Welcome, colleagues, to the opening sitting of the Committee stage of the Savings Accounts and Health in Pregnancy Grant Bill. Before we begin, I have a few preliminary announcements to make. First, the good news is that you may all take your jackets off during Committee meetings. Will you please all ensure that mobile phones, pagers and so on are turned off or switched to silent mode during Committee meetings?
As a general rule, my fellow Chair, George Howarth and I do not intend to call starred amendments that have not been tabled with adequate notice. The required notice period in Public Bill Committees is three working days, therefore amendments should be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration on Tuesday.
Not everyone—including me—is familiar with the process of taking oral evidence in Public Bill Committees, so it might help if I briefly explain how we will proceed. The Committee will first be asked to consider the programme motion on the amendment paper, on which debate is limited to half an hour. We then proceed to a motion to report written evidence and then a motion to permit the Committee to deliberate in private before the oral evidence sessions. I hope that we can take those two motions formally—we are not expecting much difficulty with those issues. Assuming that the second of the two motions is agreed, the Committee will move into a private sitting. Once the Committee has deliberated, witnesses and members of the public will be invited back into the room, and our oral evidence session will begin.
If the Committee agrees to the programme motion, we will hear oral evidence this morning and this afternoon.
Motion made, and Question proposed,
(1) the Committee shall (in addition to its first meeting at 10.30 am on Tuesday 2 November) meet—
(a) at 4.00 pm on Tuesday 2 November;
(b) at 9.00 am and 1.00 pm on Thursday 4 November;
(c) at 10.30 am and 4.00 pm on Tuesday 9 November;
(d) at 9.00 am and 1.00 pm on Thursday 11 November;
(2) the Committee shall hear oral evidence in accordance with the following Table:
Tuesday 2 November
Until no later than 12.00 noon
The Institute for Fiscal Studies.
Until no later than 1.00 pm
The Association of Financial Mutuals; the British Bankers’ Association; the Building Societies Association; the Tax Incentivised Savings Association.
Tuesday 2 November
Until no later than 5.30 pm
The Children’s Mutual; the Association of British Credit Unions Limited.
Until no later than 7.00 pm
Thursday 4 November
Until no later than 10.25 am
The National Childbirth Trust; the Family and Parenting Institute; the Royal College of Midwives.
Thursday 4 November
Until no later than 2.15 pm
The Centre for Social Justice; the Institute for Public Policy Research; Toynbee Hall.
Until no later than 2.45 pm
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 4.00 pm on Thursday 11 November.—(Mr Hoban.)
I thank you and welcome you, Mr Streeter and your co-Chair, Mr Howarth, to the Chair. I think that we will get on fine in the next eight or nine sittings. You and I were elected on the same day, Mr Streeter. Sir John Major was Prime Minister, and in those days we sometimes did not know the outcome of votes before the Tellers told us. They seem halcyon days in the current climate, but not to worry.
The Bill is important, and before we move on to the evidence sessions, I want to consider the programme motion briefly. I am grateful to my hon. Friend the Member for West Ham and to the hon. Member for Scarborough and Whitby for agreeing it in the Programming Sub-Committee last evening.
As you said, Mr Streeter, the programme motion gives us an opportunity for several evidence sessions today, Thursday morning and early Thursday afternoon, ending with a discussion with the Minister about the concerns that might have been raised in the evidence sessions. We will commence discussing the amendments on Thursday afternoon, and have two full sittings next Tuesday and two full sittings next Thursday.
Although I expect that we will have sufficient time to discuss the amendments, the Bill is controversial. My hon. Friends, including my hon. Friend the Member for South Down, will take a strong view on its contents. For those who are new to Committee Bill sittings—I include my hon. Friends the Members for Stretford and Urmston, for Makerfield and for Wirral South in that—it will be a new experience, but there will be serious discussion of some of the amendments. It may help if the Minister gave an indication of whether he was minded to accept any of them. That would shorten the time needed for discussing them. [Interruption.] I do not wish to discuss the amendments in detail now, but such an indication from the Minister would shorten the proceedings and give us an opportunity to plan our approach to them. For example, later we will deal with amendment 21 about looked-after children.
Order. I hesitate to interrupt the right hon. Gentleman, but we have not issued a selection list of amendments yet, so it is slightly previous to discuss them even en passant.
I am grateful for that advice, Mr Streeter. Perhaps I could frame my comments around the discussions generally. We have tabled amendments—which might be selected by you and Mr Howarth—about looked-after children, the poorest third of children being exempted from the child trust fund and the disability living allowance. The preparation for the Committee by my hon. Friends will be around discussions on those particular points. We currently have one hour on Thursday and two full sittings on Tuesday and on Thursday next week to discuss any amendments that you, Mr Streeter, may choose to select.
I would welcome it if the Minister gave any views on those issues first. Let me give as an example the issue of looked-after children. You will perhaps be aware, Mr Streeter, that during Prime Minister’s questions last Wednesday, my right hon. Friend the Member for Wythenshawe and Sale East (Paul Goggins) asked the Prime Minister whether he would consider looked-after children and child trust fund payments for looked-after children. It would greatly help my hon. Friends and the Committee if the Minister could give some indication as to what progress is being made on discussions with my right hon. Friend for Wythenshawe and Sale East on that particular matter.
There are three main clauses in the Bill: on child trust funds, the saving gateway and the pregnancy and maternity grant. We have four sittings and an hour to deal with them. In terms of our pacing any amendments that you, Mr Streeter, may wish to select and our discussions of them, it might be helpful if the Minister could give an indication now, as part of the programme motion debate, of any progress on discussions between the Prime Minister and my right hon. Friend the Member for Wythenshawe and Sale East, and of whether the Minister has made any approaches to my right hon. Friend, or has plans to do so, on the issue of looked-after children. That is important, and we may then need to table an amendment, or prepare discussions on an amendment.
I would also be interested, and this is still linked to the programme motion, Mr Streeter—
I took the trouble of looking up the Conservative party manifesto on the child trust funds, the health in pregnancy grant and the saving gateway. There was no mention of abolishing the pregnancy grant or the saving gateway. We shall discuss under the programme motion how much time we can spend debating those issues, but in relation to clause 1, the Conservative party manifesto said that it would cut—
Order. I am very reluctant to interrupt the right hon. Gentleman. He is doing this very skilfully, but we are now straying into areas of debate rather than dealing with the programme motion.
I do not want to test your patience, Mr Streeter, but the reason why I ask these questions is that shortly we shall ask witnesses their views on a range of issues. I want the Minister to respond because, first and foremost, I would not want to ask questions about the poorest third of families or the potential for disabled children to receive a child trust fund if the Conservative Minister in Committee today was going to adhere to the Conservative manifesto commitment. I would not want to waste the time of witnesses or, indeed, the Committee by asking questions about whether the poorest third of families should be exempt from the abolition of the child trust funds, as per the Conservative manifesto, or whether disabled children should be exempt, as per the Conservative manifesto, if the Minister confirmed today that he and his hon. Friends are sticking to the manifesto on which they stood for election in May. That is an important issue in relation to the programme motion.
I will in a moment, Mr Streeter. Without wishing to test your patience, these are important issues and I have the right to make my points on them. My hon. Friends feel very strongly about those matters and I think it important that we have an opportunity to hear from the Minister before we interview witnesses on the three key issues.
First, will the Minister make any movement on or have any discussions about looked-after children? We need not question witnesses on the matter if that is the case. Will he adhere to the commitments that he made in May on the poorest third of children in relation to trust funds, and on disability living allowance? If so, those issues need not be discussed today by members of the Committee. Will the Minister uphold the manifesto commitments not to abolish the health in pregnancy grant and the saving gateway? He needs to give some indication of his approach to those issues now, under the programme motion, so that we can at least examine it, pending the amendments that you may or may not select in due course, Mr Streeter. I fear that I have tested your patience considerably, but I hope that for the sake of those elected on 9 April 1992, we can at least remain friends.
It is a pleasure to serve under your chairmanship again, Mr Streeter. There is ample time in the evidence sessions and the scrutiny sessions to debate these issues. The right hon. Member for Delyn has clearly demonstrated his desire to speak at length on some of these issues at a later stage. I think that we should listen to the debate.
The right hon. Gentleman raised a point about manifestos. Clearly, he has forgotten that we are a coalition Government. My hon. Friends the Members for Birmingham, Yardley and for Bristol West would point out that in their manifestos, they advocated the abolition of the health in pregnancy grant and the child trust fund. We are dealing with a coalition matter and we shall work on that basis.
I am not prepared to give way. The right hon. Gentleman has already taken up quite enough time in debating these issues and it is time for the Committee to move on to scrutiny.
On the programme motion, but with regard to the points raised about whether we need to have answers at this stage, it is indeed the case that our manifesto said that we should put money into the pupil premium and take it out of these particular schemes. There are many questions in this regard. For instance, 70% of looked-after children return to their families when they can escape the system. All that information informs the debate on how best to treat people, but I do not think that that information could be provided at this stage.
I welcome what the Minister said, but he may want to reflect on the programme motion and whether the wishes of 57 Members of Parliament should usurp the wishes of 593, because that is the frame in which the debate is being held today. We have a reasonable amount of time in which to debate the Bill, but we feel strongly about each of its clauses, and it would help us if we had some idea about whether the Minister intends to move on any of the issues. We need not ask questions of witnesses about those issues, nor in due course give you the opportunity, Mr Streeter, to select our amendments, nor indeed waste the Committee’s time discussing them if the Minister sticks to what he said in May, or says how he will act in response to the helpful points that the Prime Minister made in Prime Minister’s questions on Wednesday.
Carl Emmerson: My name is Carl Emmerson. I am acting director of the Institute for Fiscal Studies. I previously did some work on the child trust fund and the saving gateway in response to the Government’s initial consultations on their introduction back in 2001. I was also part of the team that carried out the evaluation of the second saving gateway pilots.
Thank you, Mr Emmerson.
Before I call anyone to ask questions, I remind all Members that questions should be limited to matters within the scope of the Bill. We must stick strictly to the timings in the programme motion that the Committee has agreed. I hope that I do not have to interrupt anyone in mid-sentence, but I will do so if necessary —as it says here; I’m not really that kind of person. I call Mr David Hanson to ask the first question.
Good morning, Mr Emmerson. Thank you for appearing before the Committee. Will you give your initial assessment of whether the child trust fund has made a difference to the potential recipients who, in 18 years’ time, will ultimately receive the benefits? What is your assessment of its success to date?
Carl Emmerson: Because of its nature, it is extremely difficult to evaluate something like the child trust fund. You are giving money to newborns, which they will have available to spend in 18 years’ time. It is not plausible that the Government could have piloted it, as they would have had to wait at least 18 years to get any results. We don’t yet know what benefits it will deliver. It is not possible to know that about a policy that was introduced so recently with such a long lag.
For me, it is the same for the child trust fund. It is a lump-sum transfer from the Government to newborns. In that sense, economists would say that it doesn’t do any harm; it is not changing incentives in a way that is unhelpful. Perhaps the bigger question is whether it does the most benefit for the use of the money. Is it a good idea? You could just give families with newborns a lump sum and say, “You can choose to spend it or save it as you wish.” You could give a lump sum to 18-year-olds, if you felt that it was an important time in their lives. It has never been clear to me whether the child trust fund is the best way of supporting those families.
Do you have a view as to whether the child trust fund has helped to encourage those who, prior to its introduction, would not necessarily have put money aside for their children before the age of 18 —either because they did not think to do so or because they were not able to do so?
Carl Emmerson: The child trust fund does little in terms of the formal incentives that people face to save for their children’s future. For instance, it is not giving them any extra reward for every pound that they put in their child’s account. It might help to facilitate more saving, because it provides a signal to parents. The voucher clearly gives them a good reason to go out and open an account. We have seen people making contributions into accounts, but that it not a necessary condition to saying that it leads to more being saved. It could be that those parents would have saved money for their children in any case. That is a difficult question to answer without some kind of pilot to show what people would have done in the absence of the account.
In its representations to me, the Children’s Mutual Society has said that prior to the child trust fund only 18% of children had regular long-term savings made for them. That average has now risen to 31%. Does that indicate that there might be some benefit in helping to raise the level of saving on behalf of children?
Carl Emmerson: That may be happening. It is still the case that we do not know what would have happened in the absence of the account. We also do not know whether the children benefit more from having low-income families saving on their behalf when they are young or from spending money when they are young on things that might benefit them.
One of the discussions that we are having is on the number of other groups that might benefit, or potentially could benefit, downstream because of the introduction of the child trust fund. One of the key groups that we are concerned about —certainly on this side of the Committee—is looked-after children. Do you have any view on the fact that certain groups, such as looked-after children, do not necessarily have anybody, either the state or their parents, saving on their behalf before the age of 18? Could the trust fund provide a nest egg at that age?
Carl Emmerson: Children from very unfortunate backgrounds are likely to reach the age of 18 without any assets. That points to several policy choices: you could give them a child trust fund at birth; you could give them a lump-sum payment at 18 years of age, which would have the benefit of their not having to wait 18 years before the policy has benefits; or, alternatively, you could say that those children would benefit from extra spending on them in some other way—for example, through schools—in order to help their life chances. It is not obvious to me that a £250 cheque at 18 years of age is the best way to support them, but clearly it would help them.
Carl Emmerson: I would look at spending money on improving education or on increasing the incomes of low-income families, rather than a lump sum payment to them at birth that can be spent in 18 years’ time. It seems to me that having families with higher incomes or better public services would benefit the children more.
So you would discard completely the idea—one of the driving forces behind the child trust fund—that it was designed to drive up a savings culture for the child’s future and to encourage people, particularly those on low incomes, to contribute, who would not normally have contributed, either because they chose not to or because they did not have the resources.
Carl Emmerson: On the idea to encourage a savings culture among children when they get to 18 years old, I would say that the obvious policy lever to pull would be financial education provided through primary and secondary schools. It is not obvious to me that you need to have an asset to learn about the benefits of saving.
Does the IFS have any view on the impact of this on the financial services sector? That sector has geared up a range of products for the child trust fund, invested in the potential to deliver it and established projections in terms of savings accrued on the basis of potential income from the fund.
Carl Emmerson: Clearly, the absence of the payments —some £540 million from the Government going forward —will make the existing accounts more expensive to run. It is presumably cheaper for the industry to run products for a number of generations of newborns, rather than the small cohort that they will be running through. Presumably, one potential pitfall is that the providers will find it more expensive to operate, because the market will be much smaller than they may have envisaged.
I have one final question. In the event of the Bill progressing and the Government contributions to the trust fund ceasing, do you think that there would be value in the Government maintaining the infrastructure for the child trust fund to be developed on a voluntary basis from parental contributions?
