Child Trust Funds (Amendment No. 3) Regulations 2010

Lord Naseby Excerpts

Monday 19th July 2010 Lords Chamber

[Lord Davies of Oldham]

My Lords, it is always encouraging to hear the Government’s defence before the amendment has been moved. I congratulate the noble Lord on taking advantage of his position and commenting on the amendment when introducing the regulations. I recognise his need to do so. Even before we had articulated and identified the main sense of the amendment, I found his response to it rather flimsy, not least because it was clear that the Conservative Party did not go into the general election with a proposition to abolish the fund. The Conservatives spoke in their usual vague terms about the necessity for some curtailing of this constructive scheme, but they did not address the issue of bringing forward primary legislation to abolish it.

The Liberals were in favour of abolishing the scheme but, knowing the consequences for the children of the less well-off in society, they had it in mind that the Budget would protect, or even enhance, the position of children in that situation. We shall debate the coalition Budget next week, but the Liberal Democrats will be hard pressed then to defend their part in it. That is why they ought to think twice about the impending decision to scrap the whole of this scheme through primary legislation in due course.

We have heard from both parties in the coalition that savings are a priority. Earlier this year, the present Chancellor said that we need to restore our savings culture and that,

“we will build a saving society”.

This scheme has one significant advantage—it is universal in its appeal and covers each and every child, with special provisions for those families with the least propensity to save. It was because of that that it was warmly welcomed when it was introduced.

What is now being proposed is quite clear. We may, in due course, hear of some vague ameliorative measures for the poor and disabled, but what will happen as a result of these regulations is a straightforward deterioration in their position. This is an attack on the poor and disabled. I appreciate that the noble Lord made the best fist that he could of it when indicating an element of gradualness, but this will happen all too quickly and with dramatic effect.

The scheme is successful in emphasising a savings culture and long-term investment. If we were talking about sacrificing short-term investments—I imagine that there will be plenty of examples and illustrations from the government Benches over the forthcoming months and longer about the constraints necessary on investments in the short term—that would be one matter, but this is investment for the long term. It ensures that, when young people reach the age of 18 and their needs are particularly acute, they have a basis that can help them to organise their lives.

We should not underestimate the significance of the point that young people will have reached at that time. When people reach the age of 18 to 21, family expenditure increases apace. The average amount owed by 18 year-olds is just over £5,000; the average family spend on young people in this range is more than £13,000. That is before we have any idea—although how can we feel encouraged?—of what the implications of higher education finance might be for that substantial section of young people who expect to stay in full-time education beyond the age of 18. A black hole is opening up for that generation of young adults, who could have looked forward to long-term, modest savings, who could have looked forward to being part of a savings culture and who could have looked forward for the first time to having a stake in the economy and in the country, something that I would have thought had some appeal to Conservatives down the ages. This was an opportunity not just to talk in broad terms about the advantages of increasing financial literacy and improving equality of financial education among our young people but also to give a clear illustration of resources that were being developed on their behalf and would give some point to that financial education and assist in it.

None of this underestimates the fact that aspects of public expenditure need to be reined in. We made quite clear as a party before the election—and we made no bones about the issue in the debate on the Budget—the necessity for constraints on public expenditure. However, at stake today is a scheme that is long term in its investment potential and has particular advantages to the least well-off in our society. It is one that aids all the objectives that we share with regard to creating greater opportunities for young people and ensuring that they feel part of society, yet the Government are out, first, to strip the scheme of many of its benefits and, then, in the very near future, to abolish it. That is why the Opposition have put down their amendment. I beg to move.

[Lord Naseby]

My Lords, I declare an interest. I contribute to the child trust funds for both my granddaughters, Ciara and Ella. In a sense, I should declare an interest in that I am the only one in the Chamber at the moment who was involved in the creation of the child trust fund when it was originally voiced by one of the think tanks, IPPR. Some funds were transferred from the Children’s Mutual, of which I had the privilege of being the chairman at that time, so I was in at the beginning. I state now, as I stated then, that I had reservations about the supplementary contributions at seven and 11.

The scheme has worked, in the sense that 6 million children have benefited from it so far. About a third of the trust funds have been topped up by various family members and that figure is slowly increasing. Some would say that a third of young people saving anything significant is not a huge success, but it is certainly a very good start. It is certainly better than anything that had happened in any previous scheme from any other Government, so when I first heard the news I had to think hard about this whole situation.

I suppose that as an economist I am conscious of the economic situation that my noble friend on the Front Bench has been saddled with. I am not the least bit surprised that he has looked at every conceivable large sum sitting on the books—and £500 million is a large sum in anybody’s counting house. My noble friend will correct me if I am wrong, but I think that the figure is £525 million, of which £5 million is the cost of administration and £520 million is the figure for the amount given out in benefit.

I recognise that any Government facing the situation that our Government face at this time would need to claw back a significant sum from any scheme, whether for children or anyone else. However, I want to make a plea. I welcome the news that my noble friend announced from the Dispatch Box that there is to be a meeting with the providers later this week or early next week. That is a hopeful sign and could be beneficial.

Whether or not this particular scheme goes forward, the kernel of the scheme is the unique number that is issued by the Government to every child in the country. I have calculated the cost of issuing those unique numbers to be about £2 million. Whether or not the scheme continues and whether or not there is to be a mark 2 version—there was an inference on that from my noble friend on the Front Bench—without that unique number it is not possible to take it forward. My plea to him is to recognise that that is the kernel of the scheme. I am sorry to take issue with my noble friend, who has just joined us, but I think that what he said was wrong. The unique number is absolutely crucial. If that goes, the scheme is dead and I would personally regret that.

