Money: Going, going ... the last few windfalls

The seemingly endless supply of windfall cash and shares from building societies and insurance companies converting into public companies has petered out. But experts think that there is still plenty of room for further conversions, Iain Morse says.

De-mutualisation enables building societies to borrow money as banks do. Under mutual status, societies that needed to raise capital could do so only by issuing permanent interest-bearing shares (Pibs.), a form of fixed-interest loan stock. A de-mutualised society can now issue new shares as a means of raising capital as well as borrowing at interbank rates. Public limited companies can also use shares to finance both mergers and takeovers as part of the process of growing bigger and more efficient.

Investors receiving windfalls do nothing for their money beyond qualifying as members of the relevant mutual. At one time opening accounts, or buying policies which confer membership status threatened to become a national pastime. But has carpetbagging had its day?

Many of the remaining mutual building societies have introduced defensive measures to deter carpetbaggers. Nationwide obliges new members to assign any windfall to a charity when opening an account but exempts existing members opening new accounts.

Britannia Building Society impose a pounds 5,000 minimum on qualifying deposit accounts, or a pounds 2,000 minimum on a qualifying growth bond, which also ties up your money for five years. Six months ago, the minimum balance required by Yorkshire Building Society for a qualifying account was pounds 25. Now the amount stands at pounds 1,000. Likewise Chelsea Building Society imposes a minimum of pounds 2,500 on qualifying accounts.

Those tempted should also read the fine-print terms and conditions when opening such accounts. For instance, Bradford & Bingley imposes a minimum opening balance of pounds 1,000, but reserve the right to close down the account if your balance falls too low. Many societies also offer deposit accounts which do not carry member status.

Some societies offer Tessas with membership status and lower opening balances. Britannia's Flexi-tessa requires only pounds 250, while Bradford & Bingley impose a minimum of pounds 500. The drawback here is that to retain a Tessa's tax-free status, you must leave your cash in for five years.

There are other routes to windfall profits. Ownership of Pibs confers membership status. Historically these shares paid higher fixed yields than gilts but they are not redeemable and if you want your money back you have to find a buyer.

According to Bryan Johnstone, of the stockbroker Bell Lawrie. "We've had lots of enquires about Pibs from clients who hear that they may secure windfalls by buying into Pibs, but this has pushed prices up." Because the coupon rate, or yield on a Pib is fixed at outset, this means that income returns have fallen. With no certainty about whether or when a particular society may de-mutualise, "better value can be had elsewhere, as the market has factored potential windfalls into current values".

Investors can become members of mutual life companies by owning endowment savings plans and investment bonds, which can be bought from the company or second hand.

Beale Doble, a market maker for traded endowment policies (Teps), report increased demand as a result. Roger Lawrence, an assistant actuary with the firm recalls, "when Norwich Union closed membership in October 1996, we sold every one of their policies on our books". He points to the flotation of Scottish Amicable, and its purchase by Prudential as an indicator of the rewards available.

Amicable announced that it would de-mutualise in January, but did not close membership till June. Policy holders received an average payout of pounds 500 plus 3.5 per cent of a policy's sum assured, 7 per cent reversionary bonuses or an average of 4 per cent of the trading value of each policy. Most policies were worth around pounds 10,000 so this amounted to a 9 per cent windfall.

But care is needed. Australian Mutual Provident (AMP) has just announced that it will de-mutualise with share windfalls estimated at around pounds 3,000 per member. AMP took over mutual London Life in 1989 and its policy holders will benefit. But it also purchased Pearl Assurance, then trading as a limited company, and Pearl policy holders will not be eligible for any windfall. Whether buying new or second-hand, Mr Lawrence issues a wealth warning to investors, "Regard windfalls as a possible benefit, but be sure you are happy both with existing fund performance and the commitment to pay future premiums on a policy." He also points to the differing sizes of mutual insurers as a possible indicator for those most likely to convert.

Very large cash-rich mutuals such as Standard Life will not feel the pressure to convert as soon as those in the middle ground such as National Provident Institution, Scottish Provident, or Scottish Life, while small mutuals may hold a market niche and be happy to stay where they are.

There is yet another route to participating in windfalls through both unit and investment trusts. Those include J.P. Cairngorms' building society trust set up to buy Pibs, and Scottish Value Management's Life Office Opportunities Trust, which invests in Peps. Jupiter has a wider based fund, the Financial Opportunities unit trust, which buys not just into mutuals but also shares in financial sector companies it thinks ripe for takeover.

But windfalls are not paid directly to investors in these funds. Free cash or shares go into the fund as a whole. That spreads the risk but reduces returns to investors. And windfalls that go into such funds are taxable.

Where does this leave carpetbaggers? "Don't open an account or buy a policy unless you would want to anyway," Mr Lawrence judges. "View any windfall as a bonus."