This is a tale of how short-sighted Government policies have turned a potential champion of savings into a puny weakling.
Actually, it is a short and simple tale. Despite converting what was a part of a Department of State into an arms-length agency, the Treasury still sets National Savings & Investments’ budget on an annual basis. By budget, I mean its target for new money raised towards the Government’s borrowing requirements.
Back in the days when UK governments found it hard to persuade people to buy conventional gilts because inflation was raging, NS&I often rode to the Government’s rescue by attracting billions into its easily accessible, plain-English products. But in recent years, thanks to the credit crunch and its consequences, the Treasury (with a little help from the Bank of England’s QE), has been able to shift enormous quantities of conventional debt at very low interest rates. On top of that, it has also been able to issue new index-linked gilts at rates that undercut even the much-reduced bonuses NS&I used to pay on its index-linked certificates.
With all that it mind, the bean-counters at the Treasury have told NS&I they do not need it to raise any new money in 2012/13. Of course, they have to replace maturing products but that is no great challenge in an era of such low interest rates. Indeed, so easy is the target that NS&I told the Sunday Telegraph it was very unlikely to issue a new index-linked cert this year.
You might be suspicious about the justification of that “no new money” target. Rightly so. The banks crawling out of their self-inflicted debt morass need to be able to increase the proportion of their loans funded by deposits rather than wholesale funds. They do not need competition from NS&I. So, with a wave of the Treasury wand, they are not getting the competition. But is the Treasury right to sacrifice the needs of individual savers to the needs of banks because the public at large effectively own one and a half of the biggest ones?
That could be seen as short-termism gone mad. In fact, it is worse than that. In NS&I, the Government has one of the very few totally trusted and reliable names in the savings industry. If there is one institution capable of creating a long-term savings product that people would buy, it is NS&I. Indeed, it has already blueprinted exactly the product that I predict would be a runaway success and help to restore the nation’s long-term savings habit – a 10-year contractual savings plan with payouts linked to inflation and bonuses on top.
This really is a no-brainer product to create and an absolute no-brainer for people to buy. You can see at once that it ought to be part of the savings portfolio of almost anyone in the capital accumulation stage of their lives. Not only is that a no-brainer, so is the notion of having a steady income of billions a year towards the state’s spending needs, without needing to compete with the banks at all.
This is one product that only the state can guarantee and that ample evidence says people want to buy.
But that is only the start. Given realistic long-term targets stretching over 10-year terms at least, NS&I could develop many more savings products. Given that it is always going to be competing with banks, there are only a few areas where it could really make a difference. Index-linked is the big one but a long-term contractual savings plan linked to the stockmarket with minimum capital amounts at set future dates is another. This is just an extension of the structured products it already sells but in a form banks are unlikely to develop because they cannot make money from it.
How easy it would be for Mr Osborne to set NS&I free. How difficult it is to get any politician or civil servant to look at policy except as defined by the narrowest and most short-term of objectives.
Chris Gilchrist is a director of FiveWays Financial Planning. He edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning