The Post Office Savings Bank: A Bonus Scheme

Irish Review (Dublin)

The Post Office Savings Bank: A Bonus SchemeAuthor(s): Justin PhillipsSource: The Irish Review (Dublin), Vol. 4, No. 41 (Jul. - Aug., 1914), pp. 237-242Published by: Irish Review (Dublin)Stable URL: http://www.jstor.org/stable/30063314 .

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THE POST OFFICE SAVINGS BANK

A BONus SCHEME

By JUSTIN PHILLIPS

THE continued serious depression in the market price of gilt- edged securities, and the consequent high yield of interest earned on money invested therein at the prices prevailing

during the past five years, have given the more thrifty section of our

population, who deposit their savings in the Post Office Savings Bank, a justifiable claim to participate in the increased profits result-

ing from the high earning power of their money. Although the

depositors have not yet claimed their rights in this respect, it is the

duty of our Parliamentary representatives to see that the interests of a considerable and most deserving section of our population are

properly safeguarded. The need for more liberal treatment for

depositors is obvious. Everywhere investors are making increased

profits from investments in industrial and Government securities, while the rate of interest allowed by the Post Office Savings Bank -2- per cent.-has remained stationary since i861.

From the last published report of the Postmaster General, it

appears that for the year ended 1912 there was a net surplus profit of u83,208 on the working of the Savings Bank, after providing interest on all deposits at the rate of 2j per cent., and for 1911

there was, for the first time since 1902, a profit on the year's working of z8,724, as compared with a deficit of v18,649 in 1910io. The

profit made during the past few years is due solely to the higher yield being earned on the investment of the yearly surplus of

deposits and interest over withdrawals; and although, from the

standpoint of private enterprise, the Savings Bank would scarcely be looked upon as a successful undertaking, it should be remembered that it was never intended that it should be a revenue-yielding Department; and it is stated in the Report of the Select Committee on Savings Banks Funds that "with a view to encourage habits of saving among the people, the Savings Banks Act of 1817 fixed the

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THE IRISH REVIEW

rate of interest payable by the Commissioners to the Trustees of the Banks at e4 I Is. 3d. per cent., a rate in excess of the income which the Commissioners could earn from their investments; while from 1877 to 188o inclusive, Parliament voted an annual sum of

x75,200 to-meet the deficiency in the income of the Trustee Savings Banks." Here we have a well-established precedent for the State subsidisation of thrift, and for depositors now to ask for the full

profits earned on their savings could scarcely be considered an unreasonable demand. Primarily, the object of the Savings Bank is to encourage habits of saving among the people: not to show an annual profit, and the taxpayer in spending his money to encourage such habits is puting his money to a profitable purpose.

As a reason against a reform in the present system, it might be urged that it is now possible to have small sums invested in Consolidated Stock through the medium of the Post Office Savings Bank. It should, however, be remembered that the saving public have not, as yet, shown any great desire to avail themselves of this system of investment, even though if by doing so they could secure a considerably higher rate of interest on the money invested and a not unlikely appreciation in the value of the security held. The average Savings Bank depositor will not take the slightest risk in investment, and the almost daily fluctuating price of Consols, together with the prospect of being compelled, through unforeseen circumstances, to realise at an unfavourable moment, and the difficulty of purchase and sale, tend to create a feeling of uncertainty, and to cause considerable worry to those holders who do not understand the Stock Exchange. For these reasons, investments in Consoli- dated Stock can never be made popular among Savings Bank depositors, and from the last annual report of the Postmaster-General it appears that, during 19I2, only ;t2,991,260 of Consolidated Stock was purchased through the medium of the Savings Bank, though the average price of the Stock during the period was as low as 76j, thus bringing in a yield of over c3 5s. per cent. The problem to be solved is: how to give the depositor the full rate of interest earned by a prudent investment of his deposits by the State.

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To increase the current rate of interest allowed on all deposits, regardless of when made, would be an excessive demand on the resources of the Savings Bank, as the greater part of the funds is locked up in Consols and such securities which, having regard to the price at which they were purchased ten to twenty years ago, are

yielding only 24 per cent., and to pay 3 or 34 per cent. interest on all deposits would mean an enormous loss, while to sell Consols or any other stocks in order to invest in higher yielding securities would be a most unwise proceeding on the part of the State. Furthermore, those who deposited their money ten to twenty years ago, and whose savings have been invested in securities bringing in a yield barely equal to the amount of interest being paid, have no claim to an increased rate of interest. It is only those depositors whose money is being invested in securities bringing in a yield of

3 to 4 per cent. who are justified in demanding a share of the profits arising from the increased earning power of their money.

The Irish Land Act of 1909 empowered the National Debt Commissioners to invest Savings Bank Funds in Guaranteed Irish Land Stock, and at the present moment all the funds of the Savings Bank Department available for investment are spent in the purchase of Land Stock, as the yield at the present price is 31 per cent., and at the price paid on the 28th June, 1913, the yield is 4 per cent. Investments in Land Stock have turned an annual deficit in income into a substantial profit, and as a result it has been arranged that if the new Irish Land Bill be passed into law, the money required to finance the sales will come out of the Savings Bank surplus available for investment. The money is to be raised on terminable annuities running for sixty-two years at a rate of interest of m3 6s. 8d.

per cent. Thus all the Savings Bank funds available for investment during the next ten or fifteen years would be put to the credit of the Irish Land Purchase Fund, and a fixed rate of g3 6s. 8d. per cent. would be paid thereon.

