Wednesday, 19 September 2007

Bank deposits vs pension benefits

I hate to say it, but I actually agree with business luvvie Jeff Randall on something. His article in today's Torygraph about Northern Rock seems pretty on the money in general to me. But it's the following point that really rings true:

Better to be a depositor in a troubled bank than a pensioner in a defunct scheme. Despite repeated assurances from Government that their money was safe, pensioners who lost everything when their companies failed have been left twisting in the wind by ministers who insist that taxpayers cannot be expected to bail out victims. Strange, then, that Northern Rock savers, who were never promised complete security, have now been offered precisely that.

Of course his argument comes with the usual health warning that it's not very accurate. First it was the DWP, not "the government" who put out the leaflets suggesting that pension scheme benefits were guaranteed. Second, as usual there is no mention of the incompetence of the company management that led to these cases of failed pension schemes (the companies behind them having become insolvent). And third, far from leaving schemes members "twisting in the wind", the government has set up both the Pension Protection Fund and the Financial Assistance Scheme.

But, and it is now a big but, why is it OK to underwrite the full value of NR customers' savings, but impossible to meet the full cost of funding the pensions of those whose schemes have gone belly up? The former is a much bigger potential cost than the latter.

I spose the two principal arguments are as follows. First, the government set up FAS before there was any notion that there would be a run on a high street bank. At the time applying the principle that they couldn't bail out business mistakes with taxpayers money was sound. Secondly, the guarantee of NR customers' savings may never need to be drawn upon.

However we are living in changed circumstances. The Bank of England and the Government have had to shift their stance because a purist "no moral hazard" approach was failing to keep up with the scale of the problem. Given that is the case it now looks inconsistent that innocent victims of pension scheme collapses don't get a proper settlement too.

We are living in interesting times as they say. The normal rules of play are suspended. Given that the Government is willing to be radical in shoring up the financial system, why not be a bit radical on the tax front. The TUC recently argued for the closure of non domicile tax loopholes, why not use the money from that to help fund full benefits for those whose occupational schemes have gone under?

PS. I've really been too kind to Jeff Randall. Robert Peston's blog for the Beeb is much better reading.

No comments: