Another option for carpetbaggers

You don't have to sacrifice good returns for a chance of free shares, writes Iain Morse

The summer has brought plenty of rain and even more carpetbagging fever. This is a condition brought on by exposure to the magic words "demutualisation" and "windfall cash or shares".

Symptoms are recognisable as an urge to become a member of a building society before it converts to a bank.

This week Birmingham Midshires members heard their society was to be taken over by Royal Bank of Scotland. The pounds 600m-plus price tag equals about pounds 600 for each of Midshires' 1.1 million policyholders, including about 300,000 speculators who joined the society in recent months for just this reason.

Many building societies hoping to keep out carpetbaggers have either pulled down the shutters or set high cash minimums of pounds 2,500 or more to open an account that confers membership rights.

One way to ensure a share in any payout, while earning a decent return on your investment, is to buy Permanent Interest Bearing Shares (Pibs) issued by many building societies as a means of raising money. Ownership of Pibs confers member status.

Pibs pay a fixed income and their prices have been going up. In part, this has been a response to the potential for free shares from future demutualisations. So how do they work, and are they a surefire route to windfall gains?

Building societies are prevented by law from borrowing in the way that banks can - from other banks.

This is because mutual status limits the liabilities that a society can enter into when borrowing and obliges it to protect members who have deposit accounts or mortgage loans. Pibs offer a convenient way for societies to get round the problem.

For example, Bradford & Bingley made one issue to raise pounds 60m, with a "coupon rate" of 13 per cent.

This means that the society raised pounds 60m by offering to pay a yield of 13 per cent gross, split between two annual pay dates.

With basic-rate tax deducted at source, the yield was cut to 9.75 per cent. Once issued, Pibs can be bought and sold like any other share. The price of Bradford & Bingley Pibs has gone up,reducing the current gross yield to around 7.99 per cent, which comes down to 6.07 per cent net for a basic-rate taxpayer.

The price of Pibs has generally tended to rise, reflecting the relatively high interest rates prevailing when most of them were issued five to six years ago.

As our table shows, gross returns are now between 7.6 and 7.99 per cent for all issues. Are they a good bargain?

Justin Urquart-Stewart, a director at Barclays Stockbrokers, warns: "The market for Pibs is linked to interest rates. Speculation [over conversion to bank status] may be driving their prices up, but if the wave of demutalisation slows down and interest rates rise, prices could suffer.

"Remember, when you buy Pibs you are really buying a stream of future income. If the price of Pibs falls, you may not get back the purchase price."

Of course, were the price of Pibs to fall, the income receivable from the shares would go up correspondingly.

Pibs are not subject to capital gains tax, but neither can they be placed in a PEP, the wrapper used to protect many investments from tax.

Income is not guaranteed, while payments can be suspended if the society decides that making them puts its solvency at risk. If the society is wound up then owners of Pibs come last on the list to be repaid, after depositors and other creditors.

Mr Urquart-Stewart concedes: "This is unlikely. The investment is low risk." He adds, however: "These are a dying breed of investment, never much traded, or very popular, and rather left out in the cold by corporate- bond PEPs. They represent another way into windfalls, but a lot depends on the pace of future demutualisation."

Not everyone agrees with this assessment. Last year JP Cairngorm Asset Management, a small Scottish fund management company, launched a Building Society Investment Trust to buy into Pibs and related bank bonds.

Chairman Ken Murray points out: "It's a matter of when you buy and how you do it. The trust has holdings in all society Pibs. We therefore manage a portfolio. This should reduce risk for the investor."

The Cairngorm trust is split into 10 subsidiary trusts, a structure designed to maximise the return from windfalls. Shares are currently trading at around pounds 9.40 for 10, with an estimated net asset value of between 113 and 115 pence per share, based on the current market for all stocks held, with a net yield of 4 per cent.

Mr Murray's strategic view is clear: "We expect demutualisation to continue as a trend."

Of course, predicting when a particular conversion will take place is impossible and societies are keen to dispel speculation.

Buying Pibs makes the purchaser a member of the society just like an account holder or borrower. This means that if the society demutualises, converting to bank status, all members may be due to participate in any windfall of shares or cash.

Most societies issuing Pibs give immediate membership to Pibs owners. Some may impose a minimum period on ownership as they do with account holders.

JP Cairngorm's trust hopes to benefit from this but Mr Murray accepts that windfalls are not guaranteed. The Building Society Act only makes provision for part of the society's funds or equivalent shares to be distributed among members, subject to rules of eligibility.

When demutualising, societies can therefore choose to distribute cash or shares. The law prevents cash windfalls to members of less than two years.

Neither are there any statutory rules on the qualifying period of membership for share windfalls. Although not likely, a society could backdate this to the date of first press speculation on demutualisation.

Moreover, the price of investing in Pibs can be at least as high as simply opening a speculators' account with a society.

In the case of Bradford & Bingley, minimum subscription is pounds 10,000, although for Britannia, Coventry and Skipton - all societies in the frame over possible conversion - minimum levels start at pounds 1,000.

