Examination of Witnesses (Questions 1-19)|
12 NOVEMBER 2003
Q1 Chairman: Mr Holgate, can I welcome
you to the Committee? Could you identify yourself and your colleagues,
Mr Holgate: I am Nicholas Holgate,
Director of Welfare Reform in the Treasury. On my left is Caroline
Rookes who is Director of Savings, Pensions and Share Schemes
at the Inland Revenue. On Caroline's left is Liz Welsh who is
Deputy Director of Savings Policy at the Inland Revenue, and on
my right is Mostaque Ahmed who is Head of the Savings Policy Branch
in the Pensions and Savings Team in the Treasury.
Q2 Chairman: Your consultation document
received a leader in the Sunday Times, describing it as
"a half-baked piece of social engineering that will cost
taxpayers hundreds of millions of pounds, stack up countless more
civil service jobs to administer and then achieve little".
How did you achieve that kind of headline?
Mr Holgate: It is a free press,
Mr Chairman, and they are entitled to their view.
Q3 Chairman: How do you respond to
Mr Holgate: I would completely
reject the notion of social engineering. I think that social engineering
carries the imputation of heavy-handedness. The Child Trust Fund
is extremely light touch. We are not mandating or requiring anybody
to do anything at all. We are teasing and encouraging them into
thinking about whether they wish to establish a savings habit
for their own sake and for their children's sake, to set an example
for their children so that their children can see the benefits
of saving, so that at age 18 they have a fund which they can use
both to take advantage of opportunities and to withstand vicissitudes
throughout much of the rest of their lives.
Q4 Chairman: What in fact is the
administrative cost or the number of jobs that will be created
to administer it?
Ms Rookes: The numbers have not
been finalised yet. We are looking at probably around £90
million cost to develop and implement the Child Trust Fund. There
will be a small number of people needed to administer it. We do
not know precisely how many, but it will be small because most
of the administration will be run off the child benefit system
and the tax credit system.
Q5 Chairman: You have consulted on
the design and detail of the scheme, but have you consulted on
the principle of asset-based welfare? I was quite struck by the
Institute of Fiscal Studies who pointed out two years ago, just
after you started this, that asset-based welfare was not the only
option available to help people on low incomes: that an alternative
would be to provide low-income individuals with greater income.
Mr Holgate: The IFS is entirely
right. What the Government is doing is establishing what I might
describe as a portfolio of interventions to assist those on low
incomes in a variety of different ways, where we hope the whole
will be greater than the sum of the parts. As you know, we have
introduced new tax credits this year which are more generous than
the Working Families' Tax Credit, so that I think it is the case
that someone on half average earnings with two children is over
£2,500 better off now than they were five years ago. From
the point of view of the creation of equal opportunity, which
is, as it were, the long-term counterpart of trying to reduce
poverty, education spending has gone up very considerably. It
is a question of what gap in the portfolio might be filled by
an asset-driven policy like this. We think that there is a gap.
Those who have researched the National Child Development Study
data suggest that there is an independent effect of the presence
of savings, and quite small stocks of savings, on people's future
outcomesacross a range of social and economic outcomes.
It is also encouraging that other countries round the world have
been experimenting with what you might call save-to-invest funds.
Ours is more ambitious than nearly all of those because it is
lasting much longer, but it is interesting that the United States
has almost simultaneously launched something called the Savings
for Education, Entrepreneurship and Down-payment initiative, or
SEED, which seems to have quite a lot in common with the Child
Q6 Chairman: It is a scheme that
will last longer. It is also universal, is it not? Perhaps you
could help us here on the detail. If your poorer third of children
who will have the £500, not the £250, make no contribution
to itif they are in a household where there is no other
saving and nothing added to itthey will end up, 18 years
later, with £911. However, somebody from a better-off family
who does top up even the lower amount of £250, if they top
up at £40 a month, will end up with £14,000. How logical
Mr Holgate: Whatever they end
up with, of course, will depend on what they invest in over the
Q7 Chairman: But are not people from
middle-income families more likely to invest in it than precisely
the sort of people you are trying to help?
Mr Holgate: If we look at savings
behaviour across income quintiles, then I think you are quite
right that better-off people tend to save more. However, I think
the question is what are the tax receipts forgone should better-off
people choose to use the Child Trust Fund? The fact is that, because
children have their own personal allowance and because we are
not match-funding incremental parental, grandparental or other
contributions to the fund, we are not incurring expenditure in
terms of encouraging the better-off to contribute. What we are
doingand commentary round various bursts of publicity rather
confirms this pointis setting people off. We are giving
them a start. It is interesting to see the reactions that we have
received to that. People have said something along the lines of,
"As someone has chipped in to begin with, it is more realistic
for me to think about contributing something because, between
me and the Government, as it were, or the taxpayer, it will add
up to something more than I could otherwise imagine possible".
