Select Committee on Treasury Thirteenth Report

3  Saving and financial inclusion

Information on saving levels and patterns

34. Saving matters at both a macroeconomic level and a microeconomic level. At the macroeconomic level, savings—by the household sector, government and the corporate sector—provide some of the necessary funds to finance investment.[98] Dr Martin Weale of the National Institute of Economic and Social Research has told us of his concern that Government economic statements do not address the question of "whether the country's overall level of saving is adequate".[99] During this inquiry, we have examined both the current measures of saving in the economy and the question of how they relate to the reality of asset ownership, particularly in the context of financial inclusion.

35. There are two main measures of saving in the economy. The first is the personal sector saving ratio, which is a residual measure of the personal sector's total income minus its total spending and captures the flow of net saving out of current income.[100] This saving ratio declined from a peak of 13.5% in the first quarter of 1992 to 2.1% in the first quarter of 2007.[101] However, the principal influence on the personal sector saving ratio over the past two decades has been changes in levels of borrowing, which in turn have been closely linked to house prices, and the personal sector savings ratio is not an accurate measure of the acquisition of conventional savings vehicles by the personal sector.[102]

36. The second measure of saving in the economy is national saving, which measures the difference between income and the amount spent consuming goods and services across government and the corporate sector as well as households. For the past 20 years, national saving in the United Kingdom has been insufficient to finance domestic investment, and so the United Kingdom has been borrowing from overseas—running a current account deficit.[103] The Minister was not concerned at the level of national saving, arguing that higher levels of such saving were often linked to consumer distress and negative equity. He considered a low level of national saving to be a reflection of economic success and stability.[104]

37. Both the personal sector saving ratio and national saving are potentially misleading as guides to levels of individual and household savings. A variety of information is available on this subject. In March 2006, the FSA published the results of a survey suggesting that only 43% of people in a sample of the United Kingdom population held no savings at all.[105] Latest data from the 2005-06 Family Resources Survey provide slightly different figures on a household basis, with only 28% of households reported as having no savings.[106] Liquid financial wealth in the economy is unevenly distributed, with many households, particularly those on low incomes, having little or no savings.[107] According to Department of Social Security survey data in 1998-99, 46% of households earning less than £200 per week had no savings at all.[108] More recent figures from the 2005-06 Family Resources Survey give a similar proportion of 43% of households with no savings, but this time for households earning less than £300 per week.[109] Financial Inclusion Taskforce data also suggest that absence of savings occurs disproportionately among the unemployed, benefit recipients and those in rented social accommodation.[110]

38. There are several reasons why such information on individual and household savings should be treated with caution. More people save at some stage than is captured by surveys concentrating on savings at a particular time: an analysis of the British Panel Survey found that only 18% of people had not saved at all between 1991 and 2000.[111] Professor Kempson cautioned that some analysis failed to capture saving outside formal savings accounts.[112] Some participants in the evaluation of the second Saving Gateway pilot project described themselves as "non-savers", but were saving regularly in more informal ways—for example, through current accounts or "kitties" with friends or families.[113]

39. One of the conclusions of the Pomeroy Review of Christmas saving schemes was that there was insufficient information about informal forms of the saving of the kind that tended to be used by people on low incomes. The Pomeroy review recommended that the Government take steps to improve the data available on the hamper scheme market—which we consider further in the next chapter of this Report—and other forms of informal saving, possibly through the Family Resources Survey or the new Wealth and Assets Survey.[114] In response, the Government has announced that "the new Wealth and Assets Survey will collect information on informal saving" and that the Government "will use the first results of the survey, due by the end of the year, to inform any further data gathering".[115]

The value of saving in the context of financial inclusion

40. Although full information on the extent of individual saving may be lacking, the value of saving is clear. The Government's overall objective for saving is "for more people to be able to save enough for

