Why it is economic for NS&I to provide index linked savings

The recent issue by National Savings & Investment (NS&I) of index linked certificates is proving very popular amongst savers and with RPI inflation currently running at 5% are probably providing the highest return on the high street.

These certificates make good financial sense for risk averse savers who want to protect the value of their money. But with interest rates so low at the moment does it make as good economic sense for the Government?

NS&I have just published their quarterly results that show the cost of their borrowing (£102.7 billion last quarter) was £200 million cheaper than if the Government had borrowed the equivalent amount through issuing gilts via the Debt Management Office (DMO), to be bought by institutional investors.

How can it be cheaper?

NS&I take into account the typical length of time people hold onto their savings products. For example, although people can cash in premium bonds and receive a cheque almost immediately, the average length of time people hold their premium bonds is 12 years. So the cost of providing a premium bond is compared to the cost of 12-year gilt. The same principle is applied to all their products.

When it comes to index linked savings certificates, 80% of these are not cashed in on maturity but immediately re-invested. As the period the certificate is held for will, it is anticipated, include a time when inflation is relatively low and stable, the true long-term cost is likely to be much less than the current 5% RPI might suggest.

That is not to say that over the long term inflation is not a serious problem for savers. Once your savings have suffered the effects of high inflation, the damage is done; it is not undone by a period of low inflation.

Whilst Governments are renowned for focusing on the short-term when it comes to spending, their borrowing is long-term and usually spread over decades. In fact the debt from the Second World War was only paid off in 2006 .

Individuals and households do not have decades in which to ride out the economic cycle. Only Governments can. The Government needs to borrow and its ability to stretch its borrowing across several economic cycles, riding out waves of inflation, should be used for its citizens’ benefit. The NS&I figures show that this can be done affordably.

The Government needs to provide more financial products to support the nation’s savers who, in these dire economic times, need a safe haven to protect the value of their hard earned cash.

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