Carl Emmerson: Yes, in the sense that I do not see any reason why the Government should not allow children to have a tax-free savings vehicle that parents, friends and family can choose to contribute to, perhaps with those funds locked away until the child reaches a certain age. There is a strong case for that, but what is less strong is whether the contribution from the Government is the best use of public money.
Your final answer on what is the best use of public money is what the Bill is all about, because it is all about whether we put money away for 18 years, or whether we should we spend it on education. I am listening to what you are saying. Would it be right to say that you think the pupil premium, which focuses resources on social mobility in education, is a better way of using the funds?
Carl Emmerson: Families with children would primarily want either their income boosted—so that they can choose whether to save or spend money and they can spend money in ways that benefit their children—or better public services. They are the traditional ways in which the state supports individuals who are vulnerable. I am not convinced about the idea of a third strand, where we provide not only public services and incomes but some kind of asset-based welfare. I would focus on the first two.
Carl Emmerson: We cannot tell whether the Government are taking the money from the child trust fund and spending it on the pupil premium. You could equally say that the Government are taking the money from the child trust fund and spending it on earnings indexing the state pension or on increasing the income tax personal allowance. Both those policies were announced in the same Budget, so I do not think it is possible to hypothecate in that way.
On a point of order, Mr Streeter. Will you rule in order a debate about the pupil premium, which will effectively take money from my poorest area in the east end of London to place it in other areas elsewhere in the country that are not as poor? If we are going to widen the scope of the debate to include the pupil premium, I would be very grateful for leave to take that argument on.
We have had that discussion at this end of the table. It is legitimate to put questions about what alternatives this money could be used for, but not to go into any detail on that. I am sure that that will be teased out in the debate. We will move on to Kate Green, who has some questions for Mr Emmerson, and we will come back to that side of the table in a second.
Good morning, Mr Emmerson; thank you for coming to speak to us. What evidence are you aware of that shows the importance of asset holding among low-income households and by low-income individuals?
Carl Emmerson: The key piece of evidence that the Government used back in 2001 to justify the child trust fund was the observation that individuals who have assets at aged 18 tend to have better outcomes in life 10 years later, once you take into account other background characteristics. I see that and think it is probably a correlation rather than a causation. Individuals who are better able to plan ahead are going to be more likely both to hold some assets at age 18 and to have better outcomes later in life. It is not obvious to me that the child trust fund is necessarily the best way to help individuals to be better planners. I don’t think we know that for sure. The evidence on the child trust fund is very shaky.
Are you aware of particular expenditure that may need to be met at around that age, because while I can see your argument about the lack of evidence in terms of the ability to plan, none the less, an asset at the age of 18 has the potential to enhance social mobility by enabling people at a certain point in their life cycle to make certain choices.
Carl Emmerson: It does, and that would be much more an argument for a payment at age 18, rather than a payment at age zero, which excludes everybody who has already been born. On that, what activities do you want to encourage people to do at age 18? For example, if it is higher education, maintenance grants might be a more obvious vehicle than the child trust fund and if it is starting a business, you might want to look at the operation of credit markets, rather than the child trust fund.
So a choice between the child trust fund and the pupil premium is not the only potential choice, is it? Indeed, what we are saying is that there are range of instruments both to boost income, and to give a lump sum at age 18 and support young people as they start in higher education. We cannot say that one precludes the others.
Carl Emmerson: No. You could take different approaches. For example, if it is for higher or further education, you could argue that the education maintenance allowance is a good way to encourage low-income families to invest in education at age 16. I see the child trust funds as being a fairly blunt instrument if that is the goal.
Carl Emmerson: If you look at wealth inequality, 18-year-olds typically have nothing and therefore it is increasing the wealth of those with very little. I am not sure how meaningful that statement is in the sense that you would expect individuals to have relatively little wealth around age 18—you might expect them to have debts when they get to 21 or 22, if they have gone to university. One would expect individuals to have the most wealth in their lives just as they approach retirement, as they have built up a pension. A sum of £250 is a lot relative to the wealth of most 18-year-olds.
Thank you, Mr Streeter, it is a pleasure to serve under your chairmanship. I would like to return to child poverty. We have talked a lot about the pressures of deficit reduction and why they have led to these measures, but a key goal of the Government is to tackle child poverty. I am interested in your comments about alternative avenues the Government would have to reducing child poverty. What evidence do you have about the range of things the Government can effectively use to improve the situation of children in low-income families?
Carl Emmerson: If you are measuring child poverty by children in low-income families, the most obvious lever is to think of policies that will boost those incomes, either directly through state payments such as child tax credit, or thinking about measures that might change incentives and encourage parents of low-income families to increase their private incomes. If you are thinking about a broader set of issues relating to child poverty and the life chances of children, I would say things such as education policy are likely to be very important as well.
Carl Emmerson: I think that the child trust fund can help, but the question is whether it is the best way. I do think that giving £500 to children from low-income families is probably going to improve their life chances; it is just whether the £500 spent in a different way would have had a bigger impact.
Thank you, Mr Streeter, and likewise it is a pleasure to serve with you as Chair. Mr Emmerson, I have two questions that both relate to the substance of your research. First, you said that economists would say that there were no formal incentives to save involved in the child trust fund. I think some economists would certainly say that. What work has your organisation done to understand the informal incentives to save? We know that people do not necessarily respond to formal incentives to save involved in financial products, but sometimes they respond to other factors in the construction of schemes. I wondered what further insight you might be able to offer about what kind of incentives the child trust fund created.
Carl Emmerson: There is a lot of evidence that people do respond to formal incentives. Most assets in the UK are held in housing and private pensions, and they are the most tax-relieved forms of saving. If we ended tax relief on pensions, I suspect people would save for retirement in very different ways. There is a lot of evidence that people respond to those incentives.
The child trust fund may help encourage those people to save who would not have placed money in an account for their children, because it gets over the inertia of opening an account. If you get a voucher for £250 or £500, you are probably going to open an account. You might then say it is worth your while paying a bit in. Of course, low-income families might also say they are least able to lock the money away until the child is 18. What happens if the child really needs some money spent on them when they are 14 or 16? It may not be a wise decision to lock the money away. They may be better off putting—
Sorry, may I interrupt you? What I was really asking is whether you have done any research on informal incentives that the scheme might offer. Do you have any data or any qualitative research?
Carl Emmerson: On the saving gateway, we found, for example, that while take-up of the accounts was higher when the financial incentive was stronger, it was also the case that how far you lived from the branch providing the account mattered, in terms of your likelihood of opening an account. It was not just how much the Government were incentivising you; it was how convenient it was, perhaps, to go and open an account. Clearly, I do buy the argument that the costs of opening an account do matter.
On the evidence that the Government had offered at the time of commencing the child trust fund, you felt that 18-year-olds with an asset do better. You felt that was correlation rather than causation. Could you say a bit about the data and why you thought that?
Carl Emmerson: Essentially, individuals were interviewed at age 18 and we could identify which 18-year-olds had money in a savings account, had investments or had received an inheritance. Then, later in life, they were re-interviewed, and the evidence looked at whether they were unemployed, whether they were divorced, whether they smoked—all different outcomes that you might want to improve. It was the case that individuals who happened to hold savings or investments at age 18 were less likely to have these less good outcomes happen to them later in life. That is probably saying that individuals who were better able to plan ahead were those who were more able to have an asset at age 18, and those who were more likely to have these other, better outcomes. I do not think that having the savings or investments was actually the cause. One thing that supports me in this is that when you looked at the receipt of inheritance, which is perhaps a little more random than whether the individual chose to have some money in a savings account, there is absolutely no effect, but that was buried in a footnote to the research that the Government cited.
