Building societies have a price upon their head
Friday 28 April 1995
The same message is coming from the mortgage market. Reluctant managements beware - competitive pressures look like doing the job of ending mutuality for them. To underline the point, Merrill Lynch has weighed in with a circular that states baldly that the movement will cease to exist in any meaningful way over the next few years. The claim may be exaggerated, but it also has a ring of truth.
Merrill claims that already tough competition in the mortgage market will intensify in the next two years. Competition from lenders which sell mortgages over the phone will drive margins down to untenable levels, forcing societies either to merge and then convert to banks, or simply to sell to a bank.
Nonsense, say supporters of this dying breed. Building societies are the main driving force behind the price war. Their cost bases also tend to be lower than those of their main competitors, the banks. What is more, they do not have to pay out dividends to shareholders, as banks do, so they can continue to pile up reserves.
All this may be true; the problem is that with economic recovery, plummeting bad debt provisions, and increasingly mountainous excess capital, the banks have money to burn. The effect is twofold. Some banks, notably Royal Bank of Scotland and TSB, look likely to follow Lloyds into buying a society. Abbey National's attempt to go over the head of National & Provincial's board and appeal directly to members has undermined the long-held belief that there can be no such thing as a hostile takeover for a building society. Abbey's approach may form the model for dismembering what is left of the mutual movement. The other effect is to make the banks' own pitch into the mortgage market that much more aggressive.
Whatever the truth of the Merrill Lynch analysis, the 100,000 staff who work in the building society movement should watch out. Societies are generally far more centralised and cost-effective than banks, but it is hard to see them escaping the shakeout that has decimated banks' branch and staff numbers. The unfortunate reality is that Britain's high streets have far too many bank and building society branches. If Merrill's predictions are even half-right, there will be a radical contraction in building society staff numbers over the next two years.
Help needed on state pensions
There was a time, and it was not that long ago, when the State Earnings Related Pension Scheme, was hailed by ministers as a magnificent edifice underpinning the security of our pensions. Recent years have echoed to the recurring sound of falling masonry; there was another loud crash yesterday, as the Government confirmed that it was removing yet another aspect of state backing for the autumn of our years.
In this column two days ago we said the central message from the meeting in Birmingham of the National Association of Pension Funds would be an uncomfortable one - that people will have to save a great deal more out of their current earnings if they want to ensure a decent old age.
In detailing the cuts in Serps benefits over the coming decades, the Government Actuary yesterday left no doubt at the NAPF gathering that people are going to have to look much more after their own welfare. The promotion of personal pensions was only the first stage of the welfare privatisation process. Now the Government is stepping up the pressure by making the implications of doing nothing abundantly clear. Perhaps the most revealing aspect of this initiative is the silence it has encountered from the Labour Party. The reduction in benefits has been known about for several months; it was there for all to see in the Pensions Bill before Parliament. The vociferous political soap-boxing over war widows' pensions, at a cost of tens of millions of pounds, contrasts perversely with the pursed lips over the prospect of cuts in Serps, depriving the the general population of billions in anticipated benefit.
The reason is simple. Labour or Conservative, no government wants to be saddled in 30 years or so with the colossal bill that would occur if present pension arrangements are left untouched. The message that people must save harder to provide for their old age is getting more strident. But how? As recent events have amply demonstrated, personal pensions may not be the answer. This is a vital area of public concern, that requires much clearer debate than the Government, or Opposition, have encouraged so far. There has been so much chopping and changing on pensions over the past 15 years that many people no longer know where they stand. The latest move on Serps adds to the uncertainty. Clarity, and better guidance are needed.as a matter of urgency.
Mixed reception for recommended prices
The battle against recommended retail prices has been a long one. As long ago as 1978 Hotpoint was forced to settle out of court with Comet after a protracted row over discounting of its products. Time apparently changes nothing. The OFT has now been forced to refer the supply of electrical goods to the Monopolies and Mergers Commission.
Minimum retail prices are illegal but recommended ones are not. Most people might think that refusal to supply retailers who break the recommended price is tantamount to the illegal practice and therefore against the law as well. Apparently not. The OFT believes it to be widespread. Manufacturers such as Sony quite often refuse to sell to discount operators. Their excuse is a familiar and hollow one, that these outlets do not fulfil Sony's criteria on after-sales service.
It is clear that customers lose from a recommended price. Many retailers, however, are on the same side as the manufacturers. The electrical market is already operating on wafer-thin margins. A price war is the last thing they want. The retailers may not like the strong-arm tactics of the consumer electronics giants but some may think it safer to keep mum.
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