The nice guys of finance hope to be born again

Created amid satanic mills, friendly societies are now hoping for another revolution. Sam Dunn reports

A mid the hi-tech financial services landscape of the 21st century, friendly societies stick out like the sooty smokestacks of the Industrial Revolution that bore them.

A mid the hi-tech financial services landscape of the 21st century, friendly societies stick out like the sooty smokestacks of the Industrial Revolution that bore them.

Another revolution is now taking place at these mutuals, which offer products including income protection and an exclusive 10-year tax-exempt savings plan (Tesp). But this time it is of their own making as they desperately try to revamp themselves to win new custo- mers and stay competitive.

Friendlies emerged out of the Industrial Revolution to support workers who had fallen ill, and their popularity soared throughout the 19th century as Britain strove to become one of the world's biggest industrial powers.

Many took on names that now seem outlandish, such as Druids Sheffield, Rational Shelley (Manchester), and Grand Order of Israel and Shield of David (London). But whatever the brand consultants might make of this, they flourished as a way of putting money aside to help people avoid hardship in the event of illness later in life.

The introduction of the welfare state after the Second World War signalled the decline of the friendly societies. In their heyday there were nearly 20,000, but the number now is barely 1 per cent of that.

Of the 200 or so that remain, only 60 belong to the Association of Friendly Societies (AFS), the trade body which fights for members' interests.

Fights and sometimes loses. For at the time of the last Budget, the AFS failed to persuade the Chancellor, Gordon Brown, to raise the tax break on Tesps, which are unique to friendlies and let you save up to £25 a month tax-free, usually into a with-profits fund. Although the AFS intends to pick up the pieces, there is an acknowledgement that Tesps are not a plank on which to build the industry's future.

"It's clear that it's not the Government's [intention] to give friendlies any special status," says David White of the Children's Mutual.

Nor are independent financial advisers (IFAs) very keen on Tesps. "Historically, the tax [break] has not been matched by performance, and the charges are fairly high," says Bruce Jamieson at IFA Jamieson Financial Management.

Friendlies have also lost out to supermarkets in the basic life insurance market. The best quotes for a 20-year £100,000 life policy taken out by a 34-year-old male smoker are from Sainsbury's (£14.90 a month) and Tesco (£15.50), according to the financial analyst Moneyfacts. Compare this with Foresters FS (£24.60) and Scottish Friendly (£21), which are among the most expensive.

That said, the biggest friendly, Liverpool Victoria, is much more competitive: in the above example, its premium is £16.20. It provides personal loans and credit cards too.

"Liverpool Victoria is big enough to take on the mainstream market. It's not usually the best but it's often in the top five for value," says Jason King of insurance protection broker Life Policies Direct.

While Liverpool Victoria walks tall, the rest of the movement has been looking for help, and the first lifeline was thrown by child trust funds. These savings plans - which went live on 6 April this year and start with a £250 sum from the Government - are well suited to the societies, which have been administering similar amounts in Tesps, at a low cost, for decades. "Managing small sums is something we have always done very well," says Mr White at the Children's Mutual.

A third of the child trust fund money invested so far has been with friendlies that have tie-ups with fund managers to run the money, says John Reeve, chief executive of the Family Investments friendly society. "This market share is way above that of any other part of the financial services industry," he claims.

Makeovers are also taking place. "There has been an image problem - we are a bit dated," says Mr Reeve. Kevin Carr, of protection broker Lifesearch, agrees: "Lack of awareness is a problem. They don't have any high-street presence."

But new brands are appearing. Last month, Home-owners friendly society changed its name to the more funky "engage". And last September, the Family Assurance society became Family Investments, to give a clearer idea of its role as a specialist in children's finance. More friendlies are expected to follow.

Today's savvy consumers are more likely to be swayed by rates and returns rather than image, but Liverpool Victoria, at least, is confident that friendlies can compete.

Their strongest suit is income protection, which pays out a monthly sum if you lose your job because of sickness, an accident or redundancy. Unlike most large insurers, a number of friendly societies have business models that don't price premiums according to your job, your gender (women carry more health risks) or a smoking habit.

So workers in traditionally high-risk occupations such as nursing and construction pay the same as office workers who don't smoke.

Your savings in monthly premiums here can be massive. For example, for a £1,000-a-month payout until the age of 60, a 29-year-old self-employed painter and decorator who smokes would pay £24.36 a month with Pioneer or £28.32 with Foresters.

The same sum would cost £64.83 with Bupa or £61.12 with Legal & General.

In particular, friendlies such as Pioneer offer "own-occupation" income protection. This pays out if you can't do your own job - rather than only if you can't do any job at all.