Consumers
What are PIBS?
| Print page | Email |
What are PIBS?
Permanent Interest Bearing Shares (PIBS) are securities issued by building societies, usually at fixed interest rates, and quoted on the stock market. Occasionally, a building society will issue floating rate PIBS, where the interest rate changes in line with other rates of interest.
They are essentially a form of risk capital, ranking lower than subordinated debt, and have been issued by building societies, which cannot raise risk capital by issuing ordinary shares on the stock market like a bank.
All PIBS are permanent and have no maturity date. A particular issue of PIBS may allow the society to “call” ie redeem the PIBS early – on a specified date. But there can be no certainty that this will happen: either the society may decide it is no longer advantageous to do so or the FSA might refuse consent. So it is important to be clear that the holder has no right to repayment on the call date.
What are the risks?
PIBS cannot be withdrawn like savings, or sold back to the society, but can be bought and sold on the stock exchange, which means the price varies. Like other fixed interest securities, if interest rates generally go up, their value goes down; conversely, if rates generally fall, their value rises. So there is a risk that you will not get back your investment if the general level of interest rates changes.
PIBS provide risk-bearing capital to the issuing society. For that reason, in the unlikely event of the building society getting into financial trouble, it can miss paying interest on PIBS (see below) and, if the society became insolvent, the PIBS holders would be last in the queue to get their money back. All the other investors would be paid first, and only if there was sufficient left would the PIBS holders be repaid. Also, unlike other building society investors, PIBS holders are not covered by the Financial Services Compensation Scheme.
The other risk is that the market in PIBS is not very liquid, so investors may not be able to sell their PIBS when they want to - it depends on there also being buyers in the market at the same time. For all these reasons PIBS are riskier than other building society investments, and, accordingly, attract a higher return.
Interest payments
Gross interest payments on PIBS are usually made twice yearly, but payments cannot be made if it would mean that the society would breach its capital adequacy guidelines. Although additional PIBS can be issued in lieu of a cashpayment, interest payments are non-cumulative, so in the event that a society fails to make a payment, no obligation is carried forward. The terms and conditions of PIBS clearly permit the issuing society to pass interest payments if necessary.
Taxation
PIBS are traded without interest, so any accrued interest has to be settled separately. Income tax is due on the income, but you can negate this by nesting them in an ISA or a SIPP. PIBS are subject to special tax provisions, so a gain or loss accruing on the disposal of PIBS is not a chargeable gain or loss for capital gains tax purposes.
Membership
Holders of PIBS are members of the issuing building society, just like savers and borrowers are, and are consequently entitled to voting rights.
Perpetual Subordinated Bonds
Where PIBS were originally issued by the building societies that demutualised these became subordinated debt on demutualisation and are known as Perpetual Subordinated Bonds (PSBs). They are not PIBS.
Trading PIBS
The BSA does not collect or monitor PIBS issue details or current prices. The following links may be of use.
Permanent Interest Bearing Shares (PIBS) are securities issued by building societies, usually at fixed interest rates, and quoted on the stock market. Occasionally, a building society will issue floating rate PIBS, where the interest rate changes in line with other rates of interest.
They are essentially a form of risk capital, ranking lower than subordinated debt, and have been issued by building societies, which cannot raise risk capital by issuing ordinary shares on the stock market like a bank.
All PIBS are permanent and have no maturity date. A particular issue of PIBS may allow the society to “call” ie redeem the PIBS early – on a specified date. But there can be no certainty that this will happen: either the society may decide it is no longer advantageous to do so or the FSA might refuse consent. So it is important to be clear that the holder has no right to repayment on the call date.
What are the risks?
PIBS cannot be withdrawn like savings, or sold back to the society, but can be bought and sold on the stock exchange, which means the price varies. Like other fixed interest securities, if interest rates generally go up, their value goes down; conversely, if rates generally fall, their value rises. So there is a risk that you will not get back your investment if the general level of interest rates changes.
PIBS provide risk-bearing capital to the issuing society. For that reason, in the unlikely event of the building society getting into financial trouble, it can miss paying interest on PIBS (see below) and, if the society became insolvent, the PIBS holders would be last in the queue to get their money back. All the other investors would be paid first, and only if there was sufficient left would the PIBS holders be repaid. Also, unlike other building society investors, PIBS holders are not covered by the Financial Services Compensation Scheme.
The other risk is that the market in PIBS is not very liquid, so investors may not be able to sell their PIBS when they want to - it depends on there also being buyers in the market at the same time. For all these reasons PIBS are riskier than other building society investments, and, accordingly, attract a higher return.
Interest payments
Gross interest payments on PIBS are usually made twice yearly, but payments cannot be made if it would mean that the society would breach its capital adequacy guidelines. Although additional PIBS can be issued in lieu of a cashpayment, interest payments are non-cumulative, so in the event that a society fails to make a payment, no obligation is carried forward. The terms and conditions of PIBS clearly permit the issuing society to pass interest payments if necessary.
Taxation
PIBS are traded without interest, so any accrued interest has to be settled separately. Income tax is due on the income, but you can negate this by nesting them in an ISA or a SIPP. PIBS are subject to special tax provisions, so a gain or loss accruing on the disposal of PIBS is not a chargeable gain or loss for capital gains tax purposes.
Membership
Holders of PIBS are members of the issuing building society, just like savers and borrowers are, and are consequently entitled to voting rights.
Perpetual Subordinated Bonds
Where PIBS were originally issued by the building societies that demutualised these became subordinated debt on demutualisation and are known as Perpetual Subordinated Bonds (PSBs). They are not PIBS.
Trading PIBS
The BSA does not collect or monitor PIBS issue details or current prices. The following links may be of use.
Collins Stewart weekly PIBS prices
FixedInvestor.co.uk daily PIBS prices
Back to the FAQ List