41. Lower income households face greater risks arising from having insufficient savings to draw upon. The Government has cited research showing that young people without assets are more likely to have lower earnings, higher unemployment and poorer life chances overall.[117] Last year we cited the then Secretary of State for Work and Pension as arguing that "increasingly inequality in asset-ownership threatens to become the social divide of the future".[118]

42. Saving has a particular value for people on low incomes, who are more likely to suffer shocks to their income; a stock of savings enables people to respond to sudden expenditure needs or drops in income.[119] As the Government has noted, "the financial buffer that comes from a nest-egg of savings provides a cushion for families if they are hit by unemployment or other unexpected adversity".[120] The existence of such a buffer reduces the likelihood that people will need to resort to expensive credit.[121] As the Building Societies Association observed, "saving can … help alleviate the pressures on household finances caused by the lumpy nature of expenditure through the year".[122] Saving can help families to plan for the expenditure associated with Christmas and other planned events.[123] Saving enhances choice and opportunity, for expenditure on items such as holidays or education and training.[124]

43. The encouragement of saving by the financially excluded supports the wider financial inclusion goal of introducing more people to formal financial services. Saving enhances financial capability and increases familiarity with financial concepts and institutions.[125] As the Building Societies Association noted, short-term saving can enable people to move from a transactional use of financial services to more advanced products and markets.[126]

Existing Government initiatives on saving and assets for all

44. The Government wants more people to be able to save and considers that there is a role for Government policy to encourage saving.[127] The Government has introduced or proposed several measures to help savers, particularly those on low or moderate earnings.[128] In this section we survey the initiatives that have already been implemented nationwide or where the Government is committed to such implementation. Chapter 5 considers the Saving Gateway, where a decision on a national launch is awaited.[129]

45. Individual Savings Accounts (ISAs) were introduced in 1999 to encourage tax-free saving amongst lower and moderate income groups.[130] They replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), but were designed to appeal to a broader range of potential savers. Over 17 million people—more than one in three adults—now have an ISA, including one in four people from low-income groups.[131] The Building Societies Association drew attention to official figures indicating that, in 2003-04, 72% of cash ISAs were subscribed by people on annual incomes of less than £20,000.[132]

46. The Government launched the Child Trust Fund in 2005 as a universal savings account for all newborn children born on or after 1 September 2002.[133] By June 2007, nearly 2.9 million children had Child Trust Fund accounts.[134] A payment of £250 is made for all eligible children, and a further payment of £250 for all children in low income families. Further payments will be made when eligible children reach the age of 7.[135] In 2003, the then Treasury Committee concluded that the Child Trust Fund "gives less well off families an unprecedented chance to build up a tax-free sum for their children".[136] The Children's Mutual estimated that 23-25% of children from low-income families in respect of whom accounts were being held were benefiting from additional private contributions to their Child Trust Funds.[137] The Government intends to use the Child Trust Fund as a tool for promoting financial capability among parents and families of children with Child Trust Funds, and, in due course, among the children themselves.[138]

47. The Government has taken several measures to encourage moderate income groups to save for their retirement. Stakeholder pensions were intended to broaden access to saving,[139] although we have previously noted that "a combination of sales approaches, commission incentives, regulatory requirements and decisions about the charge cap have created a position in which Stakeholder pensions are seen as uneconomic to both providers and potential customers among the original target market of middle income earners".[140] Following the proposals by the Pensions Commission, the Government has committed itself to the establishment by 2012 of Personal Accounts for employees aged over 22 without better occupational pension schemes, which would include compulsory employer contributions, and has made legislative provision for the creation of a Personal Accounts Delivery Authority to advise the Government and prepare for implementation of a scheme.[141] Last year, we noted the potential of such a scheme, combined with reforms to the State pension system, to broaden the range of people for whom additional savings for their retirement would be suitable.[142] The Government envisages that Personal Accounts will be suitable for employees earning more than £5,000 a year and expects that, as a result of Personal Accounts and State pension reforms, "bearing in mind the difficulty of all long-term predictions, … there will only be a small group of people—less than 10% of pensioner households in 2050—who may not see any benefit from saving".[143]

