Is the prize pool for Premium Bonds about to be cut?
The latest Bank of England stats on NS&I were an interesting read. They revealed that NS&I's balances grew by £23.5bn in 2020-21 financial year, which is 1st April to 31st March. However, these masked some wild swings. Up until 30th September, just after the rate cuts were announced, NS&I balances were up £38.3bn. Given we saw money start to move as soon as the cuts were announced on 21st September, I strongly suspect NS&I were above £40bn of growth at their high point.
In the second half of their financial year, a net £14.77bn left the savings provider but £9.79bn also flowed in to Premium Bonds in this time, meaning a much higher £24.5bn actually left NS&I's other products. In fact, across the whole financial year, £17.38bn of the £23.5bn of growth came on Premium Bonds.
Premium Bonds accounted for over 52% of NS&I's savings book, at the end of March, and this percentage continues to grow each month as £1.65bn has (on average) moved in to Bonds each month since October last year.
For 2021-22 financial year, NS&I has a net financing target of £6bn which it has a tolerance of £3bn for, either way. This means it can operate within a range of £3bn - £9bn growth in the year. However, Premium Bonds are currently on a trajectory of £20bn growth annualised. If this continues, NS&I could smash it's funding target. To avoid this, one (or a combination of) the following are needed:
1) Continued outflows from other NS&I products to offset some of the growth in Premium Bonds
2) Rate increases in the wider market to reduce attractiveness of Premium Bonds
3) A cut to the prize pool to trigger reduced inflows and/or outflows
Let's take the outflows first. Net outflows from NS&I in the past few months were £3.43bn (Jan), £1.35bn (Feb), £406m (March) and £4m (April). There's a clear trend here - which is that the outflows from other products are slowing and suggest that May will likely see positive inflows for NS&I. We know from the June Premium Bond draw figures that over £1.5bn went in to the Bonds last month so there needs to be sizeable outflows elsewhere to stop a net growth figure for the month. The trend suggests that is unlikely that outflows from other products will stop growth. Indeed, by my calculations, only around £95bn remains on products other than Premium Bonds.
If the £20bn growth trajectory on Premium Bonds continues, it will need £11bn of outflows elsewhere to be within tolerance or £14bn to be on target i.e. between 11.5% and 15% of the remaining book will need to exit to offset the increases in Premium Bonds. This seems unlikely to me.
Will the market help? I see little reason why it will. Although fixed rate bond interest rates have increased significantly since April, there's been no real movement in easy access pricing where best buys have remained between 0.40% - 0.50% and I just don't see any drivers for these to increase. The market is awash with easy access money with more than half of all savings held in accounts which don't require notice.
All this points to the need for a rate cut for Premium Bonds. In my opinion, it will need to happen, the only question is when. The figures don't suggest that immediate pressure isn't there now but one problem for NS&I is that it has to give two months' notice to savers of any rate change. This slows the benefit of any rate change. Without this, I'd expect NS&I to avoid a rate cut for now. Factoring this in, and it does increase the likelihood of making an announcement with the annual results, which I expect later this month, with any cut taking effect from September's draw onwards.
On balance, prudence supports acting now but I suspect that NS&I won't. A cut to the prize pool for the nation's favourite savings product will be very unpopular and I think NS&I will take as much time as it can to avoid doing it. Therefore, I think any cut is more likely to be announced later in the summer and that NS&I will keep everything crossed that the need for it can be averted somehow.