House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Memorandum submitted by engage Mutual Assurance

BACKGROUND

Firstly, we would like to note our thorough support for the CTF initiative. We believe that CTFs will significantly encourage the provision by parents for their children's future, and present a superb means for increasing the financial education and capability of both children and their parents. This is particularly true of children from low to middle income earning families who in the future will have the opportunity to benefit from the kind of start-of-adulthood assets that have until now been the preserve of higher-earning families. We hope that CTFs will make a significant contribution to the growth in a "savings habit", which many feel is not prevalent enough in the UK.

This is not just the view of engage but also of the vast majority of parents and children. Our own research has shown that 70% of parents, and 68% of current 17-19 year-olds, agree that having a lump sum paid at 18 years would have a positive impact on their child's/their life. Also, 65% of parents agree that CTFs will encourage them to save for their child's future. [13]

1. ABOUT ENGAGE MUTUAL ASSURANCE

1.1 engage Mutual Assurance is the trading name of Homeowners Friendly Society Limited (HFSL) and its wholly-owned subsidiary Homeowners Investment Fund Managers Limited.

1.2 engage Mutual Assurance is an enthusiastic provider of CTFs and has actively supported the Government's efforts to establish and promote the initiative from its earliest days.

1.3 engage Mutual Assurance is one of the most well-established direct to consumer providers of CTFs, with a market share of over 5%.

1.4 engage Mutual Assurance is based on strong values of consumer trust; being on the side of hard working families and delivering value for money financial products. We are a leading CTF product provider with the following distribution partners:

ASDAYorkshire Building SocietySkipton Building SocietyNAAFI FinancialScarborough Building SocietyAlliance and LeicesterCommunication Workers Friendly SocietyNational Deposit Friendly SocietyDarlington Building SocietyTeachers Friendly Society Access Matrix (providing CTF distribution to Housing Associations)Cambridge Building SocietyKingston Unity Friendly SocietyWanadooCatholic Building Society, Mercantile Building Society, Monmouthshire Building Society, Chorley Building Society, Scottish Building Society and Marsden Building Society—all are part of a group called Mutual One.

1.5 Our partnerships are an important means of reaching a wide range of customers through a variety of means. For example, our partnership with ASDA has ensured that we now provide CTF accounts for more than half of their eligible customers. These parents tend to be younger, less affluent and with fewer other forms of investments and insurance than other customers—meaning engage is reaching the kinds of customers the CTF was designed for and ensuring that all families have the chance to make some provision for their children.

1.6 Through our relationship with NAAFI Financial, we are able to provide Child Trust Funds to members of the armed forces, including those overseas.

1.7 Last year's All-Party Parliamentary Group for Building Societies and Financial Mutuals report noted that "Mutuals are well placed to provide financial services to citizens on lower incomes and the financially excluded. The importance of low value but consistent savings and investment policies should not be underestimated".

1.8 engage Mutual Assurance is dedicated to helping people understand the benefits of simple financial planning. This is continued through our provision of the CTF, and as we believe passionately in the benefits of modern mutuality, we strive ensure that our products are made as accessible as possible for those on lower-incomes.

2. OUR EXPERIENCE AS A PROVIDER

2.1 With CTFs it is important that Government payments are seen as the starting point—so that parents and other family members actively contribute as well. This is obviously important for the final monetary significance of the CTF at maturity, but we also believe it is an important opportunity to help families start or develop the "savings habit".

2.2 That is why engage Mutual Assurance allows contributions from £5 per month; which could be especially important to parents with more than one eligible child. Other providers may not offer this due to cost implications, highlighting the importance of modern mutuals such as engage and our commitment to improving hard-working families access to simple, value for money products that could preserve, protect or enhance their welfare.

2.3 50%[14] of engage Mutual Assurance's Child Trust Fund customers are making regular contributions to their accounts—nearly double the survey average of 26%, according to recent independent research from BDRC. [15]

2.4 By offering the option to make regular Direct Debit contributions from just £5 per month, engage believes that it is helping many parents who are busy adjusting to the financial impact of a new arrival to kick-start their child's savings, especially those who have more than one child eligible for a CTF.

2.5 engage is committed to making regular saving to CTFs as accessible as possible and has therefore been a leading provider of web-based access to CTFs.

2.6 According to the BDRC[16] research only 6% of parents applied for their child's account online, this compares with 65% of engage customers. [17]We believe this is a particularly important avenue of account application as parents of young children may not have the time available to visit a provider's branch. Equally online application can reduce some of the inertia that has caused some parents to not yet open an account.

3. WHAT WE WOULD LIKE TO SEE IN THE FUTURE

Voucher use

3.1 While the CTF has been an undoubted success, there are unfortunately too many parents not proactively choosing the provider of their child's account. We believe that this could be alleviated by reforms to the voucher system and more focused Government advertising.

3.2 We would like to see the Government considering the use of electronic vouchers rather than the current paper system. To open an account at present parents need to present their chosen provider with the paper voucher. This can often slow the application process and could even contribute to the inertia that has stopped some parents from proactively using their voucher. Electronic vouchers would facilitate internet application, an approach that we have already proved could be much more successful in generating e-take up of CTF.

3.3 Vouchers could still continue to be sent in paper form to parents, but we feel the parent should have the chance to register the voucher, and therefore an account, online without having to send the provider the paper voucher. This would increase the ease of account opening for parents during what is a particularly hectic period.