On Second Reading, those who wished to see the child trust fund preserved said that it gave young people a good start in life when they became adults. Of course, we will not know about that until 2020, in 10 years’ time. What do you think would give a young adult the best start in life in 2020? Free money—roughly £1,000—or investment in their education between now and 2020?
What do you think is the barrier to somebody saving? Is it their capacity to save, which must be related to how much they earn, how much they can cover their day-to-day expenses and, therefore, whether they have a surplus to save? Is that largely predetermined by how well you have done at school or college, or at acquiring a skill or degree thereafter? What fixes somebody’s capacity to earn as an adult?
So giving somebody £1,000 when they become an adult will not necessarily transform their capacity to save thereafter—possibly for the next 45 or 50 years of their productive working lives?
Carl Emmerson: For it to have a big effect, you would have to think that it opened up opportunities that people were otherwise excluded from—opportunities, for example, to make certain investments. The key investment I would focus on would be the opportunity to invest in higher education, which does deliver, on average, very big returns for those people who undertake it. Therefore, the £1,000 might be best focused on grants or subsidies to allow individuals to participate in higher education. Alternatively, you could do it at age 16 or 17, when individuals are making earlier education decisions.
Carl Emmerson: Since 2007, growth in the economy has been much lower than most people expected. Some of that lower growth is not expected to bounce back. With the benefit of hindsight, we know that the public finances are in a far worse state than expected, and the Government clearly need a combination of tax rises and spending cuts to reduce the deficit.
Carl Emmerson: The household saving ratio was very low up until the start of the financial crisis. Through the recession and since, it has increased dramatically, as it typically does during recessions. Government saving has increased dramatically as a result of the financial crisis and the fact that GDP has turned out to be much smaller than expected.
Carl Emmerson: The primary effect of getting rid of the child trust fund and the saving gateway is to reduce Government borrowing and private saving. The impact on national saving is probably about zero. You are taking money that would have been in the household sector, saved in an account. Instead, the Government are borrowing less. It is a straight transfer from Government to individuals, and a straight transfer back the other way.
Have you done any work on the price that the Government have to pay for their national debt, and the rate of return on the accounts that individuals are holding? Is there a difference between those rates of return?
Carl Emmerson: If individuals chose to invest all of the money in Government bonds, they would get exactly the same rate of return. We would essentially be taking national resources and lending and borrowing in the same way. If individuals invest in riskier assets, you would expect them to get a higher return.
With these small amounts, are individuals able to get access to Government bond-type rates? Have you done any work on how people invested these funds?
Did you say in 2009 that, when the time came for tough choices about public spending, abolishing the child trust fund would be one of the less unattractive options?
There are high levels of personal debt, particularly in low-income households. How would you respond to people who say that this is not the right time to reverse a decision that encourages saving and financial inclusion?
Carl Emmerson: The saving gateway, for example, encourages individuals to place money in an account. It promotes a very strong incentive for individuals to do that. Individuals with debts may be encouraged not to pay off those debts, but instead focus any resources that they have on building up a saving gateway account, because the rate of return is much higher than the rate of return on the borrowing they are likely to be doing, so in a sense it is not encouraging individuals to pay down their existing debts.
Would you agree that building up the habit of saving, as credit unions have done with their schemes that encourage people to save before they can take out a loan, is one of the first steps towards getting out of a spiral of debt and loans?
Carl Emmerson: The evidence from the saving gateway pilot suggests that the relatively higher-income individuals who were eligible for an account did place money in the account, but they reduced the amount they were saving in another account in order to qualify for the Government match, so they did not change their overall saving behaviour. We also found evidence that the lower-income households were placing money in the accounts, which was increasing their saving in savings accounts, but there was pretty mixed evidence on whether they were saving more overall. There was some evidence that they were spending less on food consumed outside the home, so perhaps it was leading to an increase in saving among lower-income families.
The bigger question is: do you want lower-income families to save more? Is that the best way of supporting them? If you are on a low income, you may be temporarily poor, in which case it is perhaps a good time in your life to dis-save rather than save. If you are permanently poor, you might rather that the Government used the money from the saving gateway to boost the benefits to which you are entitled, rather than to provide you with an incentive to spend less today.
Do you have a view on the suggestion in the Conservative party manifesto, which Mr Hanson has mentioned, that certain groups might continue to receive the benefit of a child trust fund, specifically families in low-income households, looked-after children and those with disabilities? Can you see how that may be administratively possible, and what sort of passporting, if it were possible, might make sense?
Carl Emmerson: For low-income households, it would be very easy administratively, because you could simply keep the child trust fund for those families who qualify for the £500 voucher and abolish it for those who qualify only for the £250 voucher. The pitfall is that you would only save half of the money that is being spent on the child trust fund—a reduction of about £270 million in Government borrowing instead of £540 million. In isolation, it would be a more progressive way of cutting back spending on the child trust fund, but it does depend on what you would do with the other £270 million that the Government would save by getting rid of the whole thing.
On Second Reading last week, the Government announced that they intend to establish a form of junior ISA, which will continue to encourage tax-free savings for those who are able to do so. Do you have any views on how that should operate, and, in particular, how it should operate in a way that encourages the people who I am concerned about—those who are not currently saving for their children’s future?
Carl Emmerson: The first issue is whether there is any restriction placed on what the funds can be spent on once they are available to be accessed. I do not think that there should be any restriction there. It is an admission of failure in the policy if you say that we are going to teach people about saving, and we are going to let them build up an account, and then you start to say, “We don’t trust you to spend the money wisely once we give you access.”
The second issue is how much you allow people to save tax-free. You might not want to fix it at too high an amount, because low-income households are not going to be able to save vast amounts for their children anyway.
The third issue is at what age do you give people access and under what circumstances. Is it age 18, as with the child trust fund? Perhaps age 16 is more appropriate if you are worried about children who may be leaving school at 16 anyway. What about children who perhaps need the money sooner than that? Are there any circumstances under which the money should be accessed before age 16?
Do you expect that the Government will reach conclusions on those issues and, indeed, other issues in the next six weeks prior to the abolition of the child trust fund contributions, which is proposed in the Bill as 3 January 2011?
The point I am looking for is whether you believe that we can sufficiently plan for an alternative junior ISA, which was announced only on Second Reading last week, in the next seven to eight weeks, because the Bill currently proposes the abolition of the current proposals on 3 January 2011. In your view, what is going to happen to individuals on 4 January 2011 when the child trust fund ends and when there may not be clarity on the issues that you have rightly mentioned? Will the financial services sector be geared to manage that demand in as early as seven weeks’ time?
Carl Emmerson: That would be an extremely short consultation period, and I do not think that it is possible to make decisions on how the policy should look and also ensure that the financial sector is geared up to operate a market of that size. One response to that would be that, once we get to the stage of introducing these junior ISAs, we would want to backdate them and ensure that everybody who was not able to have a child trust fund was able to have one of the new accounts. Of course, if it took, for example, a year to get these things operational, there would be a period in their life, perhaps, where they would not be able to save in those accounts.
