Jeff Salway: Mutuals show the way after Northern Rock

During and following the Northern Rock crisis, which entered its code-red stage on Saturday, 15 September, 2007, there were genuine fears that other banks faced a stampede of panicked customers asking for their money back so they could take it home and stash it under the mattress.

The City regulator didn’t help by getting carried away in its attempts to calm nerves. It insisted that the queues at branches and the Rock’s online meltdown were due entirely to logistics issues. In no way, said the Financial Services Authority, was it anything to do with concerns over the bank’s solvency. Few people were convinced.

It had a point, in that Northern Rock had plenty of assets. It just didn’t have the cash it needed on a day-to-day basis. It had become overdependent on wholesale money markets that began to dry up in mid-2007 as the scale of the sub-prime crisis became clearer.

As the BBC’s Robert Peston famously claimed, in the story that sparked the siege of Northern Rock branches all over the UK, the bank barely had enough cash on tap to cover the money customers had deposited with it.

Northern Rock was far from the only one in the lending boom to over-rely on cheap wholesale money markets finance. Ironically for a former building society, its downfall was its decision to specialise in mortgages but fund the bulk of that lending through wholesale markets.

It looked like a smart move for a while, with the bank lending about a fifth of new UK mortgages in the first half of 2007. Then it went badly wrong: when subprime nerves sent the price of wholesale lending soaring, the model unravelled.

The old savings and loans ethos of building societies – forbidden to use wholesale funding to finance more than half of their lending – may have been dull, but at least it made sense.

Northern Rock wasn’t the only demutualised building society – it became a bank in 1997 – to fall by the wayside during the credit crunch and ensuing banking meltdown. Bradford & Bingley, the Halifax, Cheltenham & Gloucester, Birmingham Midshires and Alliance & Leicester are among the ex-mutuals that ended up under part-state ownership or being bailed out by another bank.

The boring old model of lending to customers what they bring in through savings has served building societies well, and continues to do so. Look at the best-buy savings tables, where building societies largely dominate. The main competition comes not from the banks, but from supermarkets and overseas brands.

That has helped drive a sharp increase in building society lending over the past few months. They don’t offer the cheapest deals, but they’re open for business and enjoy a degree of public trust that banks can only envy.

It’s far from plain sailing for mutuals, subject to the regulator’s misguided one-size-fits-all approach. But they’re showing the banks the way forward, five years after Northern Rock got its comeuppance for forgetting its roots.

Decision time for your future

With annuity rates crashing through the floor, you’d think the time had arrived for new ways of making the purchase without the pressure of being tied in for life.

One option is fixed term or temporary annuities. These are an alternative to conventional annuities, which look less attractive by the day, in that they typically have terms of five years. Make the wrong decision and you have another crack at annuity purchase a few years down the line (although they may well be even lower then, so there’s still a risk).

Last week, however, one of the biggest providers in this market, MetLife, decided to walk away. That leaves just a handful of such products at a time when more people need them.

Put another way, it’s not a good time to be retiring. If you’re doing so over the coming months, do yourself a big favour and, if you have the means, take advice regarding your options.

Resist the temptation to take the annuity deal your pension provider offers you; find out whether, by exercising your right to buy your annuity from any provider on the market, you can get more for your savings.

It’s the income you’ll be getting from your pension for the rest of your life that’s at stake. Your pension savings may not be what you expected, but if you’re on the brink of retirement it’s still not out of your hands entirely.