Matthews compensation case, you might like to take a look at the analogous situation of horticultural growers receiving compensation when, for example, their crops are destroyed due to an outbreak of Sudden Oak Death or some other disease or pest. I think you may find the picture a little different.
Evan , thank you for the coverage on Wednesday and for following the story from Parliament Sq to no 10 and then to the RCJ .(Also for including my interview )
There are some further strong arguements for compensation in addition to the leaflets . I work in the pension industry as a professional trustee and believe I have a good understanding but the information I received about my scheme (Bradstocks) gave me no indications that I would lose 85 % of my benefits just a few months from my retirement date all the focus was on achieving 100% of MFR and inspite of advice the Govt never changed the weak basis until it was too late
Further in the late 90's Life Companies and advisors were publically slated and fined for transfering people out of Guaranteed Final Salary schemes (the regulators and Govt words not mine )
No wonder people felt their pensions were safe
Whilst you were producing a very good piece for the 10.00o'clock , many news and media companies covered the Shilpa vist to Tony and his cabinet who decided that she was more important than us .
PS where is Gordon Brown - he seems to dissapear when there is trouble ?
Evan, you forgot the consequential aspect. The fact that as a consequence of loss, irrespective of blame, causes other potential investors to decide against saving (retirement). They lose faith in trust, from anyone.
Bernard Matthews are fortunate that they will be compensated, and even if they weren't, there is still opportunity to recover loss through economic activity.
Choosing to invest is surely more than a gamble, after all would Bernard Matthews invest in poultry products, if they thought that some risk of bird flu was going to adversely affect their investment?
Evan,
I ride a motorbike too, but I dont 'know' that my hospital bills will be paid by somebody else.
Right now, my taxes are paying other people's hospital bills since I do not need treatment.
If I were to need treatment (motorbike or not), would it not be reasonable to say that I had 'prepaid' for my own hospital bills with the taxes I've been paying for the last 20 years?
Evan
First of all, thank-you for attending the pensioners' demonstration on Wednesday and giving it detailed coverage in the 91热爆.
It is heartening that your moral deliberations bring you ultimately to the view that the Government does not hold the moral high ground when arguing that it should not compensate the pensioners.
However, I would take issue with that aspect of your argument that equates having a pension fund with the wearing of a seatbelt.
It seems as though you accept the Government's argument that it all hinges on a few leaflets. The issue is infinitely more complex. The Government played a pivotal role in the failure of these people to be protected. It is as if they provided a seat belt that was faulty and required everybody to wear it. The Government WAS required by EC to provide a safety net; it DID change the law on what should happen to pension schemes in wind-up; it WAS responsible for the regulatory framework,protecting the members. Ultimately, it was Gordon Brown who, amongst other damaging measures, removed an unprecedented $5 billion a year from those schemes, contributing to the likelihood they would fail.
Both the Ombudsman and the PASC have studied the issue in depth and come to the conclusion that the Government must provide compensation. It is not acceptable for the Government to be judge and jury in its own case.
Valerie Hadfield
Evan,
I feel the pensioners should be compensated because the Government is probably culpable in spreading a false sense of security. The analogy with seat belt advice is probably not relevant because in that case the number of cases where the advice leads to injury is likely to be very limited, but the pensions problems appear much more widespread.
However, I think the question of moral hazard actually does arise here: not in encouraging people to be reckless in their saving habits, but in encouraging companies and pensions administrators to be reckless with the pensions funds, safe in the knowledge that if they make poor decisions the Government will bale them out.
I agree with you on the question of compensating Bernard Matthews: I always thought that the point of insurance was to protect firms against occasional disasters of this nature. The taxpayer shouldn't have to stump up.
The moral hazard lies not with the individuals, but with large companies who never securitized the pension funds.
By all means bail out the unlucky pensioners, but going forward regulate and monitor pension schemes so that they are funded and insured.
I suppose there's still a sort of moral hazard in that semi-scrupulous executives thinking of raiding their companies' pension funds may feel less bad about doing so if they believe the government will eventually help the pensioners out when the company finally goes belly-up. But that's not likely to be a significant factor in their decision.
Hi Evan,
Firstly Im must say your Blogs are a great read - bringing across some quite complex economic theories with some current relevant examples!
I also agree with the comments that the Government should compensate the victims of these company pension scheme failures - and I expect they will be forced to eventually - but I would bet the compensation will be either capped or means tested on the recipient.
I think the root causes of this situation are numerous - with many leading directly from governmemt policies.. Yes the Govt mis-sold the safety of final salary pensions, they also took out the 拢5bn per year from dividends. But just as importantly they failed to properly regulate an industry of such importance to individual/state alike, and they allowed contirbutions holidays (even taxed surpluses under the Tories).
It also seems to me that no consideration was ever made in these schemes for what happens if a company went bust, with an underfunded pension sheme - especially when life expectancies were rising, whilst most of the post war company pension schemes reaching maturity (the point at which there are less contributing members to the scheme than deferred/recipients of the scheme)..
In my view the final salary pension schemes were a ticking time bomb from the day they were invented - far to generous for what could actually be funded in the long term.... because their full liability would only ever be known in the very long term (due to life expectancies and stock market growth rates)..
I believe the term used for these schemes is "the Rolls Royce of the pensions industy" - very apt as they too are more of an aspiration than an economic reality for most people..
I think the real irony that Evan points out here is that the legal argument that is being pursued to secure compensation is the opposite of the economic argument for giving it.
The real issue in life is that no-one can guarantee outcomes. Some people get very upset about this and want to blame people for it. What people can do is insure against bad outcomes. But this removes their incentive to take precautions.
In economic terms it is justifiable to support people who have had a bad outcome despite taking precautions. And on this basis the argument should be that the pensioners took the advice of the government leaflet (i.e. were not misled by it) yet still had a bad outcome. Instead the legal argument has to be that they had a bad outcome because they took the precautions recommended by the government advice (i.e. they were misled).
This is perverse.
If the taxpayer shouldn't bail out private sector pension funds that failed then the same should apply to public sector pension funds that get int deficit.