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
Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
Sport
wimbledonScot will face Ivo Karlovic next
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Money Insider: How to make credit cards pay

Andrew Hagger reveals how to get the most from your plastic

Questions of Cash: My 'perfect travel companion' from the Post Office was a waste of money

One reader purchased the Post Office Travel Money Plus Card for a motoring holiday but discovered it can't be used at self-service petrol stations or autoroute toll booths

Continuing low interest rates are encouraging more people to switch to interest-only mortgages

Interest-only mortgages return to give more flexibility to borrowers

The credit crunch put a temporary end to these once-popular mortgages. But lenders are waking up to rising demand and relaxing their rules

EU to scrap roaming charges in 2017: European Commission under fire for taking so long to act

UK consumer groups complained that British holidaymakers face another two years of mobile phone misery before the law comes into effect

On the money: Yorkshire building society has demonstrated that it is taking the P2P industry seriously

Is peer-to-peer lending a risk worth taking?

The P2P industry must do more to shake off an unjustified image of being too complex and risky for the everyday saver, says Andrew Hagger

Generating grievances: Scottish Power's Longannet station in Fife

Questions of Cash: Scottish Power says it's sorry - again and again

Six of the energy company's customer have cause to blow a fuse this week

Will Patisserie Valerie be the portfolio's sweet spot?

Derek Pain: 'Patience is a virtue but maybe I should cut and run'

Derek's portfolio is currently suffering because of his failure to be more ruthless

There are now more than three million people in “severe problem debt”

Debt managers are misleading vulnerable people, warns watchdog

One debtor was given a repayment plan that would have taken 125 years to repay

Challengers are smashing the traditional high street banks when it comes to offering decent savings rates

Ignore the new breed of savings institutions and you'll lose interest

NatWest has ripped up its pledge to never be the last bank in town

NatWest pledged five years ago it wouldn't close the last bank in town. Now villagers have been told the branch shuts in September

When the last bank closes, local shops quickly go out of business

Under new state pension rules we will all be much worse off

Why did no one notice? The Government hides behind complexity, says Neasa MacErlean

Bogus Islington landlord scams public for £20,000 in fake deposits

It’s not just Islington... Simon Read warns renters and landlords about a nationwide fraud operation

Questions of Cash: The paperwork wasn't right so I was left high and dry with a broken washing machine

A reader encountered a problem with a Currys washer/dryer care plan

Borrowers should steer clear of established providers to get the best rates

Interest rates have never been cheaper if you want a five-figure personal loan but for lower-value loans it's a very different picture

Personal banking: Banking chiefs at NatWest and RBS insist that they are over the worst of the technical issues but customers are still complaining of payment issues. NatWest has waived overdraft fees and told customers they can withdraw £100 more than their limit over the next few days

People’s bank in crisis again: What should you do about the NatWest/RBS meltdown?

Thousands still waiting for payments to go through

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: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
    10 best statement lightbulbs

    10 best statement lightbulbs

    Dare to bare with some out-of-the-ordinary illumination
    Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

    Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

    Briton pumped up for dream meeting with world No 1
    Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

    Nick Bollettieri's Wimbledon Files

    It's time for big John Isner to produce the goods to go with his thumping serve
    Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

    Dustin Brown

    Who is the German player that knocked Nadal out of Wimbeldon 2015?
    Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

    Damien Martyn: 'England are fired up again, just like in 2005...'

    Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test