So I do not think that there is a sort of nugatory expense being
incurred here, related to the scale of contributions from better-off
families. They would have to contribute an enormous amount for
us to start losing tax receipts.
Q8 Chairman: The experience of ISA
is surely that those people are more likely to do that and therefore,
if you like, middle-income children are more likely to end up
with £14,000 and those who have not had the habit of saving
are more likely to end up with £900?
Mr Holgate: I think it is a fair
test for the Child Trust Fund. Given the extent to which the pack
of information that we send parents when the Child Trust Fund
is used, the annual accounts, the education in school and through
other means, it will be interesting to see whether it affects
people's behaviour and whether the potential gap that you correctly
identify will be closed in any way through less well-off people
contributing more than we might otherwise have expected them to
Q9 Chairman: You said that it will
be interesting to see. You are the man running this experiment.
Have you done any research? What proportion of the bottom third
of children do you think will actually take up the full possibility
of family, parental, grandparental contributions? What proportion
do you think will top it up?
Mr Holgate: What we know at the
momentand this is from the Institute of Fiscal Studies
and work they have done on the British Household Panel Surveyis
that the median savings for those aged under 25 is precisely zero.
So one point we should make is that any increment to the position
of those people may be quite significant from the point of view
of taking up opportunities later on in life. What we also have
are surveys conducted by people quite independent of government,
like Virgin Money. They say that very large proportions of parents
are attracted to and interested in the possibility of saving in
the Child Trust Fundmuch higher proportions than you might
infer from the outcome as reported in the British Household Panel
Survey. For instance, in September 2003 the Children's Mutualwho
are represented behind meshowed that 79% of parents with
children eligible for the Child Trust Fund are likely to top up
government monies. Were we to achieve 79%, that would be a very
good start indeed.
Q10 Chairman: But you have not done
any research of your own as to what the proportion is likely to
Mr Holgate: There are quite a
number of variables that we have to take account of, which we
have not yet created. There is the question of what is the power
of the information pack that we shall send all parents. To what
extent are financial service providers going to advertisebecause
it is in their interests to do so? What sort of effort are they
going to put in, once they see the full details, once the Act
is passed, when they know that it is all systems go? I think that
there is quite a lot that would make such a projection extremely
Ms Rookes: One of the important
elements of the Child Trust Fund is not just creating the asset,
but the financial education side. As Nicholas says, we are going
to create an information pack which will go out with the voucher
at the start of the Child Trust Fund. That will be based on research
into what the parents need. We are going to work with and have
started talking to voluntary and community organisations. We are
going to be looking at resources in schools. There is a whole
effort going into creating a financial education initiative to
run alongside the account so that, at the end, it is probably
true that children from poorer families will have less money but
we hope that they will be provided with financial education and
a better understanding of how to interact with financial services.
Q11 Chairman: So you are accepting
from the start that children from poorer families will probably
end up with less money?
Ms Rookes: I think it is a fact
of life that, at the moment, they will probably not end up equal,
but there are a few things I would say with that. We are starting
off with an endowment, but that is a foundation on which we want
to build. We will be taking powers in the legislation to enable
the Government to make top-ups in the future, if that is deemed
necessary. So the story does not end here. This is just the start
Mr Holgate: It is fair to add
that the significance of even £911 to someone who might otherwise
have zero might actually be very great indeed. It is what the
fund might be used for which is quite a big long-term test.
Q12 Chairman: However, you understand
the concern of those of us who seem to have heard all this beforestakeholder
pensions, ISAs and so onand the criticism that they do
not yet seem to be reaching those whom they are designed to reach?
Mr Holgate: With respect to ISAs,
I think it is the case that they have done slightly better than
previous schemes, but I take your point in principle that there
is still quite a skew to beneficiaries. The position with ISAs
is slightly different, however. There is a much higher cap there
than with the Child Trust Fund and, at least until 2004, there
is a payable tax credit to them and there is relief from capital
gains tax. One would expect better-off people to be piling into
those, in the way that indeed they have done. I think that this
is a simpler proposition with a lower cap and, potentially, a
very powerful dynamic in terms of ensuring that your children
go into adult life with something behind them.
Q13 Mr Plaskitt: When you were designing
the scheme, did you give any consideration either to imposing
restrictions on what the funds could be used for at maturity or
to building incentives in for particular uses?
