Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1-19)

CHILD TRUST FUNDS

12 NOVEMBER 2003

  Q1  Chairman: Mr Holgate, can I welcome you to the Committee? Could you identify yourself and your colleagues, please?

  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 it?

  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 outcomes—across 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 Trust Fund.

  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 it—if they are in a household where there is no other saving and nothing added to it—they 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 is that?

  Mr Holgate: Whatever they end up with, of course, will depend on what they invest in over the meantime, so—

  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 doing—and commentary round various bursts of publicity rather confirms this point—is 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 do.

  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 moment—and this is from the Institute of Fiscal Studies and work they have done on the British Household Panel Survey—is 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 Fund—much 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 Mutual—who are represented behind me—showed 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 be?

  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 advertise—because 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 unreliable, frankly.

  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 of it.

  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 before—stakeholder pensions, ISAs and so on—and 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 product—or 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 example—and this is only a crude example—to 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 computer—which would be a very sad outcome—then 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 that—if we had some committee of the great and the good vetting people's applications to spend money, or however you set it up—the 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 like—was 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 interests—anyone'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 mentioned—the 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 that cost?

  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 equitable—and that is the prior requirement.


 
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