Select Committee on Treasury Thirteenth Report


5  The Saving Gateway

Evolution of the Saving Gateway

98. The Saving Gateway was first proposed by the Government in April 2001. It was intended to be a new form of account running for a limited time and targeted specifically at lower-income households and aimed at encouraging the saving habit among those less inclined in save, but with much to gain from doing so.[304] In November 2001, the Government announced that respondents to its initial consultation had been almost unanimously supportive of "matching" as the best form of incentive for a Saving Gateway account—"matching" being an arrangement under which the Government makes a contribution to an account for every pound saved up to a fixed limit.[305] The Government announced at that time that it would establish a pilot project to examine the workings of the proposed Saving Gateway,[306] and that project ran for 18 months from August 2002.[307] In the 2004 Pre-Budget Report, the then Chancellor of the Exchequer announced that there would be a second pilot project beginning in 2005,[308] which ran with six variant forms between February 2005 and March 2007 in five pilot areas.[309] The second pilot project was larger in scale than the first, and covered a broader range of options relating to the rules governing the account and Government matching.[310] The Minister defended the Government's decision to use two successive pilot projects in order to "calibrate" the Saving Gateway before reaching any decisions on a national roll-out.[311]

The Irish comparison

99. Last year, in considering the Saving Gateway, we drew attention to the possible relevance to the development of the Saving Gateway of the Irish Republic's Special Saving Incentive Accounts, which were launched in 2001 with a five-year lifetime during which period the Irish Government provided matching of 25% of the value of subscriptions up to a certain level.[312] In February 2007, in the course of a visit to Dublin when we explored matters relating to Dormant Accounts,[313] we also discussed the operation of these Accounts with the Irish Government and a range of other interested parties. We found that the scheme had been motivated principally by a wish to tackle a declining personal savings ratio and high levels of consumer expenditure. Although the scheme had attracted many investors with low incomes, it was not targeted on certain income groups and was not perceived by those whom we met as a financial inclusion measure. There was no indication that a continuation of the scheme or a successor scheme was being considered. Professor Kempson viewed the Irish scheme, with its absence of targeting on particular income groups, as less effective in the context of financial inclusion than the Saving Gateway in its pilot form.[314] The Minister also thought that the Irish scheme was a macroeconomic measure with aims wider than those of financial inclusion.[315]

Eligibility

100. The Saving Gateway, in contrast to the Irish Special Savings Incentive Account which was universally available, has been intended to be targeted on low-income individuals and households.[316] During the first pilot project, individuals were eligible if they were between 16 and the State Pension Age and if they:

  • had children and had household earnings of less than £15,000 a year; or
  • had a disability and had household earnings of less than £15,000 a year; or
  • did not have children or a disability and had individual earnings of less than £11,000 a year; or
  • were out of work and receiving a qualifying benefit (Income Support, Jobseeker's Allowance, Incapacity Benefit or Severe Disablement Allowance).[317]

The eligibility criteria for those of the relevant qualifying age were broadly similar to the criteria used for Working Tax Credit.[318] A study published by the Institute for Public Policy Research in November 2006 estimated that around 5½ million individuals would be eligible for a national Saving Gateway on the basis of eligibility for a qualifying benefit or Working Tax Credit, although that number could be significantly increased if eligibility were extended to more than adult in a qualifying household and to those not receiving Working Tax Credit because they were in part-time employment or under 25 and without children.[319]

101. The second pilot project operated with broader eligibility criteria, including individuals aged 16 to 64 with individual earnings up to £25,000 and family earnings below £50,000 or in receipt of one of the four qualifying benefits used for the first pilot project.[320] As the Institute for Public Policy Research study noted, this was "a significant expansion: in 2005, UK median individual earnings were £19,000, and earnings at the sixth decile were £22,400".[321]

102. Last year, we noted evidence suggesting that use of the Saving Gateway too high up the income scale ran the risk of diminishing its value as a tool to promote saving among low-income households and individuals.[322] This view was expressed during the current inquiry by Professor Kempson, who had led the assessment of the first pilot project and who argued that the Saving Gateway needed to be "closely targeted" on the bottom end of the income scale.[323] The final evaluation of the second pilot project provided evidence to support this view, finding that higher income groups among those eligible for that pilot funded contributions to the Saving Gateway by diversion from other savings and assets, rather than by choosing saving over consumption.[324] The Minister noted the importance of this finding:

If you started going up the income scale above … around a £15-16,000 income, as you went up the income scale, savings started in the main to be reallocated from existing savings schemes into the Saving Gateway in order to benefit from the match, so there was a great deal of deadweight if you extended it up the income scale which was not true for the low income savers.[325]

The Minister has acknowledged that the evaluation of the second pilot project suggests "that the policy focus on people on lower incomes—up to around £15,000 household income as used in the first pilot—is about the right level".[326] The proportion of households without savings is at its highest among households with incomes at or below around £15,000.[327] Any national Saving Gateway ought to be closely targeted on those individuals and households with the lowest incomes and which are currently least likely to have savings in order to maximise the prospects that the Gateway will attract new saving and ensure value for money. Subject to considerations relating to the ease of identifying eligibility, we would expect to see a national Saving Gateway using eligibility criteria broadly similar to those of the first pilot project.

