Memorandum submitted by ippr
ASSET-ACCUMULATION
AND FINANCIAL
INCLUSION
Summary
i. Assets and saving have an important role
to play in widening financial inclusion, and financial inclusion
can in turn encourage saving and asset-accumulation. If people
hold assets they are less likely to face a situation where they
need affordable credit but have no access to it. Accumulating
an asset itself imparts knowledge about basic financial concepts.
Government policies that encourage saving and asset accumulation
therefore need to play an important part in any effort to combat
financial exclusion. We suggest three priorities for the Treasury
Select Committee in tackling financial exclusion.
1. ROLLING OUT
A SAVING
POLICY FOR
THOSE ON
LOW INCOMES
ii. The Saving Gateway needs to expand beyond
a pilot in order to have a national impact. The exact shape can
be decided in the light of the evaluation of the current pilot,
but there is a strong need for some form of asset-building policy
for those on low incomes. Asset accumulation can play an important
role in financial inclusion, and the Saving Gateway is an innovative
and effective way of helping people onto the savings ladder.
2. FOCUSING POLICIES
WHERE THE
NEED IS
GREATEST
iii. Political and other pressures risk
diluting the progressive stance of financial inclusion and asset
policies. First, the Saving Gateway has seen its income eligibility
greatly expanded, which could shift the focus from of its core
aim. Second, top-ups to the Child Trust Fund need to be targeted
where they would have the greatest impact. Refocusing top-ups
at later ages, to give a bigger share to children from poorer
families, could make a significant different to outcomes at 18
without extra cost to the government (see our submission Maxwell
and Sodha 2005).
3. SIGNIFICANT REFORM
OF THE
SOCIAL FUND
iv. The Social Fund, the government's "lender
of last resort", is in urgent need of reform. It has inadequate
resources, leading it to turn down families in desperate circumstances.
This is not simply a concern for the Department for Work and Pensions:
as well as causing immediate deprivation, the inadequacy of the
Social Fund has knock-on consequences for unsustainable debt and
financial exclusion.
v. Eligibility for Social Fund loans is
tied to the duration of benefit claims rather than being based
on income level. Only those who have been in receipt of Income
Support, income-based Job Seeker's Allowance or Pension Credit
for at least 26 weeks are eligible for Budgeting Loans. As a consequence,
some in genuine need of a loan have their applications automatically
rejected.
vi. Reform of the Social Fund should move
it beyond providing a short-term palliative, to playing a more
active role in reducing future need for affordable credit amongst
those it lends to. For example, social fund loans could be linked
to financial education.
1. INTRODUCTION
1.1 In its 2004 Pre-Budget Report, the government
announced its "ABC" priorities for tackling financial
inclusion: advice, banking and credit. These are all important
in reducing financial exclusion. But the `ABC' should not be focused
on to the exclusion of other policies that might contribute to
financial inclusion. These include policies aimed at increasing
saving and asset-accumulation amongst the financially excluded,
and the Committee is right to consider both together as part of
this inquiry.
1.2 This submission highlights three priorities
for the Committee's inquiry:
1. Rolling out a savings policy, such as
the Saving Gateway, for those on low incomes.
2. Focusing policies where the need is greatest.
3. Significant reform of the Social Fund.
2. ABOUT IPPR
2.1 The Centre for Asset-Based Welfare at
the Institute for Public Policy Research (ippr) is the foremost
UK research centre for the study of how savings and assets affect
welfare. Evidence suggests that holding assets may improve life
chances and provide a springboard out of poverty. The Centre's
aim is to undertake and commission research into why and how this
happens, and develop policies to bring the benefits of asset ownership
to all.
RECENT PUBLICATIONS
2.2 Relevant recent publications include:
The Citizen's Stake (2006)
Can and should asset-based policies such as
universal capital grants the basis for a more egalitarian form
of market economy? This book explores how universal asset policies
could be developed and funded.
Top Tips for Top-Ups: Next Steps for the Child
Trust Fund (2005)
Low-income parents will be able to contribute
less to the Child Trust Funds of their children than those on
higher incomes. But it is precisely these children, who have less
of a family asset base to draw upon on reaching adulthood, who
most need assets. Government top-ups to the Child Trust Fund need
to be increasingly progressive as children grow older to reflect
this.
Child Trust Funds and Local Authorities: Challenges
and Opportunities (2004)
This paper considers how local authorities might
consider using Child Trust Funds to protect looked-after children,
promote active citizenship or combat financial exclusion. It recommends
that local authorities should £50 each year to the CTFs of
children in their care.
Beyond Bank Accounts: Full Financial Inclusion
(2003)
Many people's opportunities are limited and
their poverty deepened through their experience of financial exclusion.
This book suggests a second generation of financial inclusion
policies.
Ownership For All (2000)
This report was the first to recommend asset
accounts for children and a matched savings scheme for those on
low incomes, both of which were subsequently adopted by government.
