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Is the Treasury’s NS&I destabilising the savings market?

Tuesday 22nd September 2015

Written by Martin Upton

This month’s news that National Savings & Investments (NS&I) had a net inflow of funds of £5.4 billion in the three months to June this year has re-ignited the debate about whether this agency of the Treasury is destabilising the UK savings market.
The huge inflows into NS&I, totalling £18.2 billion in the 2014/15 tax year have in particular reflected the success of the ‘pensioner bonds’ on offer from January this year. These one and three-year bonds, that were available for those aged 65 and over, offered fixed interest rates comfortably above the best offers from other deposit-taking institutions.
Unsurprisingly, money flowed into the products in huge volumes with £13.7 billion being raised. In total 1.1 million people invested in pensioner bonds before the products were withdrawn in May. The raising of the limit on individual holdings of premium bonds from £40,000 to £50,000 is now further helping NS&I to draw funds from savers. The new limit was introduced in June and in the first two months 360,000 people took advantage by raising their holdings above £40,000.
The success of NS&I in raising funds from private savers clearly helps the Government fund its budget deficit but, perhaps understandably, rival deposit takers have cried ‘foul’ and have accused the agency of unfair competition. The relatively high interest rates on pensioner bonds together with the government guarantee on investments and the tax-free rewards on products are claimed to have put a huge squeeze on those institutions reliant on personal savers – particularly because the NS&I’s offerings have attracted the more affluent with greater savings balances to deploy.
Nationwide Building Society, the largest in the UK, is not alone in suffering the impact of competition from NS&I with its savings inflows falling from £4.9 billion to £1.2 billion in its last financial year. David Cutter, Chief Executive of the Skipton Building Society and Chairman of the Building Societies Association (BSA) claims that the reduction in savings inflows is potentially threatening the sector’s growth plans (by limiting funds available for mortgages) and having an adverse impact on mortgage affordability (by raising the cost of funds to the sector).
The response from savers might be, though, that this is a case of the ‘biter being bit’. When the Funding for Lending Scheme (FLS) came on stream in July 2012, eligible deposit-takers did not hesitate to draw huge sums of cheap funds from the Bank of England. As at June of this year the outstanding drawing of funds under FLS totalled £61 billion. Access to FLS meant that there was less need to pay up for the funds from personal savers. The upshot has been a slump in the savings rates on offer. No surprise, then, that those who are eligible to do so have diverted their savings to the keenly priced NS&I products. Perhaps if the deposit-takers had taken more care to keep their savings customers loyal the migration to NS&I products might have been stemmed. 
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

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