House of Commons - Treasury

Select Committee on Treasury Twelfth Report

4 Saving for all

88. The Treasury's account of measures it had taken and intended to take to tackle financial exclusion which was published in December 2004 identified an absence of savings as an integral element in financial exclusion.[169] The Treasury set out measures in the field of savings that were being taken that assisted in combatting financial exclusion, including the creation of Child Trust Funds, the Saving Gateway and the stakeholder suite of low-cost savings and investment products due to become available from April 2005.[170] However, the overall approach in the Treasury's document of December 2004 and the Government's financial inclusion strategy as it has evolved since then has focused its attention on three main themes—banking services, credit and advice—and has not put great emphasis on saving.

89. Evidence we have received indicated that a full picture of the challenges of financial inclusion required fuller consideration of saving for all as an essential and integral element of a strategy to promote financial inclusion. The IPPR suggested in evidence that

savings have an important role to play in widening financial inclusion. First, they provide a financial buffer and therefore reduce the need for expensive credit. If people have savings they are less likely to face a situation in which they need affordable credit but have no access to it. Second, the process of accumulating savings itself draws people into banking services and increases their familiarity with financial concepts.[171]

90. The Government, in its own written evidence, recognised that "saving and asset ownership have a critical role to play" in that they opened up opportunities to people which can change the way they think about and plan for the future. The Government also acknowledged that "saving allows people to manage their finances both day-to-day, over the medium term and in preparation for retirement".[172] Mr John Hutton MP, the Secretary of State for Work and Pensions, noted in early May 2006 that

promoting financial inclusion is crucial to overcoming poverty. Increasingly inequality in asset-ownership threatens to become the social divide of the future.[173]

91. A recent FSA survey found that 43% of people had no savings at all, with a further 15% of people only having savings of less than half their monthly income.[174] Although some evidence observed that financially excluded households would typically not be able to afford to save,[175] we also received suggestions the issue was more nuanced: while some households could not afford to invest long-term in inflexible products that would not give them access to their money when they needed it, many households undertook shorter term and more flexible forms of saving. Mr McAteer identified what he saw as some of the reasons why savings were so limited for many people:

I think we have done a fairly big programme of research to try and understand why people do not save for the future, and so on, and our research tells us that the main reasons why people are not saving are basic unaffordability compounded by the record levels of personal debt and the housing market, and so on. We think that the retail sector is cost-based and does not allow us to reach those parts of the market that should be saving, so there are economic inefficiencies built into the system.[176]

92. Ms Whyley noted that long-term saving for the future was not "on the radar of people who are financially excluded and on very low incomes, and that is probably quite appropriate. I think the sort of saving they are looking to do is the day-to-day saving so that they can smooth their income a bit and, if they are able, putting a little bit more aside for the rainy day" or unexpected expenditure. She drew attention to credit union initiatives where people had discovered that they could afford to save even small amounts. She argued that the problem lay in the lack of appropriate products for those wishing to save small amounts.[177]

The basic advice regime

93. The Treasury's description of the linkage between savings and financial inclusion in December 2004 placed emphasis on the role that could be played by the new suite of stakeholder savings and investment products in the marketplace from April 2005.[178] The basic advice regime for the sale of stakeholder products was introduced by the FSA at that time. This was intended to be "a streamlined and proportionate regime for the regulation of advice on the sale of the Government suite of 'stakeholder' savings and investment products which is designed to support firms ability to sell stakeholder products to lower income consumers more cost effectively".[179] Basic advice is a short, simplified form of savings and investment advice. Consumers are taken through a series of pre-scripted questions to identify their financial priorities and determine whether a product from within the range of low-cost regulated saving and investment stakeholder products is suitable for the customer. The suite of stakeholder products currently comprises five types of products, each with a set of specific characteristics defined by regulation. These are the cash deposit, the medium term investment product, the smoothed investment fund, the Stakeholder pension and the Child Trust Fund.

