PMS ... not so mutual after all?

I wasn’t going to make any comment on the difficulties surrounding the Presbyterian Mutual Society (PMS). But as the story unravels, and as I discuss with Cheryl Wonders, I do have a recurring nagging thought on the matter.

The background is that the PMS has existed since 1982, providing a lending and investing facility to Presbyterian congregations and their (Presbyterian) members.

Unlike better known financial institutions, PMS didn’t trade on stock markets or invest in other institutions. Instead, it seems to have invested in retail properties in England and brought in cash from rent. And thus, it seems to have been largely unscathed by the first order effects of the recent financial market volatility.

The other key difference is that unlike banks, building societies, credit unions and most other mutual societies, PMS isn’t regulated by the Financial Services Authority (FSA). When individuals and congregations realised that their funds invested in the PMS were not covered by the government guarantee scheme (FSA), funds were withdrawn and lodged in more traditional institutions that were guaranteed. The second order effects were the ones that got them.

Being (reasonably) safe and secure wasn’t enough. The run of withdrawals used up PMS’s spare cash, leaving them in the position where they could no longer service loans or repay investors without liquidating their long-term assets. With an emergency legislation change, an Administrator was appointed. Extracts from their statement and FAQ explain the situation ...

It is apparent that the credit crunch has had a severe effect on the Society. A number of members have moved funds from the Society to other financial institutions that enjoy protection under the Government's financial guarantee scheme, leading effectively to an unprecedented run on the Society's cash which it could not sustain.

My appointment as Administrator at the request of the Directors of the Society will provide protection for its assets. Administration is not the same as liquidation, bankruptcy or a winding-up. Administration is designed to protect a company faced with liquidity problems. The Administrator's role is to act in the best interests of everyone who is owed money ...

My aim is to see if the Society can be rescued or, if this is not possible, to ensure that the Society is wound down in an orderly manner to maximise the return of money to members.”

“The Administrator is aware that representations have been made to the UK government to have the financial protection scheme extended to the Society's members. He supports this appeal but at this stage there has been no response from government.”

“The Presbyterian Mutual Society has total assets exceeding £300m of which more than £180m is in loans to members and £130m is in fixed and other assets, including commercial property which is held in order to produce a rental income which contributed to the dividend distributed to members.”

There are questions about whether the denomination encouraged Presbyterians to invest in the (legally separate) PMS. I’m not addressing that issue in this post.

A mutual society exists for the benefit of its members. There are no external shareholders to be paid. Profits are only big enough to ensure the stability of the society. The PMS existed for borrowing and saving.

I’ve never had money in the PMS, though I have friends who do. But I’d characterise the act of withdrawing invested cash from the PMS as one that was not in keeping with the mutuality of the society’s aims. While it may have been a sensible move for the most financially astute members to figure out that they could shift their money somewhere even safer, the (probably unforeseen) consequence of their action was to look after themselves, and put others who were less genned up at a disadvantage.

According to a page on the PMS website that is no longer available, the society “is managed by the Board of Directors comprised of experienced and respected ministers and laymen of the church who undertake this responsibility for the mutual benefit of all its Presbyterian investors”. After talking to someone last night, I wonder how many of the PMS directors had money invested in the society during the summer, and how many still had money in it now that the shutters had come down? Part of me hopes that none of them had money in it, and that insider trading could not have been an issue.

But mainly I wonder – though I’ve no evidence – how many of the withdrawals came from church committees? Did groups of Presbyterians vote across Ireland to protect their own interests and investments?

Wouldn’t the mutually beneficial thing to do be for those who withdrew their money to offer to put it back? All of them? To wind the clock back, give the PMS back its spare cash, and allow loans to be handed out as before, and allow investors to withdraw their cash when they need to and not all at once. (Of course, that was a question and not financial advice!)

Then there would be no need for discussion about pastoral care and a potential hardship fund. No need for the Administrator to figure out how much money could be raised by a fire sale of English retail units. It’s a Presbyterian mutual society, a kind of private denominational finance club ... maybe it’s time for Presbyterians to think mutually again?