Mr Holgate: It is very difficult
indeed to envisage any feasible restrictions on the use of funds
at maturity. First of all, most people might accept implicitly
that the great majority of people want to make the best of their
lives. So I think that there is quite a fund of wanting to do
well with this productor there will be when it comes to
begin to spend money, and not necessarily to spend it at 18. Of
course, the test for us and our colleagues, and for schools and
others, is to have inculcated the idea that this is something
that will be spent on something that will make a real difference
to one's life: not just something rather frivolous. Then you get
into a problem that were you, for exampleand this is only
a crude exampleto draw up a list of virtuous expenditures
from this fund, you could easily imagine items which would appear
virtuous but which would not be so in practice. If I were to spend
my Child Trust Fund on a computer and do nothing but play Quake
39 on the computerwhich would be a very sad outcomethen
that would appear good but would not actually be good.
Q14 Angela Eagle: What have you got
against computer gaming?
Mr Holgate: I am all in favour
of computer gaming myself, but I am just saying that you could
appear to find things which were virtuous which, in practice,
did not have quite the kind of investment aspect that you might
hope they would. Fourth, in a situation where the 18-year-old
is possessed not only of a Child Trust Fund but also a credit
card, you could imagine thatif we had some committee of
the great and the good vetting people's applications to spend
money, or however you set it upthe young person would direct
the virtuous expenditure towards this committee and keep the less
virtuous, or apparently less virtuous, expenditure off balance
sheet with respect to such a committee. If you delve into it,
you find that it is really very difficult to set anything up which
would not be other than something a little bit likewas
it the Lord Chamberlain who used to vet plays before they were
put on? You would end up with a system a bit like that.
Q15 Mr Plaskitt: Is it so difficult?
Look at all the other countries round the world. You mentioned
one yourself earlier in this evidence that had set up funds that
quite closely parallel this, but they do have incentives built
in for particular use at the end. I cite, for example, funds designed
to support further education. It is not so difficult, is it?
Mr Holgate: What one would want
to do is to ask what the conditions were round, as it were, the
most obvious opportunities on which one might spend money. You
mention further education. Plainly, some 18-year-olds may be in
further education. The question then is what is the role of education
maintenance allowances, for example, in 18 years' time? There
may be other things that the Government is doing which take care
of some of the most obvious options. The broader problem is that
we live in an ever more diverse, multicultural, mobile society.
It is increasingly unrealistic to imagine that we can predetermine
what is in young people's best interestsanyone's best interests
in some respects. They have a lot of pathways open to them at
that age and thereafter and, in one way or another, we would be
trammelling that choice. If you accept my starting hypothesis,
which is that people in the great majority do want to make the
best of their lives, then we are putting an unnecessary constraint
on that choice when it comes to having access to the funds.
Q16 Mr Plaskitt: What did the Prime
Minister mean at the launch of the fund when he said that it provides,
"a real financial springboard to better education"?
Mr Holgate: There are all sorts
of ways of achieving a better education than you might otherwise
do. He could have had any number of things in mind.
Q17 Mr Plaskitt: What contribution
to better education will £911 provide for a youngster from
a low-income background?
Mr Holgate: To return to the subject
of computers, it might, for example, provide either hardware or
software which would otherwise have been beyond them.
Q18 Mr Plaskitt: Look at the reality
here. Whatever the outcome of the current debate, it is likely
that we are moving to a situation where students have to contribute
significantly to the cost of their university education at some
point in the future. Does it seem so unrealistic to join these
things up and say that here is an opportunity for someone to start
a long-term investment to meet the cost of their university education?
Have you looked at the parallel example you mentionedthe
SEED one in the United States? Have you looked at and dismissed
all these other examples of ways in which you can encourage or
incentivise people to use this to meet that very significant cost,
which they will incur shortly after becoming 18?
Mr Holgate: With education as
a specific example, you have to ask what are the other surrounding
circumstances and the help that we are providing people at differing
levels of income, with different household backgrounds, to do
that. I think that therefore there may not be such a good parallel
with the United States.
Q19 Mr Plaskitt: There is nothing
targeted specifically at the cost of a university education. We
are clearly embarked in that direction. Did you not see in this
an opportunity to help people build up the resources to help meet
Mr Holgate: Precisely because
there is no restriction on the use of the Child Trust Fund, plainly
they could use the money should they wish to; but I think that
the prior requirement upon the Government is that, in order to
meet whatever higher education objectives are present at the time,
there is a system for funding students through higher education
which is equitableand that is the prior requirement.