Saving for shorter term purposes

48. The measures and proposals that we have considered in the previous section are long-term in their orientation. The first Child Trust Funds mature in 2020. Pension investments by their nature cannot generally be realised until after retirement. ISAs are characterised by the FSA in its financial guidance as an instance of "investing for the longer term" as opposed to "savings [which] tend to be for short-term goals or when you need to get at your money quickly".[144] A study of the behaviour of lower-income savers identified a five-fold typology:

  • "Non-savers: those who had never had any savings at all, as a result of a decision not to save;
  • Passive savers: those with a stock of assets not resulting from saving—e.g., through a bequest, gift or tax rebate;
  • Instrumental savers: those with savings specifically ear-marked for a particular short-term purpose;
  • Long-term savers: those with savings towards some specific long-term aim, e.g., retirement or further education;
  • Rainy-day savers: those saving for a non-specific future change in circumstances."[145]

49. Professor Kempson argued that public policy had concentrated too much on long-term saving.[146] Insufficient attention had been paid to informal methods of saving and to the shorter term and more instrumental saving which was more common among those on lower incomes.[147] A similar point was made by the Pomeroy Review of Christmas saving schemes in the context of the protection of consumers:

In making policy on protecting consumers of financial products, the Government needs to ensure that it takes account of all kinds of savings, including informal ones that tend to be used by people on low incomes who can least afford to be without protection.[148]

The Minister accepted that the Treasury needed to examine informal saving more carefully, and we referred earlier to the Government's commitment to collect information on informal saving.[149] The FSA referred to its online guide, "Saving for tomorrow", which provided "clear and simple messages on how to take stock of one's finances and take action, in the short and longer term" and which was being updated to take account of options other than mainstream saving.[150]

Saving and the Government's financial inclusion strategy

50. The Government's strategy on financial inclusion as it evolved between 2004 and 2006 concentrated on three main themes—banking services, credit and advice. Last year we concluded 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" and that saving ought to be accorded a higher priority in the Government's strategy.[151] In response, the Government agreed that "saving is an important element of financial inclusion"; it announced that "access to saving … will now also be prioritised" in its strategy and that it would "consider what action is needed to promote saving and saving products as it develops the detail of its ongoing financial inclusion strategy, between now and the Comprehensive Spending Review".[152] Mr Pomeroy welcomed the increased emphasis on and prominence for saving in the Government's March 2007 financial inclusion strategy document.[153]

51. Saving is reflected in one of three new goals which the Government has set within that document:

The Government believes that everyone should be able to plan for the future with a reasonable degree of security. Therefore, affordable credit, saving accounts and simple insurance products should be available to all who need them.[154]

The Minister went slightly further in his ambitions for saving and credit in evidence, characterising one strand of that document as "trying to increase the number of low-income households which have access to savings and to small loans, if that is appropriate for them",[155] and stating that, "as for low income savers, I definitely think their savings rates are too low and we would like to increase them".[156]

52. In addition to our general view on the priority of savings in relation to financial inclusion, we specifically recommended that the remit of the Financial Inclusion Taskforce be expanded to include access to savings.[157] The Government was initially non-committal on this recommendation.[158] Professor Kempson, a member of the Taskforce, told us that the Taskforce contained "a number of people who have fairly detailed knowledge of savings" and thought that it was a suitable vehicle for considering the saving behaviour of people on low incomes.[159] She also indicated that members of the Taskforce had argued for such an extension of its remit.[160] Mr John Rhodes, Head of Financial Capability at Citizens Advice, also supported such an extension.[161] Mr Pomeroy, Chairman of the Taskforce, told us that the Taskforce would be happy to consider savings issues if they were brought within its remit.[162] The Minister said that a formal decision on the Taskforce's remit for the period from 2008 onwards would be made in due course, but thought that, through the combined decisions to continue the Taskforce and to extend the financial inclusion strategy to cover savings "we have given a pretty clear indication that … savings would be added to its remit".[163]


