Mutuals’ anger at NS&I’s savings initiative

The index-linked savings certificates were withdrawn from sale last summer because demand was too high from consumers trying to protect their savings from the rising cost of living.

NS&I brought them back this week, offering tax-free returns linked to the retail price index, which is currently 5.3 per cent. “We understand fully that we will see very high demand,” said Jane Platt, chief executive of the Treasury-backed savings organisation.

The move came after the Chancellor confirmed NS&I’s net financing target for 2011-12 as £2bn. To meet this, NS&I said it will need to achieve inflows of around £14bn.

Ian Ward, chief executive of Leeds Building Society, said: “The reintroduction of inflation-linked products by NS&I will have a big impact on retail savings and significantly distort the market.”

He warned that the cost of retail savings would increase, which would restrict the ability of banks and building societies to lend.

The Prime Minister has called on banks and building societies to help him get the housing market moving again by increasing mortgage lending.

Mr Ward added: “For those that do offer mortgages, the cost to customers is likely to be much more expensive.”

Iain Cornish, chief executive of Yorkshire Building Society, the UK’s second biggest, said that the Government has an almost unrivalled advantage in the provision of financial services, benefiting from “an absolute and indefinite taxpayer guarantee, a marketing budget we could never match and it’s not got the same regulatory framework as us”.

He added: “I know these products are popular with the consumer, but fundamentally they have an impact on all banks and building societies.

“If we don’t get these funds, we cannot ultimately lend as much as we would wish to. NS&I does not lend to homebuyers; it is using the money to pay off national debt.”

Mr Cornish said inflation was hitting older savers the hardest, with historically low interest rates diminishing returns and inflation eroding spending power.

While understandably popular, index-linked products might not be the right solution for all customers, he added.

Mr Cornish said: “Don’t be seduced by the fact that inflation is high today and be locked into something when it comes down.”

A spokeswoman for Skipton Building Society said: “We believe steps should include controlling the amount of savings business NS&I does in any given year.

“Therefore – while we understand that its index-linked account offers savers a solution in the current, low-interest rate environment – we are concerned this could be a sign of NS&I’s intention to return aggressively to the savings market over the coming months.”

Ms Platt, of NS&I, told the Yorkshire Post that its maximum increase in market share would be small in the context of the savings market as a whole. “What’s more, we say in advance what we are going to do,” she added. “Each year we deliver what we are doing so they (building societies and banks) can plan around it.”

The return of state-backed index-linked savings products is not the only challenge faced by building societies and other small and medium-sized financial institutions.

Credit ratings agency Moody’s said that last month that it is considering re-rating 19 UK financial institutions, which could see their senior debt ratings cut by several notches, on the grounds that the Government would not step in to save them if they ran into difficulty.

Andrew Bailey, an executive director at the Bank of England, faced questions on the issue from building society executives last week at the industry’s annual conference.

He told delegates: “It’s quite natural that if they have created ratings on the basis of an assumption of Government support, that will have to change as globally authorities adopt policies that end the reliance of banks on such support.

“But it has to happen in a stable fashion. Messy attempts to downgrade financial institutions on a piecemeal basis – different institutions at different times – cannot be tolerated. This needs to be a sensible process.”

Yorkshire, Skipton and Leeds building societies have combined assets of £56bn and together employ around 12,000 people.