Without involving you in the deeply political issues that the Bill engenders, is it your view that there may be merit in postponing the date of 3 January 2011, so that those matters can be resolved, the industry can be geared up and, indeed, there can be fairness in relation to the contributions that are likely to be made for those who are able to afford the contributions to the junior ISA?
Carl Emmerson: One option, which was what I thought the Government were going to do back in June, would simply be to abolish the Government contribution to the child trust fund but still allow families to open a child trust fund with tax-free saving tied up to age 18, as they currently do. You would be abolishing the contribution, not the actual accounts.
Obviously, the difference between the child trust fund and a junior ISA would be that there is no financial contribution from the Government. Have you done any modelling of what sort of household is likely to invest in a junior ISA? Let us say that it is a household with one child. What would the likely household income have to be before they would be likely to be able to put some money away in a junior ISA?
Carl Emmerson: The difficulty is that if the parents were thinking, “Exactly what is the best thing to do for my child, here?” there would be a strong case for them to save in their own ISA, rather than placing it in a junior ISA. The advantages of that for a parent would be that they could get access to the fund sooner if they wanted to. Of course you can put £10,600 a year in an ISA. That is a phenomenally large amount of saving for the majority of households in this country. I would struggle to advise any family who are not already using up all their ISA allowance that the best thing for them to do is put money in their child’s ISA, where they cannot get access if they need it. I think they would be better advised to put money in their own ISA. Then they can use it if they really need to, in ways that may well benefit the child more.
Your answer was helpful because it reveals an implied value of liquidity: that a parent would place value on liquidity, so they should save in their own ISA. Do you have any evidence about the value that is in fact placed by parents on that liquidity? We have had a lot of discussion and in a lot of your answers you have talked about the fact that the money is locked away in a child trust fund; but for some people there may be value in the illiquidity of that asset. Is there any research on that?
Carl Emmerson: I think there is a good case for making that account available—where individuals can lock the money away. I am not opposed to the idea of a junior ISA, where you can save a certain amount a year, and it cannot be spent until the child is 16 or 18. I just think that parents are probably best advised to save in their own ISA and try to show restraint. Imagine if the child was born and then because of some horrible circumstances got extremely ill at the age of 13 or 14. Would you really want the money locked away till they were 16? I realise adults often do things that constrain their behaviour, such as subscribing to the gym for the whole year rather than paying in cash each month, but for low-income families in particular it would be unfortunate for them to experience hardship if they perhaps lost their jobs and had a period of unemployment, on very low income, when they had some money sitting in a junior ISA that they could not access.
To follow up a little further on what you were saying—that it might even be better for some low-income families to have a bit of money and not save during that time—is there not substantial evidence that one of the things that deepens people’s poverty is the lack of access to affordable borrowing; and that for many low-income families, particularly in certain areas, the only ability to borrow, perhaps to tide them over for a short period, not necessarily a long one, is by going for some very expensive forms of borrowing, which other people do not have to do? To some extent everyone borrows to overcome short-term difficulties. In that sense is there not a value in enabling people to build up savings, for example through something like a credit union, which will give them access in due course to much cheaper borrowing?
Carl Emmerson: I agree in the sense that if you are on a low income—a very unfortunate situation—there may be good reasons for you not to be saving at the moment, because you want to spend all your income; but of course it is still true that while your income may not go any lower, your needs in the future may increase. Something may go wrong that you did not anticipate, so therefore you may still want to build up some assets or have access to credit. There was not any really strong evidence from the saving gateway that it led to more overall saving from lower-income households. They saved more in savings accounts, but when you looked at the total amount of saving they were doing there was not much evidence at all that there was an increase in saving. As I said before, the only thing we found that was consistent with more saving from lower-income households was some evidence of a reduction in spending on food consumed outside the home; but that evidence is quite weak.
The argument that people should be enabled and encouraged to save has a long history in discussions about alleviating poverty and deprivation. Am I hearing you say that you don’t think that that is the case, or are you saying that this particular mechanism is not able to deal with it?
Carl Emmerson: People often say that more saving is a good thing, but I think it would be more helpful if they said, “You should be spending less now in order to have more to spend in the future.” It is not obvious to me that many low-income households should be spending less now. They have high needs and low incomes. If I was in that unfortunate situation, I am not convinced that I would be saving.
As you have said, people’s financial situations can fluctuate and they can be in work at one point and out of work at another. That is indeed a phenomenon that causes a lot of financial difficulty. For example, people can find it difficult to pay their rent during periods of unemployment. Is there not value in building a resource that enables people to save when they have more disposable income so that they have access to those savings or to further borrowing?
Carl Emmerson: The difficulty policy makers encounter is that some low-income households have savings. As soon as you incentivise them to place money in a saving gateway account, the most rational thing for them to do is to take the money out of their existing accounts and move it across. It is not the case that all lower-income households simply have no assets.
If I was piloting something like the saving gateway, I would try to identify a precise group of people who should be re-evaluating their saving decisions. The group that I thought about a few years ago is people who have moved from unemployment into employment. That might be a good moment in their lives to catch them, when they should perhaps be thinking about saving more than they have been. As with the child trust fund, I question whether spending £115 million on the spending gateway is the best way to help individuals on very low incomes. Would they not rather just receive more generous benefits, be it through income support, jobseeker’s allowance or housing benefit?
You talked a little about physical access to savings accounts. Would it be beneficial for such a product to be available somewhere like local post offices, which might overcome the difficulty of physical access?
Carl Emmerson: Yes. The pilots I talked about were operated by Halifax. Clearly, in a pilot scheme there are reasons why you can have only one provider. In that evaluation, we looked at what factors made people likely to open an account. We essentially offered the opportunity to open an account to a lot of people and not all of them took it up. People with higher education, higher levels of numeracy or existing assets were much more likely to open a saving gateway account than people with lower education, lower numeracy levels or no assets. The other key factor was how close people lived to a Halifax branch. Clearly there is a problem in that although the saving gateway targeted a lower-income group, it was those in that group who were relatively better off and who had assets or numeracy who chose to engage with the accounts. Among the lower-income group, those without numeracy or financial assets were less likely to open an account and benefit from it.
Compared with the child trust funds, which you said did no harm, is your argument on the saving gateway that it could do harm by getting people to save when they should be paying off debt instead?
Carl Emmerson: I think it can get people to save when perhaps they should be spending and that it can encourage people to rack up debt. If you are getting a 50p match on every £1 you put into an account and you have one month to go on that account, it is worth your while to go and get £25 on a credit card and put it into the account. There is also a problem with targeting. If you pick any lower-income group, the saving gateway will benefit those on higher incomes and who are more financially numerate within that group. It will never manage to work for the rest of the group.
Carl Emmerson: I think that financial education can help, although unlike the child trust fund, it is a harder mechanism for the Government to pull. With children, you have them in school so there is an environment in which to provide the education. The obvious question is whether you can deliver good value for money financial education to these individuals. I do not think it is clear that you can. I would say that perhaps the £115 million should just be spent on boosting the incomes of these individuals.
I heard you say that the distance from the financial institution was one of the reasons why people did not open the account. I accept that the pilot was with the Halifax, but the Government were looking to extend it to credit unions. A lot of credit unions are community-based, so they do not present the same barriers as going into the Halifax. Do you agree that the saving gateway would perhaps have been better if it had continued with those institutions?
Carl Emmerson: A lesson from the pilots was that distance mattered. Therefore, a policy response would be that in a national scheme we can have more providers and reduce that problem. I am not sure whether it gets round the problem that those with more numeracy, higher education or existing assets were more likely to engage with the accounts. I think you would still have that problem.
