Are friendly societies the next demutualisation target? As most building

societies of any size have fallen to the demutualisation trend,

carpetbaggers&#39 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&#39s 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&#39 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&#39 products do not take advantage of the

available tax concessions.

However, mutuals by definition are going to take a keener interest in

their members&#39 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&#39 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.