Child Trust Funds (Amendment No. 3) Regulations 2010

Lord Newby Excerpts

Monday 19th July 2010 Lords Chamber

[Lord Hodgson of Astley Abbotts]

I support my noble friend. Clearly, we have urgent savings to make, and £500 million is no trifling sum—and there is really no alternative. If I have a problem with what we are discussing today, it is along the lines of the direction of travel, as my noble friend Lord Naseby said. I shall come back to that in a minute.

Before I get to the substance of my remarks, I declare an interest. I am chairman of a firm that provides compliance training and administrative support to independent financial advisers. Therefore, I have an involvement in the savings industry. The firm is regulated by the Financial Services Authority and I am an authorised person.

The economic devastation wreaked on our country as a whole and left behind by the previous Labour Government is well documented, and I do not propose to plough this familiar ground. Perhaps the only astonishing thing—a theme that ran through the comments of the noble Lord, Lord Davies—is that somehow the Labour Party continues to deny its involvement and responsibility. Its approach is along the lines of, “It was nothing to do with us, guv—it was all down to those Americans and their subprime mortgages”. While the subprime mortgage market may have been the spark, our economy was tinder dry, and that is down to the previous Labour Government.

If that aspect has been well documented, less well documented are the parallel ravages of the previous Labour Government on the savings and financial well- being of private individuals. In 12 short years, the Labour Government effectively brought to an end every single final salary private sector pension scheme. It is true that this would have been a difficult time for private sector pension schemes. Increasing longevity would have caused difficulties to their operation. The increased lifespan is devoutly to be looked for and welcomed on an individual basis, but it represents a nightmare for a pension fund trustee. So there would have been problems—but the Labour Government delivered three hammer blows. First, there was the tax on pension funds; the Chancellor clearly believed that it was a goose that would continue to lay golden eggs. Secondly, there was the introduction of a pensions regulator with varying and often capricious powers. We saw the impact on management companies of the different valuations that could be applied to pension fund deficits, with the regulator nearly always taking the most extreme deficit. Last but not least, the previous Government created a perfect storm for pension funds, with low interest rates, which meant that the discount rate applied to the liability was low and therefore liabilities were high, and there was a collapse in asset values, which meant that the assets held for their discharge were reduced. There was an increasingly large deficit, so any sensible board of directors closed the scheme to new entrants, then ceased further accruals, then moved from 60ths to 80ths—and so on. This was a major plank for our savings culture, which was removed in 12 short years by the Labour Government, unless you were in a public sector scheme, where inflation-proofed pensions remained the norm. But that is for another day.

No less important was the attitude of the Government towards spending, which created a change in social attitudes to debt and to saving. If the Chancellor of the Exchequer—later the Prime Minister—claims that he has abolished boom and bust, it is not surprising that change follows. Credit card debt soared while long-term savings plans were cashed in, in a way that was almost certainly bound to earn the person who had taken them out a less than adequate return.

The consequence was the collapse of the savings ratio. When the Labour Government came to power in 1997 the ratio was 10 per cent of disposable income; by 2007 it was 2 per cent. So when the noble Lord, Lord Davies, puts down a Prayer about fostering a savings culture, he will understand why, in the light of that record, I have a sense of slightly hollow laughter. The noble Lord talks about a black hole opening up for 18 year-olds. It is opening up not because of the removal of the child trust fund but because of 10 years of incompetent economic stewardship by his Government.

Where I agree with the noble Lord is that we cannot allow this situation to continue—if we do so, our fellow citizens are going to face a difficult old age. What to do? Saving, in my view, is about creating the right habits and explaining that, because of the magic of compound interest, putting small sums aside regularly over time can create large sums over 20, 30 or 40 years. We see this in mortgage repayments. A payment each month pays off the interest but also some of the principal, so that at the end of the term the mortgage has been paid and the house belongs to the mortgage holder. Of course people are aware of the direct debit and of when interest rates rise, but that becomes part of the landscape. We need to seek to achieve this on a much wider basis.

In two places the Labour Government did some sensible things. The first was that they launched and maintained the ISA programme, a sensible way of increasing annual savings by individuals. The second was the concept of a child trust fund. The unique reference number referred to by my noble friend Lord Naseby stimulated parents to do something for the financial future of their child. Evidence from industry, as my noble friend said, suggests encouraging trends in the way that parents and families started to contribute as a result of this stimulus, and there was an increase in the number of children having regular long-term savings plans.

As I said, I agree that the country cannot afford to make a contribution to each child’s trust fund. Is it right, however, to wind down the structure that has given rise to this increasingly successful savings policy? Surely £5 million a year for administration is a low cost in comparison to the potential social benefits. If in future we continue to send to the parents of every child their unique reference number, it can do no harm. It may well stimulate some parents, who otherwise would have done nothing, to start saving for their children. One day Conservative policies will have revived the financial health of the nation, and maybe at that point it will seem to be a useful way of encouraging savings and initial payments will be resumed. It would be a pity if at that time we had to recreate the administrative back-up that we may shortly be going to demolish.

I hope that my noble friend will think carefully about this final step before statutory proposals are brought forward in the autumn. I entirely support the need to make immediate savings but we must not, in the old phrase, spoil the ship for a ha’p’orth of tar. Creating a savings culture is critical to our country’s future prosperity, and child trust funds could provide a useful element of that.

[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.