The real perils after Penrose

ANYONE who has been in a car crash knows accidents happen. If only the driver had been going less fast, had quicker reactions, not been distracted, understood the conditions or taken a different route, disaster would have been avoided. But it is always too late for such thoughts after the crash.

These days, unfortunately, no one is allowed to say 'accidents happen' any more. Instead, second-guessing and hindsight has become a national crutch. We have to pretend the world is totally safe and if ever it proves otherwise, clearly the system has failed.

This leads to demands for an inquiry, for these days the first rule of any disaster is that someone must be blamed and if possible made to suffer. The second rule is that the victims must get compensation, whether or not they expect it, deserve it or indeed have a legal entitlement to it - and regardless of whether payments come out of the pockets of some wholly innocent third party.

The last rule, which is where government kicks in, is that there will be legislation to ensure this will never happen again.

All these ingredients are obvious in the 800-page Penrose report on the near-collapse of Equitable Life which is published today and tells you more than you could possibly want to know about the rise and fall of one of our longest-established and - until its last few years - most successful savings organisations.

Reading it, we can see that, like an overconfident driver, the company was going too fast - running hot, in the vernacular of the time - while not being fully aware of the implications of changing road conditions, or the hidden dangers in the chosen route. So the crash unfolds like a Greek tragedy.

But then it would, because people are involved. Unfashionable as it is to say so, that's life. It is unjust. It is messy. It is unfair. And the hindsight that Penrose brings to his judgments does not actually help very much because all one can ever expect of people is that they take account of the circumstances of the time.

Protest their innocence as they might now, most people knew what strategy Equitable was pursuing 20 years ago and thought it was OK. It made no secret of it. Indeed, Equitable trumpeted the fact that it declared maximum bonuses and kept little in reserve. That was how it delivered the performance that attracted more business.

And if the directors failed to think through the implications of making promises without reserves to back them, neither did anyone else, because quite honestly in the era of galloping inflation when the promises for fixed-rate annuities were made, they were a sales gimmick, not something anyone ever expected to be called.

The death of inflation and the collapse of interest rates undid Equitable. But in the context of the 1970s and 1980s no sane person would run a business on the basis of inflation being tamed.

Ideally Penrose would be left to gather dust because the lessons of the Equitable fiasco have already been learned and further policy moves, regulation or compensation have far greater potential for harm than good.

On the reform front, the 'realistic reportingî insurance companies are now required to do - and which astonishingly caught out a Standard Life management asleep at the wheel recently - would quickly identify and stop a future Equitable.

But any moves to push the boundaries further - to expect a regulatory system not to have failures, or to think failure is a basis for compensation - will take us further down the path to risk aversion. Regulators will note what they need to do to avoid criticism in future and clamp down even harder.

Insurance companies will retreat even further from equities and promises of performance. The savings market will become even more unappealing.

It will be a tragedy if Penrose is used as a cudgel to beat the savings industry or the regulators, and it is disappointing that Tory shadow Chancellor Oliver Letwin is not alive to such dangers as he plays politics and fuels demands for compensation.

Insurance companies and pension funds are abandoning equity investment, a development that has been viewed so far only in the context of how it could hit equity prices. But more important, surely, is what it means for the British economy and the capitalist system if pension funds and insurance companies no longer mobilise savings and insufficient funds are forthcoming to meet the demands for equity investment. How then will we create and finance the new businesses on which our future prosperity depends?

Protecting savers obviously has its place, but too much combing through the entrails of the Penrose Report carries a cost. It risks undermining the whole system.

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