Assuming, therefore, that the new money-i.e., the annual surplus of deposits and interest over withdrawals-being the only money available for investment in the higher yielding securities should

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THE IRISH REVIEW

alone participate in the increased profits, and that the investments of such surplus money will bring in an assured dividend of

r3 6s. 8d. per cent., we are in a position to formulate a workable scheme for the equitable division of the resultant profits. A system of Bonus payments, similar to that adopted by the majority of Life Insurance Companies, would appear to offer a solution of the problem of how to deal fairly with the proprietors of the new money in the

Savings Bank. As a beginning there should be established a Bonus Fund, and to it should be credited the annual surplus net profit made through the investment of the new money. Moreover, with the object of further encouraging thrift, the Government should undertake to pay into this fund, in addition, half the cost of manage- ment of the annual surplus of all new deposits and interests. These sums should be allowed to accumulate at interest for five years, at the end of which time the Fund should be distributed amongst the

depositors in proportion to the average yearly amount by which their

deposits exceeded their withdrawals in the period to which the Bonus related. To get a rough idea of how such a reform would work out in actual practice, it should be stated that in the year 19o8 the excess of deposits and interest over withdrawals was k3,I48,137; in 1909, b3,947,851; in 191o, p4,294,150; in 1911, i7,628,293; and in 1912, ;y5,586,056. These sums have been invested at a price bringing in a yield varying from 34 to 4 per cent., so that having paid interest to the depositors at the rate of 2- per cent., there remains a profit of from 15/- to 30/- per cent. From this must be deducted the working expenses-a trifle over' 7/- per cent., leaving a net profit of from 8/- per cent. to 22/- per cent. Assuming, therefore, that for the next five years there will be an average annual surplus of l6,ooo,ooo available for investment at j3 6s. 8d. per cent., and that interest thereon would be payable to depositors at the usual rate-24 per cent.-there would remain an annual gross profit thereon of I6s. 8d. per cent., or n50,000. From this would have to be deducted half the working expenses at, say, 3s. 61d. per cent. (full working expenses for I912 was 7s. Ijd. per cent.), or d10,625, leaving a net sum in the first year of quinquennium of,

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roughly, o39,4oo, or s591,ooo-with interest over a6oo,ooo--at the end of the quinquennium. All this would be available for distri- bution on approximately h6,ooo,ooo, which would be the average yearly excess of deposits and interest over withdrawals. Thus, there would be payable a quinquennial Bonus of over ten per cent.

A quinquennial Bonus system would encourage depositors to

put away as much as possible each year, while withdrawing the minimum. Thus genuine thrift, not mere convenience, would be

stimulated, as the object of every depositor would be to have a substantial deposit each and every year, and to have as few withdrawals as possible, and to participate to the fullest extent in the Bonus. The system would, of course, bring comparatively little

pecuniary gain to the very small depositor whose withdrawals from

year to year nearly equalled his deposits, and who looks more to

security and convenience than to interest. But the larger depositors who have learnt thrift, and who are capable of taking care of their

money, and, if necessary, investing it in a safe high-yielding security, must not be lost to the Savings Bank, as they undoubtedly will be, if some system be not devised whereby the depositors may share in the increased profits resulting from the higher earning power of their

money. That they will desert the Savings Bank is proved by the fact that new deposits during the years 1894-1897 increased at an

alarming rate when the price of securities was high, and the interest allowed by the Savings Bank was as high as could be obtained from investments in Government or other Gilt-edged Securities, whereas withdrawals increased when the price was low. During the years referred to the deposits exceeded the withdrawals by an annual

average of w7,I87,ooo at a time when the price of Consols, as well as of all other securities, was so exceptionally high that the Govern- ment could only invest the deposits entrusted to them on very unfavourable terms. In 1912 the amount deposited exceeded that

withdrawn by q'I,326,974, whereas the withdrawals during the same

period exceeded those made in I9II by f2,775,309; so that while

deposits increased by I.I per cent., withdrawals increased by 6.0 per 241



THE IRISH REVIEW

cent., and the number of active accounts was only 8,868,oo8, as

compared with 11,018,251 in 19o8. A Bonus scheme appears to be the only workable system by

which new depositors could be encouraged and treated fairly. Through it they would get a fair market price for the money deposited, the tendency to excessive withdrawals would be counter- acted, and thrift would be stimulated. The reform would mean a direct pecuniary gain to almost half a million Irish people, while in the United Kingdom some nine million depositors would benefit. Moreover, such a scheme would have a beneficial effect on the

general financial condition of the Savings Bank itself, as Bonus

payments would be conditional on a profit being shown on the

working for the quinquennial period. To await a demand for such a reform is unstatesmanlike, and as the matter is one of concern to a large and deserving section of the Irish people, the Irish Members of Parliament should draw the attention of the Postmaster-General to the question, and urge upon him the necessity for some immediate

change-even if such a change brought only n4o,ooo to Ireland in

every five years.

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The Post Office Savings Bank: A Bonus Scheme

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