Clause 6 - Opening by Inland Revenue
Child Trust Funds Bill
10:15 am
Mr David Laws (Yeovil, Liberal Democrat)
I want to speak to amendments Nos. 149 and 150 and new clause 10. Clause 6 is extremely important, as it sets out how the state is to exercise its functions in respect of those child trust fund accounts that it opens for children who have no one to take responsibility for the account or whom the states considers are not fit to take such a responsibility. The clause provides that, for those individuals without parents, or those who have no other family members to exercise the responsibility, the state should ensure that every child has an account, even those who are in care, which certainly seems sensible.
The state will therefore exercise a sort of parental responsibility in establishing child trust fund accounts. The Treasury believes that equity accounts will perform better over a longer period than cash or bond accounts, so the Inland Revenue will open all those accounts in a format that has a significant equity investment component. Under subsection (5), however, the Treasury and the state disown responsibility for their decisions when acting as the responsible entity in respect of those accounts. That seems extraordinary, and potentially dangerous. The Minister and the Treasury, doubtless for the most admirable of reasons, indicate that they believe that the equity account will be best for those particular individuals.
I question whether it is right for the Treasury and the Government to give such unambiguous investment advice as that embedded in the Bill and that given by the Minister on Second Reading and in evidence to the Select Committee. I also question whether adequate safeguards have been put in place for those accounts over time, so that a response can be made should the investment environment change. I question whether there should not be more flexibility in relation to the management of accounts. I question also whether it is fair for the Government to give such ambiguous investment advice in respect of equities as a class of investment and then, in subsection (5), to disown responsibility for managing the accounts. My incredulity about the Government's proposals and my sense that they pose a significant risk seem to be shared by a number of members of the Treasury Sub-Committee, not least the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) in his exchanges with the Financial Secretary when she gave evidence.
The background is the Government's unambiguous judgment that equities are going to be a better investment than cash or bonds. I repeat the evidence
that I cited in last week's debate, when my hon. Friend the Member for North Norfolk (Norman Lamb) asked the Financial Secretary in the Treasury Committee evidence session whether the Government wished to promote the equity product, she said:
''Absolutely, because people tend to do better with equities''.
The Government and the Treasury point out that equities tend to perform better than cash and other investments over time, yet in relation to the safeguard referred to in other evidence given, Ms Rookes told the Treasury Committee that
''we would hope that they''—
the people who make decisions about child trust fund accounts—
''would understand enough to know that, over the longer term, equity accounts do tend to provide higher returns; but, when all is said and done, they will still have the opportunity to move to a cash account if that is what they feel more comfortable with.''
That is absolutely true of those individuals who exercise responsibility over the accounts in question. However, it is not true of individuals who rely on the Inland Revenue to manage the accounts and exercise responsibility over them. Those individuals will have much less protection over time because, it seems, nobody will police their accounts or make decisions in response to changes in the investment climate.
There can be big changes in the investment climate, and I cite the example of the share market in Japan over the last 20 years. The majority of people who exercise responsibility over their own children's accounts might respond to changes by shifting the balance of the investment from equities to bonds or cash. However, those people whose accounts the Inland Revenue are to open will not have that flexibility, which should be a matter for concern. I know that we chortled somewhat over the Nikkei stock index accounts from Japan when we discussed the matter last week, but I invite the Minister to take a longer-term historical look, perhaps at the experience of the United Kingdom, as the Library has information on the share market in the UK that goes right back to 1700. Although I do not pretend that the investment circumstances in all those periods were precisely similar to those in the last 100 or so years, there is no reason why the 1800s and the industrial revolution should have been dramatically different from the last 60 or 70 years.
I invite the Minister to consider whether the results of investment returns from equity products to which the Inland Revenue has alluded are not heavily biased by the experience of the post-second world war period in the 20th century. In that period there were some incredibly high investment returns that have not been matched in many other countries—I mentioned Japan—or in other periods in British economic history. I would be very willing to go over some of the investment experiences of the 1700s, 1800s and the earlier part of the 20th century, although I suspect that you might not want me to do so, Mr. Benton, so I would be happy to pass my notes to the Minister if she would like to see them.
The point that I should like to underline, which should be evident anyway and which the Minister
should promote in her advice, is that, as the Building Societies Association put it in the memorandum that it submitted to the Treasury Committee,
''past performance is a fallible indicator of future returns''.
Yet there is a real possibility that the Government are taking decisions about the equity investment interests of those most vulnerable citizens on the basis of a limited period of years, without thinking about how those individuals could be disadvantaged in the future.