3.4 engage welcomes the Government's recent advertising drives regarding CTFs and we believe they have been successful in increasing take-up. However, we feel that this may have been further increased had the adverts made more explicit to parents the potential loss to their children if they do not proactively chose an account and investment option. We would also suggest that the Inland Revenue accompany each voucher with an independent action/decision tree that makes it clear to parents what the next steps are.

Stakeholder accounts

3.5 engage shares the concerns of others that too many parents are not giving due consideration to opting for an investment account rather than a savings based one. Independent research[18] notes that 53% of parents are opting for a savings account CTF rather than an investment based one. This could have serious implications for the fund growth within these children's accounts. When investing money for a long time, accounts that invest in equities almost always produce a better return than savings accounts; this is true for every 18-year period in the last 40 years. [19]

3.6 We understand that for some parents there are very sensible reasons for not opting for an investment account, such as bad previous experiences of investment returns. However, we feel that too many parents are not making an active decision in this area. Research has noted that only 54% of parents were offered an account choice when they applied to their chosen provider. [20]

3.7 Very few parents take advice when choosing a CTF account so it is important to ensure that parents make as informed a choice as possible through independent information. Government advertising needs to highlight that a CTF can be an investment account as too many parents assume that it is simply a basic savings account. Equally parents need to be made more aware of the potential longer-term benefits of a Stakeholder account, particularly as it has built in "lifestyling".

Helping Children get the most out of their CTF at age 18

3.8 Research commissioned by engage highlights that parents have some concerns over how their children could use their CTF amount at age 18 years—which may discourage contributions by some.

3.9 Nonetheless, we are pleased to note that overall parents were very encouraged by CTFs. We found that 70% of parents strongly or slightly agreed that having a lump sum paid at 18 would have a positive impact on their child's life, and that 65% also strongly or slightly agreed that Child Trust Funds will encourage parents to save for their children's future.

3.10 Our research[21] highlighted that most children would use such a lump sum for activities supported by parents, such as further education, savings and purchasing a car. In fact, the most popular option, voted for by 25% of the youngsters surveyed, was saving for a rainy day. Asked what they would do with a potential fund of £13,000 almost two thirds (64%) of 17-19 year olds surveyed said they would save 75%+ of their trust fund for the future; 90% said they would save over 50% of the amount.

3.11 It could be made easier for children to continue saving all, or part, of their CTF final amount at age 18 years by encouraging them to put their financial education into action; developing a lifetime "savings habit".

3.12 For example, this could take the form of the provider being able to "auto-enrol" CTFs into a savings vehicle if the child does not actively ask to withdraw the final amount, perhaps linking up with other Government or wider savings solutions such as Individual Savings Accounts (or even a pension), or providing an additional incentive for those 18 year olds who choose to continue saving.

Default account providers

3.13 Currently if the parent fails to open an account with a chosen provider the Government does so on their behalf. The Government chooses providers on a rotation basis of registered providers, allowing an even distribution of default accounts. We would like to express our support for the current system of voucher allocation. We believe it maintains the best range of choice for consumers, as well as being fair for all organisations involved. Any change to this arrangement could threaten competition and lead to a reduction in the innovation provided to the market by modern mutuals.

Further payments at secondary school age

3.14 In the 2005 Budget the Chancellor began consultation on making a further Government payment to CTFs during the child's secondary school age. engage whole heatedly supports this as we have done for their commitment to make further payments when the child reaches age seven years.

3.15 In our response to the consultation we supported this payment being made at age 11 years, for the reason that there already existed significant CTF landmarks at age 16 years to stimulate financial education, and that a flat rate payment made universally at 11 years could benefit from five more years of investment/savings growth.

3.16 Age 16 is an opportune stage to provide the child with financial education. At this stage they also gain personal investment control over the account and will therefore have to understand issues of investment risk, investment options and "lifestyling". It will also be the last chance to discuss with them at school the potential uses they may put their CTF account to following maturity.

3.17 We also believe that there is another important educational landmark at the age of 16, which could link up with the CTF. At the age of 15-16 years children are considering whether they will be staying on at school for a further two years. To encourage greater educational attainment, HMT, along with the Department for Education and Skills, has established the means-tested Education Maintenance Allowance; providing weekly payments of between £10-30 to pupils from low-middle income households who decide to remain in education (additional bonus payments of £100 are payable, based on achievement).

3.18 Any financial education given in schools at the age of 16 years (and beyond) could ask children if they would consider making weekly contributions to their CTF, or at least depositing some of their bonus payment, if achieved. This could well help encourage the "savings habit" among children.

Account availability

3.19 CTFs are currently available to children living in the UK born on or after 1 September 2002. We have therefore understandably had requests from many parents with a child born on each side of this date for their older, non-eligible, children to be provided with an account. We understand that for fiscal reasons vouchers cannot be provided for all children. However, we would like the Government to consider allowing CTFs to be provided for such children without Government vouchers—allowing parents, if they wish and have the necessary funds, to make up the difference so that both children may equally benefit from a lump-sum at age 18.

Registered parent

3.20 Under current CTF rules only one parent/guardian may register as the account-controller upon application. This means that the provider cannot issue the non-registered parent with any information on the account. While we understand that for practical reasons only one parent may have control over the investment choices of the account, we would like to see it made possible for the other parent to at least be able to receive progress reports on the account—making CTFs more compatible with modern family arrangements.

Contribution cap

3.21 Currently parents can contribute a maximum of £1,200 into their child's CTF per year. We understand the need for a cap due to the tax privileges of a CTF. To ensure that this cap remains as valuable, we would like to see the Government link its value to a relevant form of price index.

November 2005