Societies on shaky ground

Angry calls and letters were still coming into the Independent last week from people who subscribed for the National Savings First Option Bond only to find that the rate was suddenly cut while their applications were in the post.

These people are mostly 'empty-nesters' keen to wrest every last penny from their savings. They are the sort building societies are so loath to lose and on whose loyalty hangs the fate of mortgage rates for those whose nests are still full and far from paid for. One large society estimates that 80 per cent of its deposits are now held by 20 per cent of investors. It notes that if it does not keep in favour with these savers, money marches swiftly out the door, especially from branches on the south coast.

Mark Boleat, director-general of the Building Societies Association, warned this week that societies would probably report another net outflow of savings for the month just ended, following a pounds 314m outflow in June. The lenders' juries are still out on how long they can hold mortgage rates before pressures from the savings side of their balance sheets demand a move.

National Savings reported at the end of last week that it had raised more than pounds 3bn for the Government last year, well over double the previous year's contribution.

But just as the most astute investors have warmed to the charms of National Savings, many others are still letting money languish. There is pounds 2.7bn of matured National Savings Certificates, dating back to the early days of this century, which has never been redeemed. Most is earning the 'general extension' rate of 5.01 per cent (tax free). Savers could have transferred to any number of other certificates or the Index-Linked National Savings Certificates to obtain much higher returns.

It is a mark, however, of just how tough life is getting for the societies when you consider that the general extension rate - traditionally the Cinderella of National Savings' portfolio - is only a whisker away from the post- tax returns on the lower tiers of mainstream building society accounts.

High interest rates are not the only attraction of National Savings. Security must be a big factor.

Last week, savers received another reminder that building societies are not invulnerable. The tiny Haywards Heath became the latest society to announce plans for a merger in the face of likely losses for 1992 after bad debt provisions. Haywards Heath is based smack-bang in the middle of the crisis-ridden south-east housing market.

Losses do not necessarily mean the end of the road for a building society, but talk of losses can cause a crisis of confidence and then a run on deposits that could bring it down.

The societies' regulator, the Building Societies Commission, appears reasonably confident that there are no big accidents out there waiting to happen. But the outlook is far from certain. Repossessions have come down in the first half of the year, but lenders may simply have attached a longer fuse to the time bomb by allowing borrowers to build up arrears.

Investors need to be aware that savings and lending institutions are not bedded on the same sort of foundations that they were a few years ago. And the country's largest building society, the Halifax, has made it quite clear that it will not automatically bail out smaller brethren.

Savers should remember that the most they can expect to get out of the building societies' compensation fund is pounds 18,000 and from the banks' scheme, pounds 15,000. There may be a price to pay - in terms of lower rates for smaller deposits - by spreading investments around, but caution may pay a greater dividend in the long run.

JUST as savers need to think about spreading their risk, however, they are being encouraged to 'consolidate' their accounts.

The Halifax starts extracting charges from small accounts in a fortnight's time. One aim is to encourage people to close accounts with little in them and put all the money into one account.

This move is being watched with interest, if not envy, by competitors worried about the costs of maintaining many small accounts. But the Halifax's closest rival, Abbey National, has chosen a different way to tackle the problem. It has launched a competition called Prize Pyramid with a range of glamorous prizes geared to the size of an investor's deposit in the Instant Saver account.

Vivien Goldsmith is on holiday