DPS shortfall is around £30 million

Looking at the last line of my previous post on this blog, I think it is fair to say that I spoke a bit too soon.

“I for one am impressed that the DPS, which is funded by the interest on the deposits it holds, has managed to keep going through such a long period of rock-bottom interest rates. Surely their contingency planning couldn’t have foreseen what is a sea change in fiscal policy. All power to them for adapting to a rapidly changing environment.”

It emerged in the press this week that the DPS had a clause in it’s contract with the government which required central funds (or The Taxpayer, if you read the tabloids) to bail out the DPS if it didn’t make enough money from interest alone. With interest rates so low for so long, the DPS, which is funded by interest on the deposits it holds, had gone cap in hand to the treasury, admitting to a projected shortfall of over £30million over the life of the contract.

Reading between the lines it seems that the then new coalition government weren’t particularly pleased at the contractual terms they inherited from their labour colleagues and renegotiated the agreement with Computershare, the multinational corporate giant who run the DPS. In exchange for a four year extension to the contract, which will now end in 2016, the DPS accepted more than a 50% reduction in the fees payable to just £12.7 million. £12.7 million sounds like a lot of money, granted, but to a business expecting a cast iron guaranteed £30 million, it represents a massive shortfall and must have some serious implications for the cash flow forecast. 

I don’t think that landlords or tenants need worry about the safety of the deposits, as the government is clearly committed to backing the scheme and, at any rate, the deposits themselves will be in a ring fenced client account. What intrigues me is how the DPS were able to accept such a significant reduction in their fee structure? It seems to me that either the original agreement was extremely favourable to the DPS and they are in a good position to adsorb the loss, or the DPS have taken a gamble on interest rates rising sufficiently over the lifetime of the contract to enable them to recoup any losses over the longer term. No doubt rates will rise over the medium term, and if the DPS can stay in business long enough it is bound to reap the rewards, but exactly when rates will rise remains to be seen, especially while anyone on the Bank of England Monetary Policy Committee who votes for a rise in the base rate is invited to dinner at number 10 and promptly changes their mind...

...As for the Taxpayer, it is worth noting that £12.7million represents relatively good value. Over the six year term that was renegotiated, the DPS can expect to protect something like 3 million deposits, so the scheme only costs us around £4.25 per deposit to run, compared to £30 to use MyDeposits, so it’s not all bad.