Are friendly societies the next demutualisation target? As most building
societies of any size have fallen to the demutualisation trend,
carpetbaggers' attention has spread to the life companies and speculation
mounts that friendly societies could be their next prey.
With £13bn under management, almost six million members and a total
annual income of just under £3bn, the sector looks ripe for the
plucking, especially given that many friendly societies have enviable
free-asset ratios.
However, the fact is that most friendly societies, while mutuals, do not
offer the rich pickings that generate the gleam in the eye of the would-be
carpetbagger.
The friendly society movement was established over 200 years ago but its
values go back over 2,000 years to when Roman legionnaires first clubbed
together to provide for each other's financial protection.
This history is one of the reasons why demutualisation is less attractive.
Much of the current legislation has evolved with the movement and most
friendlies are based on the friendly society tax regime, which applies to
no other financial institution.
By losing its mutuality, a provider will lose its friendly society status,
with a corresponding loss of product com-petitiveness – the basis of its
distinctive products is removed. There is then no future for the company.
If a friendly society were to demutualise, it is improbable that there
would be sufficient capital raised from the market to replace the cash
handouts generated from the demutualisation. The share-out would become not
a change of status but a dissolution.
In most cases, the dissolution simply would not produce sufficient cash to
overcome the loss of the distinctive products and the requirement to pay
tax which might well now arise.
Specifically, a member with a 10-year savings plan with more than three
years to run will not merely lose the long-term saving but will also become
liable for tax.
Few friendly societies have enough spare cash swashing around in the
basement to make a carpetbagging exercise worthwhile. Even the bigger
societies are on a differ-ent scale from carpetbaggers' usual targets.
Generally, friendly societies are not cash-rich, having paid out to their
members or provided excellent benefits rather than accumulated substantial
reserves.
In just a handful of instances, the friendly society product argument does
not apply. Some friendly societies' products do not take advantage of the
available tax concessions.
However, mutuals by definition are going to take a keener interest in
their members' welfare than their plc counterparts, which means they will
always look at the pros and cons of their status – and some may well
feelthat it could be beneficialto demutualise.
But demutualisation is also now far less likely with the repeal of
schedule 7 of the Friendly Societies Act 1992. This has removed many of
the constraints placed upon friendly societies' activities and allows them
to diversify into a far broader range of financ-ial services.
The other reason why many societies would not convert is that they
dominate the league tables for financial performance while the performance
of almost all recently demutualised companies has declined as shareholders
with little if any long-term connections or commitments to the company take
their profits.
A commitment to mutuality is not just a sentimental attachment. Investing
with a mutual has been proven to be a sound financial investment. Whether
you are looking to provide a nest egg for your children or grandchildren,
saving for your retirement or providing health cover for your family,
mutuals put the member first.
The threat to mutual organisations is a direct attack on consumer choice.
The carpetbaggers forcing the demutualisation of leading financial services
organisations are only interested in their own short-term cash windfalls
and not the long-term best interests of members and policyholders.
The arguments given for the demutualisation of building societies and life
companies do not work with friendly societies – demutualise and say
goodbye.
View more on these topicsAnalysis
Comments