The only certainty of investing in Pibs is the future income they will pay. Those suffering windfall fever should take an aspirin and find qualified advice from a stockbroker.

Barclays Stockbrokers, which specialises in Pibs, can be contacted on 0345 777 4000.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
Rob Lowe
peopleRob Lowe hits out at Obama's snub of Benjamin Netanyahu
Sport
football
News
Davies (let) says: 'Everybody thought we were having an affair. It was never true!'
people'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Arts and Entertainment
Over their 20 years, the band has built a community of dedicated followers the world over
music
News
Staff assemble outside the old City Road offices in London
mediaThe stories, the writers and the changes over the last quarter of a century at Britain's youngest paper
Finacial products from our partners
Property search

Simon Read: Frozen in time - the expat British pensioners who deserve a better deal

I had dinner with the pensions minister Steve Webb this week. There was a wide-ranging discussion about the new pensions freedoms starting in April, and changes to the state pension. Crucially, I also got to ask Mr Webb whether he had any plans to have another look at the injustice that is frozen pensions.

Mark Dampier: We always bring down Britain. But there's plenty in the tank

While the health of the economy is not insignificant, Mark Dampier finds it incredibly unpredictable in terms of its impact on the stock market

If you haven’t switched supplier or tariff in the last 12 months then you could almost certainly save money by doing so

There are easier ways to save hundreds on your energy bills

A new free app is aimed at the three-fifths of Brits who have never switched supplier

Worse hit are loyal customers with long-standing accounts – their loyalty is rewarded with lower interest rates than more recently-launched accounts

Savers are being let down by banks and building societies, says Financial Conduct Authority

Regulator’s investigation into the market found that around £160bn was held in easy access savings accounts that pay interest lower or equal to BoE base rate

What to do if you're facing repossession: However far you fall, you're not on your own

Helen Fisher had to become a 24-hour carer, and then she faced repossession. But going to the right places for help changed everything, writes Simon Read

Simon Read: Information is power. And it's in the wrong hands when people are cold-called by companies that know they're in debt

In debt? You're likely to be targeted by unscrupulous companies that hope to profit from your misfortune. They may try to pretend to be your friend by offering what they call "help" – but almost certainly that help will come with a cost and leave you worse off than you were before they got in touch.

Mark Dampier: So you've got pension freedom... will it end up as a cold shower?

In less than three months' time radical changes to pensions will take effect, providing investors with more freedom. Yet for those who prefer to make their own investment decisions, the choice of funds available is overwhelming. And an income drawdown account is also not particularly easy to manage.

The move marks the culmination of a long campaign by debt charities and insolvency firms and follows a call for evidence launched by the Minister last August

Bankruptcy rules to change, Business Minister announces

The minimum amount for which you can be forced into bankruptcy is being raised from £750 to £5,000

Three-quarters of parents say being unable to afford to heat their home adequately is hitting the health of their children

Family well-being and health hit by heating costs

A shock report reveals that fuel poverty is affecting desperate families – and their children

Many people have no understanding of pensions

Are you ready for pensions reforms?

Most people are too confused to know how to use their pensions for a secure income

At a rate of 7.5 per cent, the wind is blowing behind ethical investors

A new initiative has financial and ethical virtues, says Simon Read
Ticket to cry: many passengers have been penalised with exorbitant and unnecessary rises

Simon Read: Inflation is riding the slow train. So why have we been given a one-way ticket to travel on the fares express?

I struck a chord with many of you when I wrote a piece earlier this week about rising train fares. It seems there is an army of travellers who feel they've been ripped off by increased transport costs.

Your money: Let’s hope for a fairer, more honest 2015

Poor service from banks and energy companies has sadly been a theme this year

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Recruitment Genius: Outbound Sales Executive - OTE £25,000

    £16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

    £45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

    Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

    £35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Day In a Page

    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
    America: Land of the free, home of the political dynasty

    America: Land of the free, home of the political dynasty

    These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
    A graphic history of US civil rights – in comic book form

    A graphic history of US civil rights – in comic book form

    A veteran of the Fifties campaigns is inspiring a new generation of activists
    Winston Churchill: the enigma of a British hero

    Winston Churchill: the enigma of a British hero

    A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
    Growing mussels: Precious freshwater shellfish are thriving in a unique green project

    Growing mussels

    Precious freshwater shellfish are thriving in a unique green project
    Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

    Diana Krall interview

    The jazz singer on being friends with Elton John, outer space and skiing in Dubai
    Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

    Pinstriped for action

    A glimpse of what the very rich man will be wearing this winter
    Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

    Russell T Davies & Ben Cook: How we met

    'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
    Bill Granger recipes: Our chef serves up his favourite Japanese dishes

    Bill Granger's Japanese recipes

    Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
    Michael Calvin: How we need more Eric Cantonas to knock some sense into us

    Michael Calvin's Last Word

    How we need more Eric Cantonas to knock some sense into us