You mentioned that financial capability and financial education were important. A lot of credit unions give financial capability training and budgeting training particularly when people start work, which you said was the time they should start saving. Would you agree that that should be continued?
Carl Emmerson: If you look at the evaluation evidence from north America, where they operated similar accounts, they also offered a matching incentive but alongside that they provided much more in the way of financial education, to the extent to which they were spending as much on education as they were on the matches. The evidence that those accounts had longer-term effects is more convincing than the saving gateway partners that we have here.
People said they had more of a feeling of financial security when they saved, and they felt better able to control their lives. For a lot of people in debt, it is the feeling of lack of control that caused those problems, and the psychological problems. Do you think that the psychological problems and the psychological benefits of the saving gateway have been properly taken into consideration?
Carl Emmerson: One of the problems is that there was no longer-term evaluation of the saving gateway. The pilots lasted for 18 months, and we answered the question, “Did you get more saving at the end of 18 months?” but what we really care about with these policies is whether they leave people better off after the account period has ended. For the account to meet the Government’s objectives, it needed to lead to an enduring saving habit, not to saving only through that gateway period. We have absolutely no evidence on that.
Given that we are absolutely determined to help as many people who want to work into work as possible, I was very interested in your comments about an ideal time to trigger people into regular saving being when they take a job. To what extent do you feel the auto-enrolment in pensions will be a good way to encourage people on low incomes to save for the future?
Given what you were saying about the need for people to save for their futures, do you think that is a more appropriate time for them to be saving than in their childhood when, as you have said, the funds would perhaps be more locked up and would not actually help youngsters to improve their opportunities?
There was some discussion among housing associations that they might have been able to take part in the saving gateway, and I am aware of some who were quite keen to get involved. That would provide people with access to a place to save, because they could save at the same time as making their rent payments. Were you aware of that, and would that help with accessibility?
Carl Emmerson: I am not aware of that, but clearly if it is somewhere they go regularly anyway, that would seem to make it much easier to make those payments. It is also notable with the saving gateway that people opened an account at the Halifax branch and paid in cash or cheque with their first contribution, and a lot of people set up direct debits for the remaining 16 months in order to get the full amount of the match without having to go back again. It is unfortunate that when the account period finished, the money was moved over to a different account and all the direct debits were cancelled. I think that that makes it harder to get a permanent, enduring saving effect. If one buys into the idea of defaults, I would have made sure that those direct debits continued to be made rather than stopped.
I want to ask you about financial advice, because I have had mixed messages from you. You talked about how some longer-term reviews in America resulted in beneficial decisions being made, where people had been sent the national advice. Earlier on, you talked about youngsters at age 18 receiving a nest egg and that there may be a correlation between that and good role-modelling. Do you think that the best investment that we can now make, with the limited funds that the coalition Government have, to help people manage their finances, is not the proposed financial advice, but a broadening of that advice? As a country, do we not need to improve that overall, whether in schools or more generally, to help people manage what funds they have wherever they are in life?
Carl Emmerson: I agree with the argument that financial education, advice and information are increasingly important, where individuals have to make their own decisions on saving and spending, with the state doing less saving on their behalf. It strikes me that from ages five to 16 there is a relatively easy way to engage with people—through school. Beyond that, it is harder to do, and I do not have any empirical evidence saying it is cost-effective.
I thought that that would be the answer, which is why I did not think that we would be focusing much on it.
On the measures introduced by the Budget and the spending review generally—such as restricting eligibility for the Sure Start maternity grant, and changes to child tax credit and child benefit—have you done any analysis of the impact on families with children and on whether they will be worse off as a result of the changes?
Carl Emmerson: The tax rises and benefit cuts that are yet to come in—they are a combination of measures announced before the election, in the June Budget and in the spending review—will on average reduce household incomes, because they are reducing the deficit. They will reduce household incomes for families with children by more than they will for pensioners, which is true right across the income distribution.
Carl Emmerson: Clearly, when a baby is born, it is a point in life where there are high costs. Therefore, it seems logical that Government should provide not just an ongoing payment through child benefit, but should focus a payment on a time when costs are particularly high. In that sense, a policy aimed at the time around birth is a good idea. There is a decision about whether to make that universal, which the health in maternity grant is, or to target it more precisely at households with high and increasing costs, and which might be unable to meet those costs. The Sure Start policy makes a payment to mothers giving birth for the first time, which is a way of targeting mothers who are in low-income houses and who experience the biggest increase in costs, because it is their first birth.
Carl Emmerson: You clearly attain much higher levels of take-up, and you reduce the possibility of stigma and the amount of administrative burden on individuals in claiming the payment. If you are just trying to give money to households when their needs are high, regardless of whether the people in them are rich or poor over their lifetimes, clearly their needs will be higher when they have children and such needs will be particularly high when they have a newborn arriving. There is a case for a universal payment, but equally you might want to target the resources more precisely at those who need them.
I am pleased to serve under your chairmanship, Mr Streeter, and I welcome Mr Emmerson from the Institute for Fiscal Studies. I represent a constituency in Northern Ireland, where the Bill will apply as well. With particular reference to the health in pregnancy grant in clause 3(2), has the Institute for Fiscal Studies, in association with institutes in Northern Ireland, carried out any studies about the impact of the withdrawal of the grant, particularly from low-income households and where there is a high level of deprivation in many areas, especially urban areas?
As a supplementary question, may I ask whether you intend to have consultation with any particular areas? I think that there could be a particular area of work there.
Carl Emmerson: We have looked at the impact of the tax and benefit changes coming in. I have talked about the impact on families with children compared with pensioners. We have looked at how it varies across the income distribution. We are also going to do it by region. We have already been asked to do London and Northern Ireland; they are the two that we have been asked about. We will be publishing some work looking at the impact of all the measures on incomes in Northern Ireland, and we will break that down by income level within Northern Ireland. We do not intend to look solely at this one policy, though; it will be the package as a whole.
This is a straight transfer payment from the Government to the individual. Do you have any research or evidence about people’s propensity to spend the payments? I am aware of some evidence on winter fuel payment and comparative transfer payments, but is there any evidence on this specifically?
Carl Emmerson: I am not aware of any evidence on what the health in maternity grant is spent on. In terms of the design of the policy, I am torn between the idea that you would want to make a regular weekly payment in order to encourage spending that might be beneficial for the child who is not yet born—for example, on diet, which is a lot of the advice that the mother receives when she qualifies for the grant—versus the idea that the one-off expenditures are all around birth and that you want to be buying clothes, somewhere for the baby to sleep and so on, so maybe a one-off payment there is better. I am not quite sure how you would balance those two, but it seems to me that there is a case for either approach.
Thank you. Colleagues, any more questions for this witness? Mr Emmerson, thank you very much for your evidence. It has been extremely helpful, and we are grateful to you.
We now call the next group of witnesses, who seem to be assembled. I invite them to step forward. Gentlemen, thank you for joining us and for being here nice and promptly; we appreciate it. For the record, can you introduce yourselves for the purposes of Hansard?
I register an interest, which is declared in the Register of Members’ Financial Interests. I chair JHC, John Hemming and Co., which provides software for people to run ISAs and things like that. It is on the edge of this.
Welcome, gentlemen. As a general opening point, can you give your assessment of the success or otherwise of the child trust funds, from your perspective, over the past few years of operation?