FORTHCOMING RESEARCH
2.3 Assets and Life Chances
It is argued that holding an asset improves
life chances, allowing people to take productive risk. How strong
is this effect, and how does it operate? We are working with the
Centre for the Analysis of Social Exclusion at the London School
of Economics to track the effects of asset ownership on life chances,
with new qualitative and quantitative research.
Building the Assets Ladder
This project will link arguments in favour of
asset-based welfare to previously unconnected frameworks in behavioural
economics and social policy, exploring the nature of poverty and
how decisions are made. It will consider the next steps for the
Saving Gateway and Child Trust Fund
Risk and Resilience
Poverty brings an increased risk of income drops
and unexpected expenses. The concentration of risk can in turn
deepen the persistence and severity of poverty. How does the state
contribute to risk and how can the negative impact of risk be
reduced? We will look at labour market policies, benefit transitions
and coping mechanisms.
3. MAINTAINING
THE FOCUS
OF ASSETS
AND SAVING
POLICIES
3.1 By focusing saving policies on those
on lower incomes and the financially excluded, these policies
will have the maximum impact on reducing financial exclusion.
Financial inclusion can encourage saving and asset-accumulation.
But the relationship also works the other way. 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.
The Saving Gateway
3.2 There still is not a nationwide savings
policy that works for those on lower incomes. Currently, government
savings incentives in the UK mostly take the form of tax relief,
through saving into ISAs and pensions. As a result incentives
disproportionately go to those on higher incomes, who pay more
tax. Basic rate tax payers who do not pay Capital Gains Tax do
not benefit from the tax relief delivered through ISAs.
3.3 The Saving Gateway pilots are exploring
how savings could be matched to encourage a savings habit. It
is now on its second pilot, but some of the changes between the
first and second pilots suggest that without close scrutiny it
could lose its focus on those on low incomes. Eligibility for
the first pilot was defined as the receipt of key benefits (such
as Income Support or Incapacity Benefit), or working at least
16 hours per week and having a household income under £11,000,
or £15,000 if the participant had children or a disability.
In the second pilot, this was 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.
3.4 Yet the evidence from the first pilot
is that matched savings schemes targeted at those on low incomes
can be effective (Kempson et al 2005). It found that matched
incentives did encourage new saving by those on low incomes. Deposits
were made in 71% of months, with an average monthly deposit of
£16. These deposits mostly represented new saving: 94% of
participants said they saved from their regular incomes, with
only 5% transferring money from other savings and 3% borrowing
from other sources. The evaluation of the second pilot will add
to this evidence base. Significantly, it will allow us to draw
conclusions about the effects of different match rates on savings.
3.5 The Saving Gateway matched incentives
need to be focused on those on the lowest incomes, who need the
incentives to save, and who do not qualify for the current tax-based
incentives to save into ISAs and pensions. .A potential national
roll-out of the Saving Gateway raises the following questions:
1. What level of matching is required in
order to efficiently encourage those on lower-incomes to save?
Evidence from the second pilot will allow us to compare the effects
of different match rates on saving.
2. What should the income threshold be? The
scheme should be focused on those who need incentives to save.
3. Should there be two or more rates of matching
dependent on income level? There could, for example, be a more
generous match rate for those on the lowest incomes, and a less
generous rate for those who are better off.
4. How should a national matched-saving scheme
link into ISAs and the rest of the current UK saving environment?
The Child Trust Fund
3.6 Child Trust Funds could do much to combat
financial and asset exclusion. But, like for the Saving Gateway,
further top-ups must be focused where they are needed most if
they are to make the maximum possible impact.
3.7 Recommending that later CTF deposits
become more progressive would be an important and timely contribution
from the Committee: in a consultation launched at the Pre-Budget
Report 2004, the government suggested topping up the CTFs of children
aged seven with £500 for the poorest 40%, and £250 for
the rest. A consultation launched at the Budget 2005 asked for
views on the size and progressivity of top-ups during secondary
school.
3.8 As children get older, the arguments
for focusing top-ups on children in poor families get stronger.
An older child in poverty is more likely still to be in poverty
at 18 than is a younger child. And, as children get older, the
purpose of top-ups shifts from encouraging parents to open an
account and save money (which could be done with flat-rate deposits),
to providing an asset for early adulthood (which demands progressivity).
3.9 More progressive payments are also required
to combat the extremes of wealth inequality. Some children will
have access to considerably larger CTFs than others, as their
parents will be able to save more. At the limit, an account with
the maximum £1,200 annual saving could have a value 14 times
greater than one that only receives the larger government top-ups:
if only £250 is given in payments at each age, but the parents
save the maximum £1,200 per year, the account would be worth
£31,570 at 18. Government deposits of £500 at birth,
seven and 12 would be worth £2,270. This assumes annual real
growth of 3.5%.