94. Which? saw "no evidence that the Basic Advice regime is encouraging retail insurance firms to actively target consumers on lower-median incomes".[180] Mr Tiner admitted that "very, very few financial institutions" had signed up to offer products under the basic advice regime.[181] The FSA submitted a list of the 46 organisations that had signed up to offer the basic advice regime. Of these, there was only one major insurance company and no major high street banks, with the overwhelming majority made up of small Independent Financial Advisers.[182]

95. The FSA told us that "broadly, the feedback from the industry has indicated that we have created a regime that is proportionate to the products being sold".[183] This assessment was disputed by financial services firms and organisations that submitted evidence. The ABI were disappointed that "the FSA's basic advice regime, designed specifically for the sale of stakeholder products, has retained many of the high-cost features of the current 'full advice' regulatory regime. The original vision—of simple, reliable products sold cheaply within a light-touch regulatory regime—has been lost."[184] Norwich Union told us that "further layers of complexity were added to the model which increased costs. It is therefore hard to deliver within the price cap and has limited the use of the model by providers and distributors".[185] Mr Tiner did not agree with the ABI's views. He thought that "the full advice, fact find and advice process that takes two and a half hours is now down to 22 minutes; that is quite a significant shift".[186]

96. We received evidence that the restricted range of investment products offered through the basic advice regime could also be a factor behind the low take-up of the regime. Mr Dyfrig John, Chief Executive of HSBC, noted that "when you are giving advice you generally wish to give some options to the customer". HSBC told us that they "do not offer basic advice or a stakeholder investment product as we believe that the limitations of basic advice, and the restricted product range for investments under basic advice (one product) do not meet important customer needs".[187] Mr James Crosby, Chief Executive of HBOS, claimed that "for a number of years [HBOS] have provided simple investment products with simple charges, and we provide full advice is a superior proposition on those basic products than stakeholder based advice".[188] The restricted range of products available under the basic advice regime, combined with the perception that the scheme has not been as light touch as expected, has led to a low number of major providers introducing the basic advice regime. We recommend that the FSA conduct a full review of the basic advice regime to examine what factors have led to such a low take-up of the scheme by the financial services industry and how the regime can be reformed to increase take-up. In making this recommendation, we do not wish to imply that the problems lie solely with the design of the regime. Problems with basic advice are inseparable from issues relating to the structure of the industry itself.

A market-led solution?

97. Many of the issues relating to financial inclusion that we are examining are related directly to the provision of products by financial services providers in a competitive market. Accordingly, we have given careful consideration as to whether the current weaknesses of saving for all can be remedied by a market-led solution.

98. In both the last Parliament and the current Parliament the Treasury Committee has examined the challenges facing the long-term savings industry. In 2004, the then Treasury Committee concluded that "the bear market has exposed a catalogue of problems and scandals that has left a large body of savers feeling disillusioned with the long-term savings industry".[189] The disconnection between many savers and the savings industry is closely related to the problems that came to the fore at the end of the 1990s and at the start of the current decade when a commission-driven sales process led to serious doubt being cast over the impartiality and value of savings advice. Our predecessors noted in 2004 that the commission-driven distribution model creates a "negative image ... in the eyes of some potential savers".[190]

99. More recent developments have reinforced the impression that the problems of the long-term savings industry relate not simply to perceptions among savers and potential savers, but also to the overall viability of the business model of the industry, and of the life office business model in particular. In March 2006 Mr Trevor Matthews, Chief Executive of UK Life and Pensions at Standard Life, stated that "our basic business model is flawed".[191] In April 2006 Mr Ned Cazalet of Cazalet Consulting cast doubt on the viability of this model in evidence to us. He told us that this model relied on the payment of commission to intermediaries for new sales, which gave those intermediaries an incentive to move business from one provider to another, a process which generated costs to providers without creating new business. He estimated that, in four years, insurance companies had spent about £17 billion on trying to obtain pensions business, with little to show for it except business moved from one company to another before it could become profitable. Mr Cazalet thought that "this model is economically defunct ... crazy ... hugely loss-making and ... unsustainable".[192]