[Lord Liddle]

My Lords, in rising to support the amendment moved by the noble Lord, Lord Davies, I make one simple point. I accept that the country faces grave financial difficulties and that there will be a need for public spending cuts. I accept that the child trust fund scheme may need revision. However, what the Government are proposing is extremely drastic. Of all cuts, it is not the right cut to make. I will explain why.

The child trust fund attempts to build capital that people, especially the most vulnerable and poorest in our society, can spend when they reach adulthood. There is far greater inequality of wealth than of income and there is a particularly great inequality of what an economist would call liquid wealth. Inequalities of wealth have narrowed in recent years largely as a result of the expansion of home ownership, which has spread over large sections of the population. However, there is a massive inequality in how much cash in savings people have for meeting essential needs.

This morning, I looked at the figures that the Institute for Fiscal Studies—a noted body—quotes in its latest research on the subject. The latest figures, which were for 2005, show that the median family in Britain has cash savings that it can access of the massive sum of £1,100. For the family at the 75th point of the distribution, the figure is £16,000 and, for the family at the 90th point of the distribution, it is £60,000. However, families at the bottom, below the median, have virtually no cash or liquid savings of any kind.

The child trust fund was a bold and radical attempt to give children from poor families in particular, through targeting extra resources on those families, some stake, so that, when those children came to maturity, they would have some funds that they could access. This Government are proposing to take that away, which is why I support the amendment moved by the noble Lord, Lord Davies.

--- Later in debate ---

[Lord Newby]

My Lords, over the coming months and years a series of public expenditure cuts will no doubt come forward that will make people on these Benches feel extremely uncomfortable,. This, however, is not one of them. We opposed the introduction of child trust funds at the start, before there was a financial crisis, for a number of reasons that in my view have not been seriously undermined by the experience of the child trust fund programme.

First, we were very sceptical of the programme because we felt that it was poor value for money. We felt that the principal beneficiaries of it would be middle-class parents and middle-class families who saved every last penny they could tax free, and that the poor—because they were poor—would not be able to add to the programme. As the noble Lord, Lord Liddle, said, poor children will undoubtedly end up with a nest egg aged 18, but middle-class children will end up with a big nest egg aged 18 because their parents will have taken advantage of very significant tax breaks. This view has been borne out by the take-up of child trust funds in constituencies. In the poorest constituencies, 40 per cent of parents have not even exercised their option on where the trust fund should go, far less put any money in it. Therefore, our view was that the scheme was not such a wonderful measure in reducing wealth inequalities—far from it, as the wealthy were the principal beneficiaries.

Secondly, it always seemed to us implausible that this scheme would somehow inculcate a savings culture among young people as young people were not saving. The Government were saving on their behalf and in a minority of cases their parents were also saving on their behalf. Why would that inculcate a savings culture in a 10, 12 or 15 year-old? Many children will simply be unaware of the scheme as they are not putting anything into it; they are passive beneficiaries of it. Therefore, I do not believe that it inculcates a savings culture, nor do I see how, in itself, it helps improve financial literacy.

The third issue we have with this flows from that. I am a great supporter of thrift. When I was a boy, my parents practised it and encouraged me to practise it. However, the thing about thrift is that you save up and forgo something now so that when you get the benefit of it at a later date, you value it because you know that it has cost you something in terms of consumption forgone. The problem with this scheme is that there is no link between the contribution and the benefit which you achieve aged 18. Noble Lords have said that 18 year-olds will use a nest egg they are given for all kinds of worthy purposes and that it will be used to help their education. On an earlier occasion, a noble Lord from the Labour Front Bench suggested that 18 year-olds might use this nest egg to put down a deposit on a house. I do not know whether my experience of 18 year-olds is totally different from that of other noble Lords who have spoken but, frankly, I do not believe that the mentality of most 18 year-olds—poor or affluent—is to take a nest egg to which they have not contributed and use it for long-term savings and benefits. To me, that goes against the grain of human nature and nothing that I have seen in my experience of 18 year-olds suggests that human nature has suddenly changed.

The strongest argument for child trust funds is that it must be in the interests of society for parents to save funds so that their children can be helped when they have more requirements. At the moment, parents can save £5,100 tax free in an ISA, which can then be transferred to their children at age 18, or whenever, to benefit them. If the money is transferred in that way, I suspect that the relationship between the parents who have saved the money and their children will mean that it is more likely to be used for a positive purpose. The tax free ISA limit of £5,100 is far beyond the savings capability of a family on a median income. It offers plenty of scope for parents who have a desire to save for their children to do so already. There may be an argument for marketing ISAs which may eventually be used to provide a nest egg for children, but the benefit in terms of taxation is already there in ISAs, and the child trust fund, almost by definition, can be of additional benefit only to parents who have enough money to put not only into an ISA but into a child trust fund. That is not the cohort of parents who the proponents of child trust funds—

[Lord Naseby]

If the noble Lord’s argument was valid, why do 12 per cent of families contribute to ISAs, whereas contributions to child trust funds cover 30 per cent of families?

[Lord Newby]

My Lords, that is why I was saying that I thought that within the ISA wrapper, a marketing campaign directed at parents who wanted to save for their children could be extremely effective.

We opposed the child trust fund from the start. We oppose it now and we hope that the Government waste no time in bringing forward the primary legislation to finish it off.