53. As we noted when we considered financial inclusion last year, there is a view that financially excluded households cannot afford to save, but some evidence received then suggested to us that the issue was more nuanced.[164] Evidence available since our last inquiry reinforces the view that decisions on saving are about more than the financial wherewithal to do so. Research published by the Building Societies Association indicated that saving behaviour was influenced by individual attitudes as well as financial capacity, so that people in seemingly similar financial circumstances saved vastly different amounts. The promotion of saving was not, therefore, simply related to individual products and their suitability: "a change in the way that people think about saving needs to be engendered as well".[165] This point was reinforced by Children's Mutual:

Consumers are far more likely to think about savings first for tangible items than they are to engage initially on savings that are quite a long way in the future. We therefore encourage financial inclusion [measures] to include language and information about what a financial savings product can do for them rather than concentrating on the features of the product itself.[166]

54. Evidence received during the current inquiry has reinforced our view that saving should be accorded a high priority in the Government's financial inclusion strategy. We welcome the Government's acceptance of our earlier recommendation on this matter, and look forward to the formal extension of the remit of the Financial Inclusion Taskforce to cover savings issues, which we wish to see promulgated before the end of 2007.

55. The current inquiry has provided some signposts for ways in which savings issues could be taken forward in the context of financial inclusion. The statement in the Government's latest strategy document that "saving accounts should be available to all who need them" is not ambitious. That part of the goal concentrates on a formal saving product. It does not include any specific target or means by which progress against that part of the goal can be measured. It does not deal with the issue of the promotion of entry into saving, as opposed to availability. We recommend that the Government's strategy on saving and financial inclusion be formulated in consultation with the Financial Inclusion Taskforce and with the following aims:

  • to acquire further information about the extent of personal saving of varying kinds, having particular regard to saving patterns among individuals and households with lower incomes and to the extent and variety of informal saving;
  • to ensure that public policy is concerned with the motivations for saving and with ways of promoting saving for particular purposes, as well as with the promotion and regulation of particular savings products;
  • to ensure that public policy on saving pays greater regard to informal means of saving as well as formal saving products;
  • to ensure that public policy on savings pays greater attention to the saving needs of lower income individuals and households and to shorter term as well as longer term products;
  • to ensure that the objectives of National Savings and Investments give proper weight to the encouragement of savings;
  • to establish a measure of personal saving within the economy and at particular income levels that reflects people's own understanding of what constitutes saving and that captures the extent of informal saving; and
  • to set a target for increased savings among lower income households and individuals and enable progress against that target to be measured.

98   HM Treasury, Microeconomic Reform in Britain: Delivering Opportunities for All, 2004 (hereafter Microeconomic Reform in Britain), p 266. As the Treasury notes in that document, "In an open economy such as that of the UK, international capital flows-not just domestic saving-provide funds for investment": ibid., p 397. Back

99   Treasury Committee, Fifth Report of Session 2006-07, The 2007 Budget, HC 389-II, Q 109 Back

100   HM Treasury, Helping People to Save: The Modernisation of Britain's Tax and Benefit System, Number Seven (hereafter Helping People to Save), para 2.2, p 3 Back

101   Office for National Statistics, Financial Statistics, July 2007, Table 14.8D, p 274; data from, NRJS Back

102   A Sentance, "The changing pattern of savings: implications for growth and inflation", Bank of England Quarterly Bulletin, 2007, Quarter 2, pp 293-294; Building Societies Association, The Individual's Saving Decision, February 2007, p 16 Back

103   S Whitaker, "National saving", Bank of England Quarterly Bulletin, 2007, Quarter 2, pp 224-230 Back

104   Q 293 Back

105   Ev 66; Financial Services Authority, Levels of financial capability in the UK: results of a baseline survey, March 2006, p 43 Back