Tony Vine-Lott: I am happy to answer that. I would say that the child trust funds have been extremely successful, with 72% take-up of the scheme by parents, which is far higher than the take-up of most other schemes, pension credit being a case in point. Obviously, the other major benefit of the scheme is its universal nature, which means that all children are automatically enrolled into the scheme, one way or another, after 12 months. The majority of people in the scheme have invested in equities, with a ratio of about 75:25, the other 25% being in cash. This should provide an excellent basis for social change, a move, or a transition from a debt-based society to an asset-based society. It will give those individuals a strong start in life from the age of 18, when they have access to the money to pay for investment in a first property or to assist them in buying a car or a bike to get to work, or even with clothing for work. Then, there are all the educational benefits that can be leveraged through schools.
Martin Shaw: The majority of the stakeholder or equity-based child trust funds were provided by friendly societies and members of the Association of Financial Mutuals, so we have a particular interest in the success of the programme. Everything that we have seen through our work with the CTF demonstrated that it was really helping to achieve something quite significant, both in terms of the number of people who had a newfound interest in saving for their children and in the amount that they were saving. Typically, parents were saving at something like twice the rate that they were before the child trust fund and indeed, saving twice the amount that they were saving previously. To all intents and purposes, it has been a very successful product.
Adrian Coles: Successful in as far as it goes. Building societies and other mutual deposit takers were, in recent months, the only providers of the cash child trust fund. Nevertheless, the balances in the cash child trust fund, which account for about a quarter of the market as we have heard, accounted for about 0.2% of total building society and other mutual savings balances. So it was a successful product, but it was not in any sense central to building societies’ business. It was something that a number of building societies were keen to add to their range of products, but it was never a dominant product for us.
Eric Leenders: Clearly, as parents, customers found them to be a useful savings mechanism. I am not quite sure that we understand fully the extent to which parents—apart from those, obviously, who have chosen the default option—who have actively engaged in a child trust fund would not necessarily have actively engaged in some other savings fund. Equally, I think we need to be a little careful in so far as we do not really understand yet the full-term benefits of the whole child trust fund proposition, which was to include an element of education. No doubt, we will come on to that.
I will commence with Mr Vine-Lott. Do you have any views on the success of the child trust fund in generating savings among those who did not save before it was introduced?
Tony Vine-Lott: Providers have a lot more research on this than we do as trade bodies, but all the evidence that we have—as Martin has mentioned—is that twice as many parents were saving substantially more money. So, the overall amount of money going into children’s savings was far greater than previously. From that perspective, we consider it to be extremely beneficial. If you look at the analysis done by the Treasury and the HMRC, it indicates that the increase in take-up was across the board.
Martin Shaw: One of the enlightening elements of what the child trust fund was doing, in terms of creating a savings culture, was that even during 2007 and 2008 when people were starting to feel the pinch through the recession, there was an ongoing commitment from parents to continue putting money into the child trust fund. That was the last thing that they wanted to give up. In terms of the amount that they were saving, and also the culture, that was very strongly enforced.
Do you have any figures on the percentage of parents, or indeed other relatives, who were contributing to the child trust fund over and above the initial grant?
Martin Shaw: Yes. The figure provided by HMRC was that 31% of accounts were being topped up, and that was across the board. There were significant differences among certain providers; those that were heavily marketing the product were achieving top-up rates of 40% to 50%. What was encouraging from that work was that they saw top-ups from across the social spectrum, not simply among people who were already wealthy.
Eric Leenders: Our experience was slightly different. From what we understand from our members, only about 24% of child trust fund accounts received any form of additional funding, and that dropped back to about one in 10 receiving regular contributions. When you get to the maximum level of contribution, it dropped back to about 1.2% or 1.3%, so there is quite a tailback.
One area of concern for Committee Members is how we encourage savings for those such as looked-after children, who do not have a parent or a local authority to contribute to their savings post-18, or children with a disability, for whom the Government previously gave an additional premium to support the extra needs they may have post-18. Do you have any assessment of how the loss of either or both of those will impact on the future ability of individuals to meet those needs post-18?
Martin Shaw: Disabled children would receive a higher grant or voucher than other children. The principle of the child trust fund was that simply relying on the voucher alone would never create a fortune. Something like £500 at birth and £500 at year 7 would create a total value of just over £2,200 at 18. The most important concept around the child trust fund was that regular savings were the route to creating a worthwhile lump sum. You are right that many children are in the difficult position of not having a parent, guardian or grandparent able to make those contributions. The AFM is part of the Save Child Savings Alliance, which has produced a piece of work through ResPublica on the ABC account—asset-based savings for children. It suggests that a new form of product could emerge that facilitates the creation of a fund, which could be used for targeted audiences, so if there was no parent or guardian, companies or other organisations would be encouraged to create and invest in the fund for the public good.
The Government announced on Second Reading that they would establish a tax-free ISA for younger people, to mitigate the impact of the loss of the child trust fund. There are three issues. First, has there been sufficient consultation on the implementation of that new proposal? Secondly, is there sufficient clarity on how it will operate in respect of your businesses or sectors? Thirdly, will it do what the child trust fund did in part, which was to encourage people who were not saving to save?
Adrian Coles: One or two observations on that: first, let us not pretend that we need to rely on the Government or the public sector to do all of this. The 49 building societies and other mutuals offer about 100 children’s savings accounts in the free market, which have been pretty successful over the years, although less so in the recent era of very low interest rates. There is lots of pure private sector activity in the children’s savings market.
Has there been enough consultation? We have certainly been involved in consultation with the Treasury as recently as this week on the development of proposals for the so-called “junior ISA”. We would support those proposals. They are consistent with a paper that we put into the Treasury’s consultation six to eight weeks ago. We hope to be able to offer the junior ISA; the building society market share in the senior ISA market is much higher than its share of the deposit market generally, and I think that our members will be offering the junior ISA.
Can I press you on that? In the Committee next week we will be asked to abolish the child trust fund from 3 January 2011. I am interested in whether there is an alternative product available from 4 January 2011, as promised by the Government, for the people who will not be able to access this particular product after that date.
Tony Vine-Lott: If we are talking about the consultation as per your previous question, a consultation was issued three or four weeks ago and everybody who wished to respond had the opportunity to do so. The responses went in a week last Friday. The first face-to-face consultation will start at 1.30 this afternoon, and three or four are to be held over the next week or so. The Government are obviously moving quite quickly to try to address your point, which is how quickly it can be brought in. There are a number of options as to how that scheme can be designed, and whether it is referred to as a junior ISA. It could be virtually the same as today’s CTF, but without the Government contribution. If that was the case, it could be run on very easily from 4 January. If changes to the design of the product require changes in terms and conditions, publication, training, IT systems and so on, it will take much longer, possibly until the summer.
Martin Shaw: I suspect most of my members would not be ready to provide a junior ISA by early January. The child trust fund itself is a completely different animal to an ISA. An ISA is run on an annual renewal basis, whereas a child trust fund is run as a trust for the child over a much longer period. Therefore the investment in setting up a new product would in effect be like starting from scratch. There is no legacy that you can continue.
Adrian Coles: There is a difference between the friendly society and mutual insurers’ approach and that of the deposit-based institutions that I represent. There is a choice. Do you continue with the CTF framework or do you move it across to the ISA framework? For my members, the ISA framework is much more important and represents a much greater proportion of their business. For administrative reasons if nothing else—there are policy issues as well—they would prefer the ISA framework to be dominant in future rather than the CTF framework, but I acknowledge that that is not in the business interests of the friendly societies and mutual insurers.