3.10 The government's planned top-ups to
CTFs could be rebalanced to have a greater impact at the same
cost, and still ensure that all children receive some payment.
Top Tips for Top-Ups (Maxwell and Sodha 2005) recommended
that top-ups should be rebalanced as children get older in the
following cost-neutral way:
IPPR RECOMMENDATIONS
FOR TOP-UPS
TO CHILD
TRUST FUNDS
For children aged 7:
— Poorest 20%: £650 top-up
For children aged 11:
— Poorest 20%: £800 top-up
Source: Maxwell and Sodha (2005)
These would cost the same as giving £500
to children in the poorest 40% of families, and £250 to the
rest.
The poorest 20% are in families with gross household
income less than £17,600. The next 20% are in families with
gross household income between £17,600 and £26,800 per
year. The rest have gross household income above £26,800
per year. These figures have been provided by the Department of
Work and Pensions, based on the Family Resources Survey 2003-4.
They have been uprated by 8.16% to take account of earnings growth
between 2003-4 and 2005-6, and include tax credits and other benefits.
3.11 In addition, local authorities should
contribute £50 each year to the CTFs of children in their
care as part of their duty as corporate parents (Maxwell 2004).
Such a policy would be low cost, but the potential benefits it
would deliver would be significant.
4. SOCIAL FUND
REFORM
4.1 The Social Fund is in urgent need of
major reform. One of the positive effects of assets is to reduce
the need for affordable credit. But there will always be those
who have access to no assets at all, and who need access to affordable
credit at certain points. For these, the Social Fund should play
an important role as a `lender of last resort' through its Budgeting
Loans. Currently the Social Fund is failing to fulfil this role.
Numerous studies have highlighted problems in the way that the
Social Fund works (for example, Collard and Kempson 2005; Regan
and Paxton 2003; Barton 2002; Social Security Select Committee
2001).
4.2 Although the government has increased
the amount of money available for grants and loans since 1997,
the Social Fund still has inadequate resources to meet the need
for affordable credit. In 2003-04, around a quarter of Budgeting
Loan applications were turned down. Analysis has suggested that
the extra £90 million that will be injected into the Fund
over the next three years would need to be doubled in order to
meet the needs of those in the lowest household income quintile
with no full-time earnings (Collard and Kempson 2005).
4.3 Eligibility for the fund is linked to
benefit eligibility rather than income level. Applicants must
have been in receipt of Income Support, income-based Jobseekers
Allowance or Pension Credit for at least 26 weeks. Consequently,
some of those on low incomes but who have not been in receipt
of benefits for this length of time have their applications automatically
rejected.
4.4 An unreformed Social Fund also misses
the chance to make a larger impact on financial exclusion. When
someone approaches the Social Fund, this is an instance in which
the state comes into contact with the financially excluded and
the hard to reach, and each time turns them away empty-handed
or with no more than a short-term palliative. Reform could explore
how this contact could be made more productive, to make a longer-term
difference to the capabilities and inclusion of users.
5. CONCLUSIONS
5.1 Policies that encourage saving and asset-accumulation
have an important role to play in helping to combat financial
exclusion. We have highlighted three priorities for tackling financial
inclusion:
1. Delivering a national policy that helps
those on low incomes on to the savings ladder.
2. Focusing assets and saving policies on
those on lower incomes. This means making sure that a successor
to the Saving Gateway programme is not hijacked for higher income
groups, where the rationale would be far less clear; and making
more targeted top-ups for Child Trust Funds.
3. Improving access to affordable credit
through significant reform of the Social Fund.
6. FURTHER INFORMATION
6.1 Further information about our work is
available in our publications, from our website (www.ippr.org/assets).
REFERENCES
Barton, Alan (2002), Unfair and Unfunded:
CAB Evidence on What's Wrong with the Social Fund, London:
National Association of Citizens Advice Bureaux.
Collard, Sharon and Elaine Kempson (2005), Affordable
Credit: The Way Forward, Bristol: The Policy Press.
HM Treasury and Inland Revenue (2003), Detailed
Proposals for the Child Trust Fund, London: HMSO.
Kempson, Elaine, Stephen McKay and Sharon Collard
(2005), Incentives to Save: Encouraging saving among low-income
households, Bristol: Personal Finance Research Centre.
Maxwell, Dominic (2004), Child Trust Funds
and Local Authorities, London: ippr.
Maxwell, Dominic and Sonia Sodha (2005), Top
Tips for Top-Ups: Next Steps for the Child Trust Fund, London:
ippr.
Regan, Sue and Will Paxton (2003), Beyond
Bank Accounts: Full Financial Inclusion, London: ippr.
Social Security Select Committee (2001), Third
Report of the Social Security Select Committee Session 2000-2001
on the Social Fund, London: HMSO.
January 2006
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