Putting a new spin on crisis

SO you thought that Equitable Life was bad? Well now something even worse has apparently been uncovered by the Labour-controlled Treasury Select Committee.

A report just leaked claims that the shortfalls on endowment mortgages could reach an astonishing £30bn. And guess what? The same executives whose companies sold these terrible policies saw their salaries soar by up to 72% over the last three years.

Before anyone gets too angry, it is worth examining these events more closely. If you were a Labour spin doctor seeking to divert attention from the serious Government regulatory failings at Equitable Life and avoid discussion of compensation, the best course would be to create a diversion.

Nothing could be better than to show private sector insurance management in the worst light. This would reinforce the case, selectively edited from Penrose, that Equitable was responsible for its own misfortunes.

But how big a scandal are endowments? Certainly these policies, designed to pay off mortgages, were mis-sold. Moreover, financial advisers and insurers have continued to collect commissions for doing very little, on insurance contracts that have produced shortfalls.

But is this a scandal like pension mis-selling or Equitable Life? I think it is questionable. The average endowment shortfall is estimated at £5,500 after 25 years.

This may seem a substantial sum to people on limited incomes. But in the context of behaviour on Britain's red-hot housing market, it is immaterial.

It is worth noting that people move on average every seven years, so many of the endowments bear no relation to their current property. Low interest rates mean that savings on mortgage repayments will far outstrip the shortfall on the insurance policies. That is before one takes account of the huge capital gains made by home owners.

Equitable Life is in a different category. People have been seeking to build up a pensions pot over a lifetime of savings. What they find is a management at Equitable that went off the rails, coupled with neglectful - not 'light touch' - regulation.

This is a huge disincentive to save for retirement and risks throwing more people on to State benefits. Now there is a crisis worth the Government's full attention.

Trade pounded

BRITAIN'S trade deficit hit its worst-ever level in January. The shortfall reached £5.6bn as the strong pound exports to America and the Far East where currencies are dollar-linked.

In itself one month's trade should not be a big worry since the data is notoriously erratic. The late Prime Minister Harold Wilson went to his grave believing that a couple of imported jumbo jets cost him the June 1970 election.

There are worrying aspects to the latest data. If the last three months are taken together, the trade deficit in goods reached £13.9bn or 5% of total output - the worst outcome since 1989.

Another factor was a £400m deficit on oil. We export a great deal from the North Sea and import energy from all over the world. But North Sea production is in decline.

Output is shrinking by 5% a year. Barring a miracle, our indigenous resources will be depleted by 2020. That is one reason why BP has scaled down to refocus on Russia.

Perhaps the biggest worry about the trade figures is that they show an unbalanced economy. Most of the growth is still coming from household spending and public works. Manufacturing is recovering, but far more slowly than hoped, rising just 0.2% in January against market estimates of 0.5%.

Most of the life is coming from technology and telecom equipment, which climbed by 2.9% in January. If this is stripped out, manufacturing - the larger part of the export sector - is still flat on its back. This increases the dilemma for the Bank of England. It needs to rein in consumption.

But every rise in interest rate gives new impetus to the pound and smothers the export-led recovery.

Pay-off watch

ANNUAL reports are rolling in and there is plenty for Trade Secretary Patricia Hewitt to get her teeth into. In contrast to the flagrant pay-offs to Michael Green at Carlton, we learn that former ICI chief executive Brendan O'Neill left with a relatively modest £1m pay-off, a small pension and lapsed options.

At Abbey, which has run up two-year losses of £1.5bn, they know how to do things properly. Top executives Luqman Arnold and Stephen Hester squirrelled away bonuses of £2.1m.

Heaven knows what would happen if the bank ever made a profit.