100. More recently, in September 2006, Mr Cazalet indicated that, of £121 billion in new single premium business received by the life offices over the preceding five years, £119 billion could be accounted for by recycling or "churning" of business from other offices, rather than the generation of new business.[193] On the same occasion, Sir Callum McCarthy, Chairman of the FSA, said:

we have at present a business model which is based on incentives which produce results which are unattractive to reputable providers, unattractive to their customers, and whose benefits to intermediaries are questionable. What are we going to do to change it? … But the solution to the problem must lie principally with the industry. And one of the key questions that must be addressed is this: who is the real customer of the provider—is it the policyholder who invests their money in the hope of seeing a decent return? Or is it the distributor, who in the main, secures access to the end-consumer for the provider? If, as many commentators would have it, it is indeed the distributor who is the actual customer of the provider, this raises all manner of difficulties which further perpetuate the shortcomings of the current model—particularly with regard to treating the real customer fairly. I understand well that many are frustrated by what they describe as the 'commission stranglehold' that the advisory community enjoys, but so long as providers continue to compete over the attractiveness of their commission proposition, the fundamental flaws in the present business model will remain.[194]

101. On 24 October 2006, Sir Callum told us that he thought that many in the industry now recognised that the current business model was "deeply unattractive" for both businesses and consumers and were trying to change the situation. He envisaged the possible emergence of new providers as one way in which the market might change.[195]

102. We are not concerned in the current Report with the general viability of the long-term savings industry, although this is a matter to which we may well return. We are concerned with the narrower question of whether it is fit for purpose in terms of providing appropriate savings opportunities for the less well-off. Our inescapable conclusion is that it is not fit for purpose. The market may change in the future, but until it does, it is likely that non-market-led solutions will also be necessary to solve the problems of savings incentives and opportunities for the less well-off.

The Saving Gateway

BACKGROUND

103. One of the ways in which the Government can support saving is by "matching"—by providing a cash contribution to individual savings. One method of "matching" is to provide tax relief at source for personal and stakeholder pensions. Another method of "matching" is the so-called Saving Gateway which was launched in April 2001 and which was intended to provide lower-income earners incentives to save by offering to match savings with additional contributions paid by the Government.[196] An initial pilot stage was established in 2002 under which the Government matched pound-for-pound the savings of low-income households up to a limit.[197] In December 2004, the Government announced that a second Saving Gateway pilot would begin in 2005.[198]

104. The policy is intended to increase rates of saving and asset ownership amongst eligible families and to explore how Government matched funding and the provision of financial information can promote saving amongst those who do not usually save.[199] The Treasury told us that "matching, as an alternative to tax relief, provides a more understandable, transparent and effective framework of support to savers, and … provides greater incentives for those on low incomes who often cannot benefit from tax relief".[200]

EVIDENCE FROM THE PILOTS

105. The Treasury provided further information about what had emerged from the two phases of pilots. In the first phase, savings were matched at a £1 for £1 rate and people could save up to £25 a month and a total of £375 over the 18 month period. To be eligible to open an account, people had to have an income of £11,000 per year or less, or if they had children or a disability, £15,000 a year or less. According to the Treasury, a report on the project had shown

some very positive findings on saving characteristics of low income participants. Account holders saved a total of around £475,000 with half of participants (52%) achieving the maximum amount of £375, and 70% managing to save over £375. The final evaluation confirmed matching in particular can double saving among low-income groups (average individual net saving increased from £150 to £300 over 18 months) and encourage genuinely new savers and new saving. Before the pilot, 56% had no money saved in a savings account and 25% did not have a current account at all.[201]

106. Professor Kempson, who undertook the report, told us that the first pilot phase had been a "great success" and that people had been attracted to this account because it "was clearly designed for those on low incomes and this helped overcome their resistance to deal with the banks".[202] Ms Whyley stressed that the first pilot phase of the Saving Gateway was "simple" and "easy to communicate" and provided a real tangible benefit to saving rather than spending.[203] HBOS, which had administered the first pilot phase of the Saving Gateway through their branch network, told us that their overall experience of the pilot had been positive, but had raised issues arising from the fact that a higher than normal number of customers had difficulty satisfying the anti-money laundering/identification requirements and also noted that branch capacity was stretched due to the very high take-up rates and the lack of telephone or internet application processes.[204]

107. The Treasury explained that the second pilot of the Saving Gateway was much larger that the first, with a value of £15 million. Account opening which began in March 2005; by Summer 2005 all 22,000 accounts had been opened. Accounts will operate for 18 months and Halifax is providing the banking facilities in six areas. The second pilot is testing a variety of different incentive structures. As with the first pilot, funds only become available at the end of the 18-month account. Eligibility criteria relating to age, receipt of qualifying benefits and level of earnings.[205] Table 1 gives further information about the arrangements in the different pilot areas:

Table 1: Savings Gateway second pilot areas

Location Match Rate* Monthly savings limit Maximum Match Maximum Savings

Manchester £1 : £1 £25 £400 £400

South Yorkshire £1 : £2 £25 £200 £400

East Yorkshire** £1 : £2 £25 £250 £400

Cumbria £1 : £2 £50 £400 £800

East London £1 : £5 £50 £160 £800

Cambridgeshire £1 : £5 £125 £400 £2,000

Source: Ev 34

Note: (* Match Rates are £ Government Match : £ Participant's saving) (** £50 initial endowment) Note: All pilots allow savings in 16 out of 18 months.

108. Professor Kempson expressed some reservations about the second pilot because it seemed to have

lost the simplicity and focus of the first one—which was clearly aimed at people on low incomes and had a match rate that was easy to understand. While we welcome exploration of matching as an alternative to tax relief generally, we are concerned that the Saving Gateway may, like ISAs and Stakeholder Pensions, fail to attract people on low incomes.[206]

The IPPR noted that eligibility for the second pilot had been extended "upwards to an individual income under £25,000, or household income under £50,000. The arguments in favour of a matched savings account are far weaker higher up the income distribution."[207]

COMPARISONS FROM ABROAD

109. In the United States the Individual Development Account (IDA) has been introduced. These are matched savings accounts to enable low-income families to save towards a specific goal such as buying their first home, paying for college education, or starting a small business. The matched funding is provided through a variety of government and private sector sources, including charities and employers. However, the programme is relatively small, with around 26,000 active accounts at the end of 2004.

110. In the Republic of Ireland, the Special Saving Incentive Accounts (SSIA) scheme was introduced in 2001. Accounts could be opened between 1 May 2001 and 30 April 2002. The scheme allowed savers to invest in their SSIA account on a monthly basis for a 60 month period. The Irish Government provided a top-up of 25% of the value of subscriptions made in each month. At the end of the five year period when the account matures, the saver is entitled to all the funds in the scheme less an exit tax of 23% levied on the profit from the investment of both the saver's subscriptions and the Government contribution. The accounts were available to all and 1.17 million people applied (approximately two-thirds of the Irish workforce). Data indicates that 28% of account holders were on an income of less than €20,000 (£14,000) a year.[208] In the 2006 Finance Act, the Irish Government introduced an incentive for those earning less than €50,000 a year to reinvest some or all of their SSIA funds in a pension product when their SSIA account matures.[209] There remain questions about the extent to which the Irish scheme was successful in encouraging new saving as opposed to the transfer of existing savings into the SSIAs and it may be too soon to draw definite lessons from experience in the Irish Republic for policy in the United Kingdom

CONCLUSIONS

111. As part of its inquiry into the 2004 Pre-Budget Report the then Treasury Committee explored with the Chancellor of the Exchequer whether it would have been better to extend the Saving Gateway nationwide after the success of the first pilot phase in promoting sustainable saving and stated that it looked forward "to the Government moving as quickly as possible, subject to evaluation of the initiatives, to national availability of the Saving Gateway scheme".[210] There is evidence from abroad and from the emerging findings of the Saving Gateway pilots that matched savings accounts such as those piloted as part of the Saving Gateway provide a clear and understandable framework of support for savers. They also provide clear incentives for those on low incomes who often cannot benefit from tax relief. The first pilot phase of the Saving Gateway showed that matching can encourage genuinely new savers and increased savings. We are concerned that the valuable lessons from the first pilot phase of the Saving Gateway must not be overlooked and that the Gateway must be promoted nationwide at an early stage as a framework for savings for all, although we recognise that in any national roll-out the Government will need to consider the overall match rate, which income levels the scheme should be focused on and the overall cost of the scheme. We recommend that the Government examine ways to encourage the development of matched savings accounts with contributions from the private and charitable sectors.