106   Minister's Bristol Speech, para 26 Back

107   Microeconomic Reform in Britain, pp 268-269 Back

108   HM Treasury, Saving and Assets for All: The Modernisation of Britain's Tax and Benefit System, Number Eight (hereafter Saving and Assets for All), para 2.12, p 7 Back

109   Minister's Bristol Speech, para 26 Back

110   Financial inclusion: the way forward, Chart 2.2, p 16 Back

111   Microeconomic Reform in Britain, p 269 Back

112   Q 44 Back

113   HM Treasury and Department for Education and Skills, Final Evaluation of the Saving Gateway 2 Pilot: Main Report, May 2007 (hereafter Final Evaluation of the Saving Gateway 2 Pilot), p 4 Back

114   HM Treasury, Review of Christmas saving schemes, March 2007, para 6.4, p 27 Back

115   Financial inclusion: the way forward, para 4.24, pp 45-46 Back

116   Helping People to Save, para 3.1, p 9 Back

117   Saving and Assets for All, para 1.6, p 1 Back

118   HC (2005-06) 848-I, para 90 Back

119   Ev 67 Back

120   Saving and Assets for All, para 1.4, p 1 Back

121   HC (2005-06) 848-I, para 89; Ev 48 Back

122   Ev 68 Back

123   Ev 48 Back

124   Saving and Assets for All, para 1.4; Ev 68 Back

125   Ev 48; HC (2005-06) 848-I, para 89 Back

126   Ev 68 Back

127   Helping People to Save, p 9 Back

128   Ibid., p 25 Back

129   See paragraph 110. Back

130   Saving and Assets for All, para 2.10, p 4 Back

131   Financial inclusion: the way forward, Box 2.1 and para 3.36, pp 14, 34-35 Back

132   Ev 68 Back

133   Financial inclusion: the way forward, Box 2.1, p 14 Back

134 Back

135   Ibid. The initial standard payment was higher in respect of children born between 1 September 2002 and 5 April 2005. Back

136   Treasury Committee, Second Report of Session 2003-04, Child Trust Funds, HC 86, para 21 Back

137   Ev 58 Back

138   Financial Capability, Box 4.1, p 46 Back

139   Department of Social Security, A new contract for welfare: Partnership in Pensions, December 1998, Cm 4179, p 47; Saving and Assets for All, para 2.10 and Box 2.2, pp 6-7 Back

140   Treasury Committee, Fifth Report of Session 2005-06, The design of a National Pension Savings Scheme and the role of financial services regulation, HC 1074-I, para 21 Back

141   The Pensions Commission, A New Pension Settlement for the Twenty-First Century: The Second Report of the Pensions Commission, November 2005; Department for Work and Pensions, Personal accounts: a new way to save, Cm 6975, December 2006; Pensions Act 2007, c. 22, Part 3; Explanatory Notes to the Pensions Act 2007, paras 91-97 Back

142   HC (2005-06) 1074-I, para 81 Back

143   Cm 6975, paras 63, 79, pp 27, 32 Back

144 Back

145   Saving and Assets for All, Box 3.1, p 9 Back

146   Q 57 Back

147   Q 44 Back

148   Review of Christmas saving schemes, para 6.4, p 27 Back

149   Q 307; see paragraph 40. Back

150   Ev 66; Back

151   HC (2005-06) 848-I, paras 88, 118 Back

152   HC (2006-07) 437, pp 2, 14, 15; Ev 71 Back

153   Q 25 Back

154   Financial inclusion: the way forward, para 1.12, p 6 Back

155   Q 293 Back

156   Q 298 Back

157   HC (2006-07) 53, para 68 Back

158   Ev 71 Back

159   Q 51 Back

160   Q 57 Back

161   Q 89 Back

162   Qq 2, 25 Back

163   Qq 293-295 Back

164   HC (2005-06) 848-I, para 91 Back

165   Ev 69-70; The Individual's Saving Decision, p 19, 21, 24 Back

166   Ev 57 Back

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