Thousands of people who invested in building society shares could face reduced income under plans to prevent the sector from collapse.

About 800 investors in permanent interest-bearing shares (Pibs) issued by the West Bromwich will see income halved by this month’s rescue plan, regarded as a template for the rest of the sector.

The Treasury is expected to publish a white paper to suggest other building societies adopt a similar model.

Fitch, the ratings agency, downgraded the Newcastle last week and said it should follow West Bromwich’s example. West Brom agreed with institutional bondholders that it would swap £182.5m of their outstanding debt for new instruments — profit-participating deferred shares (PPDSs) — which boost society capital. Investors with Pibs, however, will see 6.15% interest cut to 3%.

What are permanent interest bearing shares?

Societies can issue Pibs, a type of share with fixed interest, to raise capital, but interest is not guaranteed. If a society is in financial trouble, it can reduce interest, as happened at West Brom, or miss it altogether, as with Bradford & Bingley.

So why is West Brom cutting Pibs payment?

It all relates to the profit-participating deferred shares (PPDSs). Previously, if West Bromwich had gone into liquidation, bondholders would have ranked above Pibs to get back their money. Now, the PPDSs will rank alongside Pibs, so Pibs investors have gained protection but sacrificed some income.

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