Capital limits for benefits

112. We received evidence drawing attention to the relevance to financial inclusion of capital limits for benefits. The Government stated that its objective in this area was to ensure that "benefit arrangements strike a sensible balance between providing targeted State support and not unfairly penalising those who have acted responsibly by saving".[211] The DWP told us that from April 2006 the Capital threshold in Income Support (IS), income-based Jobseeker's Allowance (JSA(IB)), Housing Benefit and Council Tax Benefit (CTB) will increase from £3,000 to £6,000 and that the upper capital limit in IS and JSA(IB) will increase from £8,000 to £16,000. The total cost of these changes is estimated at £15 million each year.[212]

113. Citizens Advice welcomed these changes, but noted that "the rules on 'tariff income' remain the same; that is that every £250 of savings over the £6,000 is assumed to produce a weekly income of £1. These rates of return are unrealistic. Currently, once a person has £6,000 in capital, they are assumed to be receiving a rate of return of 10.4%. The base rate is 4.5%. From April 2006, the same tariff income will apply on capital over £9,000, even after the capital limits have risen. In contrast, the tax credits system takes into account actual income from savings and investments. This is a much fairer system, which should be adopted by the benefits system".[213] We welcome the increase in the capital allowances for benefits. We recommend that the Government review the rules on tariff income to ensure that the withdrawal rates for additional saving above capital allowances continue to encourage households on benefits to accrue additional saving.

Housing associations savings with rent accounts

114. Providing easy and accessible savings products was seen in evidence as an important factor encouraging the financially excluded to save. Some housing associations have begun to offer the ability for tenants to save alongside the collection of rent.[214] However, if savings accrued by tenants increase to over 1% of turnover then, under the Financial Services and Markets Act 2000, the housing association would need to be authorised by the FSA as a deposit-taker.[215] We recommend that the Government consult on the case for an exemption for Registered Social Landlords from the FSMA requirements to register as a deposit-taker. The Government should consider whether the appropriate degree of regulation could be accomplished through other bodies such as the Housing Corporation.

Savings and other aspects of financial inclusion

115. We received evidence which highlighted linkages between saving and other aspects of financial inclusion. The Financial Inclusion Taskforce told us that it recognised the value of helping people to accumulate small levels of savings as part of tackling financial exclusion in particular as a key tool to avoiding over-indebtedness.[216]

116. It was suggested that the key to freeing income up for saving for financially excluded people was to tackle some of the other costs of financial exclusion. Ms Davenport of Leeds City Credit Union believed:

it is not true that they cannot afford to save. It is just that usually they are paying out so much to doorstep lenders and other organisations that they do not have any free income. If we can free up their income by giving them a more affordable loan, then they can and do [save]. I think [credit unions] have proved that.[217]

Mr Lyonette noted that "only when people actually start to save a small amount of money when they have been paying high cost credit, at that point, that people break the cycle of taking more and more high cost loans".[218] ABCUL told us:

Southwark credit union in London started offering a benefit service to members in 2005. By June 2005 235 members were having a total of £344,950 in benefits paid into the credit union and £32,149 or 9.3% of that was retained by the credit union as savings. Other credit unions are reporting between 5 and 10% retention of benefits.[219]

117. East Lancashire moneyline (a CDFI) has developed a partnership with HBOS which enables individuals to open a saving account with savings collected alongside loan repayments; it was suggested that the appeal of this arrangement was the ease of saving.[220]

Conclusions

118. Saving is not accorded the same priority in the Government's strategy for promoting financial inclusion as credit, advice and banking. The evidence we have received suggests that savings, and the problems of making saving worthwhile and beneficial for those on lower incomes, are integral to any effective strategy on financial inclusion. In our subsequent Report on the roles of the Government and the Financial Inclusion Taskforce and the overall strategy, we will consider further whether the terms of reference of the Taskforce ought to be amended to include access to savings and the role of savings clubs. In the present Report, we have set out a series of recommendations designed to ensure that saving is accorded a higher priority in the context of financial inclusion and that the particular needs of savers and potential savers are at the heart of Government actions to combat poverty and financial exclusion.

169 HM Treasury, Promoting financial inclusion, December 2004, Chart 1.1 Back

170 Ibid, paras 1.14-1.16 Back

171 Ev 358 Back

172 Ev 344 Back

173 Speech to Fabian Society, 10 May 2006 Back

174 FSA, Levels of financial capability in the UK: results of a baseline survey, March 2006, p 43 Back

175 Ev 249 Back

176 Q 122 Back

177 Ibid Back

178 HM Treasury, Promoting financial inclusion, para 1.14 Back