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Mr. Laws: I shall not deal with the issues that have just been covered by the hon. Member for Tatton (Mr. Osborne). As we pointed out in Committee, we are not in favour of the Bill or the child trust fund accounts, so we do not seek their extension to any other cohorts of children.
I shall speak to new clauses 8 and 9 and amendments Nos. 63 to 68, which would lay down in a little more detail the basis on which the Inland Revenue
contributions will be calculated over time. At present, most of those issues seem to be left entirely to the discretion of the Chancellor and the Treasury, so new clause 8 would index some of the contribution levels to the rate of inflation, while some of the amendments would fix the relationship between particular levels of contribution. For example, amendment No. 65 fixes the supplementary contribution at twice the initial contribution.I seek clarification from the Financial Secretary on an issue on which I thought we had made some progress in Committee: in essence, how much compensation will be paid by the Treasury because people entitled to child trust fund accounts from 1 September 2002 onwards will not receive the moneys until April 2005? I was expecting to tease the Financial Secretary by indicating that I thought that she would offer compensation at the rate that she anticipated the accounts would yield—that is, the 7 per cent. that the Government said would be yielded over time, which is an 8 per cent. rate of growth minus a 1 per cent. assumed level of charge.
3.15 pm
In Committee, to my surprise, the Financial Secretary said:
- "The hon. Member for Yeovil queried the assumption of a 7 per cent. nominal rate of growth. I assure him that it is the rate recommended by the FSA in its "conduct of business" handbook as a fairly cautious estimate of future growth. We are aware that children born after the qualifying date of 1 September 2002 but before April 2005, when the first payments are to be made, will lose out on the potential growth of the fund over that time."
- "I intend to make up for the difference in the regulations, and I can announce that the value of the endowments will reflect a 7 per cent. growth of the fund in nominal terms for each cohort or financial year in that period, but the exact figures will be laid down in regulations."—[Official Report, Standing Committee A, 13 January 2004; c. 120.]
Perhaps it is just me—I do not know whether my brain is not working properly today—but those amounts seem lower than I would have expected from the application of a 7 per cent. yield, compared with the amounts that would be expected by children who would otherwise have received them from September 2002 onwards. I had assumed that the Minister would be generous—or, to put it another way, fair—in her calculation of the amounts, but the amounts set out in paragraph 7(ii) on page 7 of the regulations are somewhat mean in the application of the 7 per cent. yield, compared with the amounts that would be received by individuals in their child trust fund accounts.
For example, sub-paragraph (ii) indicates that children born between 6 April 2003 and 5 April 2004 would receive £268. That seems to reflect an uprating factor of roughly 7 per cent., so anyone born during that period will receive a 7 per cent. uprate. However, children born at the beginning of the period, who would not otherwise receive their money until April 2005, could forgo two years of yields at 7 per cent. I have been
unable to work out the method of calculation under sub-paragraph (iii), which applies to children born between 6 April 2004 and the day preceding the appointed day—I assume that will be the end of March or the beginning of April 2005. The amount specified to be received by that cohort is only about £256, which seems to be a yield of only 2.5 per cent.There seems to be a gap between what we might have expected those cohorts to receive, with the full application of the 7 per cent. yield, and the amount that they will actually receive. I seek clarification from the Minister about how those amounts were calculated. Does she consider that the calculation is fair, especially to people born at the beginning of the periods in question? For example, a child born on or just after 6 April 2003 might have expected to receive 7 per cent. compounded for two years. There appears to be a gap between what the Financial Secretary is delivering and the undertaking that was made in Committee, so it would be helpful to have clarification on that point.
Ruth Kelly: We have already held a significant debate in Committee about whether siblings should qualify for a look-alike child trust fund without Government contributions. It is a shame, but I have to say that the hon. Member for Tatton (Mr. Osborne) rather misrepresented my position on Second Reading. In fact, I argued that if we allocated accounts to all siblings of children who qualify for a child trust fund account, there would be 10 million shell accounts, which would be an unwarranted burden for providers. They would not welcome that additional burden at this time.
However, I recognised in Committee, as I recognise now, that there could be—indeed, would be—many parents who wanted to open similar accounts for older children and add their own endowment to the fund on a voluntary basis. That is a completely different proposition, with a much reduced impact and burden on providers. I continued to argue in Committee that if there was a demand for such a product, there was no reason why the market should not provide—and, indeed, market—a look-alike product for older siblings when marketing the child trust fund for younger siblings. It would be open to providers to offer a similar account; they could offer a charge cap which matched that on their child trust fund product, or they could offer a lifestyling facility which matched that on the child trust fund. The main difference between the accounts would be their tax treatment.
I argued, however, that the child's income from savings would not be enough to incur tax in most cases. Children have the same personal allowance as adults—currently £4,615—and the parent is taxed only when a gift from a parent produces more than £100 gross income a year. I said that I was sure that the industry would provide a look-alike product without a Government endowment if there were sufficient demand in the marketplace for such a product. However, I did commit to consult providers on whether they thought that there would be a gap in the marketplace if the Government did not step in to offer a product identical to the child trust fund for older siblings.
The Inland Revenue and I have undertaken some informal consultations with those in the industry, which has confirmed that of course, an identical product would
make life easier for them. However, they have also said that they would undoubtedly step into the market to provide a look-alike product on the day of the launch and that they would see that as opportunity to market a savings vehicle for older siblings, as well as the child trust fund to younger siblings.If we were to offer an identical child trust fund product—without the Government endowment, of course—to older siblings, it could not be up and running by 2005, which is the launch date of the child trust fund. Given that providers think that the market seems to exist and that they intend to fill that gap, we should monitor the situation to find out whether, after the launch of child trust fund products, parents feel that their demands have not been properly met, or providers feel that they have not had the opportunity to fill a gap in the marketplace. That issue will have real resonance for parents, but it will be fulfilled and taken up by the marketplace.
Mr. George Osborne: What regulatory changes does the Financial Secretary think would be required to provide an identical product? What is the main regulatory problem? What would have to be changed?
Ruth Kelly: As the hon. Gentleman correctly identified, we have been working up proposals so that we would be able to meet any unfilled gap in the market, if such a gap were identified. However, he will know that we are still at a very early stage of any plan, and I will continue to consider whether any change in regulation is required. If we find evidence of a gap in the marketplace and regulation is required to fill it, that is clearly something that we would consider.
On new clause 8, the hon. Member for Yeovil (Mr. Laws) asked us to commit to raising the Government contributions in line with inflation. It is only fair to say that it is much more sensible for the Government to keep the structure and level of the endowments under review, in the light of the progress and future evaluations of the child trust fund. I know that he is sceptical about the merits of the child trust fund, but surely he would agree that it is sensible to take into account how it develops before committing ourselves to stating in the Bill how that endowment will be increased in the future. The regulation-making powers that we are taking will enable us to develop the child trust fund further to achieve policy objectives if the evaluation of the policy suggests that that is a good idea.
New clause 9 and the related amendments suggest what the retrospective payments to children born between September 2002 and April 2005 should be. As the hon. Gentleman suggested, those extra payments were set out in the draft regulations, published on 2 February 2004. All children born between September 2002 and April 2003 will receive £277, with those entitled to the higher amount getting an additional £266. Those born between April 2003 and April 2004 will get £268, with those entitled to the higher amount getting an additional £258, and those born between April 2004 and April 2005 will get £506. The hon. Gentleman suggests that that is somehow not generous and fair. In fact, I believe that it is both generous and fair. For example,
those figures do not include any allowance for the administrative cost to the Government, whereas, as he rightly points out, the illustrative figures in the projections included an amount for the charge cap.
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