Permanent interest-bearing shares

I’ve heard mention of permanent interest-bearing shares but am confused as to what they are.

Pibs are shares issued by buildings societies that allow them to gain access to stock market funds without going through the complexities of a demutualisation. The shares are listed on the London Stock Exchange so prices may move daily. They are reported weekly in FT Money’s Databank section. They carry a fixed rate of interest (called a coupon) that makes them closer to a corporate bond than a share. The rates payable are currently higher than those on ordinary building society savings accounts.

How much higher?

Pibs are currently paying a gross yield of 5.5 to 6 per cent compared with the 3 to 4.5 per cent available on many savings accounts and the 4.25 per cent available on the 10-year gilt. Pibs have stated rates of interest that are much higher but you need to set this against the market price of the Pib to calculate the yield. When choosing a Pib, compare the yields rather than the headline interest rates.

How common are Pibs?

A total of 20 building societies or demutualised societies have Pibs in issue with a total nominal value of more than £1.3bn. Several have more than one Pib. Pibs that have been issued by societies that have since demutualised are known as perpetual subordinated bonds but their characteristics are otherwise the same. Societies with Pibs outstanding include Britannia, Coventry, Manchester and Skipton. Bradford & Bingley and Halifax have bonds in issue.

They pay a higher rate of interest than a building society share account. Does this mean they are more risky?

Yes. They rank behind “share” (savings) accounts for payment in the event of a winding up of the society. Interest is payable only after it has been paid on ordinary accounts. There is also no back-up protection for Pibs from the Financial Services Compensation Scheme that covers other forms of investment.

These are risks that need to be considered but in practice no society has ever missed an interest payment. On the risk-reward scale, Pibs are suitable for investors who are cautious but with a modest appetite for risk. Building societies are generally well-capitalised businesses with a steady inflow of mortgage repayments. It would take a steep decline in mortgage demand to inflict much damage.
Are there any other risks?

Like other fixed interest securities, Pibs lose value if interest rates go up. Investors may also end up getting back less than the price they paid. Some of the more recent Pibs have “call dates” that allow issuers to buy them back at a pre-determined time at their nominal price – normally around 100p per share. These dates have been set 15-20 years after issue and the Financial Services Authority would have to approve exercise of the call, according to the Building Societies Association. All listed Pibs are trading at above their nominal value – some on more than two times – so investors would suffer a capital loss if the Pibs were called.

How should I regard a Pibs investment – as short or long-term?

This is not a highly volatile market so investors tend to stay in for the longer term. The restricted secondary market is another reason for taking a long-term view.

How easy is it to buy Pibs?

They can be acquired like shares through a broker, a savings account or a fund. There is a minimum purchase size of £1,000 for most Pibs although Nottingham requires a £5,000 purchase, Bradford & Bingley £10,000 while Cheltenham & Gloucester and Halifax require at least £50,000 (although Halifax has one £1,000 Pib/bond outstanding).

How easy is it to sell Pibs?

Since they are irredeemable, they can’t be sold back to the society so you will have to find a buyer in the open market.

How are they treated for tax?

Capital gains are exempt from tax but income is subject to the investor’s marginal rate of tax. Income is paid gross with the tax deducted via a normal tax return.