William Kay: The pain is not over for thousands of wounded policyholders

The Norwich Union bonus cuts, while not entirely unexpected, have dealt a severe blow to millions of with-profits and pension policy investors.

They bring home in unmistakable terms the message that such policies are inextricably linked to the fortunes of the stock market, although the cuts announced so far amount to but a small fraction of the 43 per cent fall suffered by the FTSE-100 index since it hit its all-time peak of 6930 just more than three years ago. So smoothing works, up to a point.

Policyholders had better steel themselves for more bad news in a year, when the 2003 bonuses are announced. And the process is cumulative: next year's annual bonus is calculated as a percentage of the assured sum so far, which will include this year's shrunken offering. The same applies in spades to the final bonus, which is based on what has already been promised and can often amount to half of the total payout. The final bonus is supposed to be a share of the reserves which have been kept back in earlier years for smoothing purposes, but these reserves have been eroded by the stock market's fall.

It is a grim picture, made all the gloomier by the uncertainties which still surround the stock market. Even the City's optimists, those whose hope has not yet been fully extinguished, concede that share prices are extremely vulnerable to events.

The main reason for that vulnerability is that in the present climate you do not have to be an unreconstructed, paranoid pessimist to compile a list of realistically possible events of an unpleasantness that would send the stock market into a vicious tailspin. Start with nerve gas in the underground transport system of any one of umpteen major cities, then go on to suicide bombers and surprise attacks by Iraq or North Korea.

But what would really pull shares down is not an event but a lack of one: the start of the war against Iraq. The US and Britain are shipping substantial numbers of men and munitions to the Gulf, and reservists are being called up. At present, those out there are busying themselves training for house-to-house combat, but if they are reduced to kicking their heels because the political process has become bogged down, the momentum could easily expire.

Professional investors have factored in a prompt, short war the invaders (or liberators, depending on your point of view) will win easily. Anything disturbing that scenario will be bad for shares, and therefore for anyone whose money is in the stock market, however indirectly.

This unsettling prospect is hardly the setting people expected when they took out pensions and with-profits contracts, in some cases decades ago. It is highly tempting to run away from it all, by surrendering those policies. Don't. The insurance companies are so worried about a wholesale rush for the exit that they will impose stiff penalties on leavers. Better to keep sending the premiums until the policies mature.

WHAT A difference a few months makes. Only last April we were being assured by the Financial Services Authority (FSA) that there was no need to change the regulations governing investment trusts, and more particularly those naughty delinquents, the split-capital variety . In any case, the FSA purred, change would require primary legislation, so tiresome darling and such a bore, so let's not go there.

This week, though, eager to show that it is far from "asleep on the job" – the Treasury Select Committee's derisive allegation last November – the FSA published its new regime for the investment trust industry. Now we have what the FSA modestly describes as "tough new rules" cracking down on cross-shareholdings between trusts and cosy multiple directorships, and requiring more explicit risk warnings.

These are all to be welcomed, especially the warnings and the limits on cross-shareholdings. But much of the new proposals smack of a team of career bureaucrats sitting down and coming up with ideas that will show they are doing something and insulate them from further criticism, rather than thinking what will be most effective.

While I am all for restricting the amount of mutual back-scratching that goes on in financial services, multiple directorships do not really make much difference. The truth is that the boards of most investment trusts are really little more than ciphers, and it is the manager who calls the shots. Better to save shareholders' money by insisting that no trust has more than six directors, all elected every year.

I also suspect there will be some modification of the FSA's suggestion that trusts should publish their portfolios every month instead of every year. If a trust is unloading a large shareholding in a tricky market, it may not want to signal the fact half-way through by publishing it in a monthly portfolio. Quarterly reporting would make more sense.

GOODBYE TUNBRIDGE Wells Equitable Friendly Society (always a bit of a mouthful), hello The Children's Mutual. That, at any rate, is to be the public face of the 122-year-old society as it reconfigures itself for the 21st century.

David White, the chief executive, has found that four out of five parents do not save regularly for their children, though most want to. So he has come up with a packaged savings account, in which several types of investment – with-profits, Isa, deposit account – can be financed by lump sum or regular contributions from several family members, godparents and friends. The account can be run for any length of time, whether the child's parents want to save for university education or the trip of a lifetime.

It is such a good idea there must be a strong possibility it will be copied by other providers. That will provide much-needed competition for this specialist service. But I think Mr White has been lacking imagination over the add-ons he could attach to these accounts, such as discounts on children's clothes, toys, theme park tickets, travel and hotels. In this way, The Children's Mutual could touch its customers' lives in so many more ways, and make them or their parents feel part of a truly mutual enterprise.

Come on, Mr White, pick up the phone and start hammering out those money-off deals.

The writer is personal finance editor of 'The Independent'

w.kay@independent.co.uk