I’m sure by now that most readers will be aware that this week National Savings & Investments closed for sale its RPI+1% index linked savings certificates (ILSC’s). If they stay closed for a long time or even reopen in a few months linked to the CPI instead of RPI its going to give me and I’m assuming many others a few problems. My retirement investing strategy uses NS&I ILSC’s extensively. I currently have 20.7% of my net worth ties up in them.
I was using these certificates as they were the only low risk option which to my knowledge could ‘guarantee’ me my capital back plus a return after tax that matched a semi reasonable measure inflation plus a little bit. This was true whether we had inflation or deflation. I’m just not sure what I can use as a substitute now. If any readers have any ideas then please drop a comment as I’d like any suggestions. Of course I’d always do my own research before buying anything suggested.
What I think is disgusting though with the suspension of this product is the reasoning behind it. A quote in this weekend’s Financial Times says it all - ‘Jane Platt, NS&I chief executive, said the changes were a result of receiving net savings inflows of £2.4bn between April and June, well ahead of the £2bn target for the year. Continuing to attract cash at the same rate would risk starving banks and building societies of funds, making it harder for them to lend and to rebuild their capital after the credit crisis.’
I’m sorry but that shocks me. If it doesn’t you then read the quote again. The way I read it is that NS&I as an organisation backed by HM Treasury fully acknowledge that banks are operating as a semi cartel and are paying savers uncompetitive returns on their savings. Instead of continuing to offer a product which might eventually have forced banks to also start offering competitive products what we will do instead is collude with the banks in robbing savers by removing our product from sale.
So now it appears that HM Treasury and hence the government agree that it is acceptable for banks to be a semi cartel and punish savers at will. Here’s how it works in the real world, the world where I work. It’s called supply and demand and only the strong shall survive. Company A (that can be NS&I) has clearly done their market research and developed a product that has a Unique Selling Proposition (USP) which is attractive to the consumer. This is resulting in them gaining market share. Company B (that’s the banks) have a few options:
- they can continue as they are and accept they will lose market share. They do this because they know that their earnings as a percentage of turnover is excellent and so they trying to maximise profits. Eventually though they will have to offer a competitive product because as their turnover falls their cost block (that’s the employee costs amongst other things which would mean redundancies) continues to remove their percentage of profit.
- they can cut their cost block allowing them to offer a more competitive product while maintaining profit percentage.
- they can accept a lower profit margin and offer a more competitive product while maintaining their cost block. That of course IMO would be difficult for banks to swallow. After all they have to make record profits to pay out all those record bonuses to bankers.
- of course, they can also do nothing and watch their company lose market share until they start making losses. That continues until eventually they become insolvent. For some this might be unavoidable as they have already cut their costs but can’t come up with a competitive product that is profitable.
It should be all about market competition. In this instance the government wanted money from savers more than the banks and were prepared to pay for it. Banks could have followed and pushed up the cost of borrowing allowing higher rates for savers also. Unfortunately it appears as though our banking sector doesn’t operate like this. Instead I suspect the banks have completed plenty of lobbying and pressure of government and their ilk in the background probably saying things like we’ll become ‘bankrupt’ again if you don’t allow us to make record profits. In return Company A says sorry about that Mr Bankers we’ll just take our product off the market so that you can continue with your rip off strategy.
As always do your own research.