Just one question on the current situation with child trust funds. I am interested in the difference between the wealthy and the less wealthy families. Do you have any information on the current value of those funds held by deciles?
Martin Shaw: Roughly, from the sheet I have here, I can tell you that more prosperous people were paying in higher proportions, so 47% of people who were classified as living in prospering suburbs in the standard classification system were paying into their CTF compared with 29% of people who were constrained by circumstances. That is one provider’s children’s mutual, who I think you are seeing this afternoon, anyway.
Martin Shaw: All the evidence that we have seen is that parents have rallied behind it and been very positive about the discipline that comes with a long-term savings product, and therefore they have really warmed to the concept, perhaps because they could not see other forms of short-term saving providing for them.
Martin Shaw: Yes. Friendly societies, for instance, have for a long time been offering a tax-exempt savings plan with a 10-year term. That has been held at a restricted threshold for the past 15 years, so the maximum that you can pay in is £25 a month—we have been campaigning for a long time to see that increased—but it is certainly an alternative that we have found has worked well in the past.
Adrian Coles: The only observation that I would make is that financial needs for children do not necessarily emerge at the age of 18. It can be very frustrating—when you are in a desperate financial situation that is affecting a child at, say, 13—if you have a built-up fund and yet you cannot access it. So, I don’t think that a universal lock-in is favourable to the child in all circumstances .
Specifically on that point, Mr Coles, we heard before—this morning—about the pro and the against of the lock-in. Do you have any evidence on what customers want out of financial products? Are you describing a problem that might occur, or is that an assertion based on knowledge of customers’ needs?
I was interested in the conflicting answers that you seemed to be giving about the impact on the industry, the financial services sector, at the opening of your evidence. Perhaps people could describe what the impact would be on the industry. There seemed to be a suggestion from the deposit-based institutions that, really, the child trust fund was not central, so in terms of increasing deposits, it is not seen as having a large impact. My understanding is that the sector at the moment is looking to increase deposits, so I would suppose that removing the child trust fund would be seen as a disbenefit. There seemed to be some conflicting evidence, so I am looking for a bit more information.
Martin Shaw: Over the past five or six years since the child trust fund came in, friendly societies have opened nearly 3 million CTFs. That is against a total membership now standing at just more than 6 million. In other words, half our members are under the age of eight. That is a seismic change in a sector that, historically, was regarded as largely for older people. Therefore, our focus has very much changed as a result.
The money invested has obviously had a significant impact, which meant that over the past few years, when the insurance market as a whole has been in fairly significant downfall, our market size has grown steadily through the period. Our real concern, of course, is that in 2011 we would expect that to change very dramatically.
Tony Vine-Lott: Our organisation actually covers almost all the organisations here, with the exception of building societies, so I feel that I can talk across, if you like.
The friendly societies are providing the vast majority of child trust fund accounts. The larger ones have invested a huge amount of their capital, in percentage terms, to supporting the initiative, on the basis of what they assumed was cross-party support for the scheme. I believe that not only have they, as Martin said, developed their business very much as a result of the scheme, but they might indeed be severely damaged if the scheme is withdrawn without their being able to continue to use that investment.
Adrian Coles: There is a quite different position for building societies and other mutual deposit-takers: just 12 building societies, plus the Co-operative bank, also a member of the BSA, offered cash child trust funds. The administration was seen as complex. For example, you have to send a statement to the child on its birthday. Many institutions are set up to send out statements on a specific day in the year say, 31 December or 31 March, and they did not make that investment. It is fortnightly reporting to the Inland Revenue, for example. Those sorts of requirement put off many building societies and, I suspect, some banks from offering the accounts. If you offered a cash child trust fund, you also had to offer a stakeholder product involving equities, and that typically has not been the market that building societies have been in. As a result, a number of building societies decided not to offer the product. As I said, it accounts for 0.2% of the whole cash balances invested in building societies so it is a small proportion of building society business. It is a large proportion of friendly society business, hence the differing answers that we have offered you.
Eric Leenders: The only point I would make is that the large banks certainly see this as part of an overall service proposition. Acknowledging that there are administrative complexities and attached costs, they feel that it is part of the overall offer they would like to provide for their customer base. They see some reputational benefits in it as well.
Adrian Coles: On the cash deposit account, typically the building societies offering these accounts have been offering fairly high rates of interest relative to the market because it is guaranteed money. It will be there for a number of years. At the moment though with base rates at 0.5%, the returns are pretty low. I would guess they would vary between about 2.5% and perhaps 4.5%, but I can write to you with current returns if you like.
For your respective industries, over the period that child trust funds have been in place, what would you estimate the charges that your organisations have been able to charge on these products?
Martin Shaw: The maximum charge you can take on a stakeholder child trust fund is 1.5% so if the voucher is paid in at £250, the annual charge you receive is £3.75. Obviously that covers the cost of administering the account, sending out the statements and usually sending a birthday card along with it.
For institutions that have chosen to make the child trust fund central to their business model, how important has the Government contribution been in making it a cost-effective product for them to develop?
Tony Vine-Lott: It was quite core. As it happens, I was involved in the design of the child trust fund from its initial inception. I did actually go round to see the executive committees of many of the providers to explain to them the financial dynamic of the product. As Martin has just said, much of it is based on the £250. You are basically talking about £3—£3.50—a year as an income. When you consider you have to provide all administration, all the investment management and also the sending out of statements etc., it is very hard to do for that kind of money. It probably costs about £6 a year minimum to administer the account.
Therefore, the £250 or the £500 for the third of the population of children through child benefit would make an average of, say, £375, therefore an average income of £450 without any top-ups. It was only for the first few years that it would be a loss-making product, and most of the providers are working on the assumption that it will be a loss-making product for five to 10 years. If you then take away that Government contribution, you can see that it starts to make the whole thing very difficult. Whether that will result in a number of organisations withdrawing from that market will very much depend on what this junior ISA looks like going forward and what it is based on.
I want to follow up on Harriet Baldwin’s question about charges; 1.5% sounds innocuous but the Library briefing for the Bill estimates that your collective industry has earned £700 million, over the last eight years, presumably, in commission, fees and so on. Do you think that is a fair estimate of how the industry has benefited from this policy?
Martin Shaw: I don’t recognise the number. Our members have obviously benefited from the product, both in terms of creating a market that was not there previously and in expanding their membership very quickly. They have therefore accepted very gratefully the management charges that have come about. But as Tony said earlier, the early-year costs of funding the development of that product far outstrip the charges that have been received so far. Had it run on for another three or four years I am sure that firms would have been happily saying, “We have started now to see a small return on our investment.” At this stage, if it is £700 million, I suspect that the set-up and administration costs so far would have been a lot more than that.
That is why I am surprised the amount was that large. Would you say that thus far it has not been a profitable line of business for your relative sectors?
Martin Shaw: It depends on the provider and the model that they adopted. Of the friendly societies, for instance, a number actively marketed and developed the product. That has meant a significant capital investment on their behalf. Others took the route of saying, “We’ll just take the revenue-allocated accounts”, which are products that the parent did not themselves invest in. That meant that they could run the product on the back of a spreadsheet and for some of those smallish providers, their largest single cost was buying a new envelope stuffer. After years five or six they started seeing a very small return on their investment. The larger firms, because of the marketing and investment costs, will not have seen a positive return.