Matching and contribution limits

103. From the outset of the Saving Gateway, the Government has recognised the importance of matching as a way of encouraging saving among lower-income households. Matching matters particularly to such households because they are less likely to be able to benefit from the range of tax reliefs available for saving.[328] A second key advantage of matching is its simplicity, because the extent of the incentive payment is immediately evident to the saver.[329] These initial views have been borne out by the experience of the pilot projects, which, according to the Government, "suggests that matching can provide a more understandable, transparent and equitable framework of support for savers".[330]

104. The first Saving Gateway pilot project was based on the simple proposition that, for each pound invested by an individual up to £25 per month over the 18-month period of the account, the Government would itself pay a pound into that account.[331] Professor Kempson saw great merit in matching at this rate, arguing that "the simple one-for-one matching is a very easy thing to understand and very motivating".[332] The second pilot project involved different match rates, with some areas having £1 of Government funding for every £5 invested by the individual, others having £1 for every £2 invested and one area having pound-for-pound matching.[333] The final evaluation of that pilot project found that the £1/£1 match-rate had no obvious effect compared with the £1/£2 match-rate.[334] The evaluation suggested that "the ideal match rate was thought to be around 50p for each £1 of matchable contribution, although the majority of participants accepted that a lower rate would be more appropriate for reasons of affordability".[335] The evaluation also suggested that some participants were concerned that a high level of matching might raise undue expectations about the value of saving among inexperienced investors which would not be maintained when matching came to an end.[336]

105. A study by the Institute for Public Policy Research in November 2006 argued that the match rate "should be as low as is consistent with kickstarting a saving habit, in order to minimise deadweight costs (the amount spent on the scheme that does not increase saving rates) and reduce the profitability of borrowing to save".[337] That study concluded that the match rate could be in the region of 50 pence for every pound saved, but also argued that "the match rate should be doubled for the first two months of the account, in order to provide further encouragement to take part".[338]

106. The Minister considered that the second pilot project had been useful in demonstrating that matching could be effective, and offer better value for money, at levels of matching below a pound for a pound, and also in suggesting that £25 a month was the correct limit on contributions subject to matching.[339] However, he expressed sympathy for the proposition that the level of subsidy for the least well-off through matching should at least as good as the level of matching for the most well-off through tax relief.[340] The pilot projects for the Saving Gateway have proved conclusively that the principle of matching, whereby the Government makes a contribution to an individual's account for every pound that individual saves up to a fixed limit, is essential to the success of any national Saving Gateway. We accept that, on grounds of affordability as well as other grounds, a national Saving Gateway could be based on a level of matching lower than pound-for-pound, and that a lower level of matching might be effective in encouraging saving among low-income individuals and households. However, we note that certain forms of saving by the highest income groups obtain subsidy through tax relief at an effective rate of 40%, and we consider that the level of subsidy in percentage terms for those on the lowest incomes ought to be higher. On grounds of simplicity, this argues for a rate of matching of 50 pence for every pound invested by the individual, although we also see merit in the proposal that a pound-for-pound match rate might be set for saving in the initial two months of an account to encourage participation.

Duration

107. When the proposals for the Saving Gateway were first set out in detail, it was suggested that a Saving Gateway account might operate for five years.[341] In both pilot projects, the accounts matured after 18 months.[342] Professor Kempson thought that 18 months was about the right duration for an account of this nature, telling us that her observation of the first pilot project was that some customers "were beginning to find it a struggle at the end of 18 months, and some of them did need access to the money for specific purposes".[343] She also argued that people should be given the option of signing up to a second account at the end of the 18-month period.[344] The Minister has acknowledged that the issue of whether individuals should be restricted to one Saving Gateway account needed to be considered, and that such a restriction would bring its own challenges—"policing the rule and equipping individuals to make informed decisions about when to take up the opportunity".[345] The evidence which we have received during this inquiry reinforces the impression that low-income households are most likely to be able to save for short periods, and may be deterred by products with a longer maturity period. We recommend that any national Saving Gateway account be designed to operate for no more than 18 months. We see no reason why those who continue to be eligible should not be able to open a further account following maturity of an initial account for as long as the Saving Gateway operates.

Providers

108. In the initial Government consultation on the Saving Gateway, some respondents expressed doubt whether the Saving Gateway would form the basis for a self-sustaining business model.[346] The Government believed at that time that "the Saving Gateway would probably be better suited to provision through a single provider than through a competitive market" and noted that the single provider might be in the form of a consortium.[347] The pilot projects have used a single provider, Halifax.[348] ABCUL argued that credit unions were ideally placed to offer accounts in any national Saving Gateway, not least because "in many low income communities, credit unions can be the only financial institution with a physical presence".[349] Similarly, the Building Societies Association argued that building societies were well-suited to provide Saving Gateway accounts.[350] A study by the Institute for Public Policy Research in November 2006 argued, "to maximise accessibility and consumer choice, the [Saving Gateway] account should take the form of a product wrapper" with generic terms and conditions for accounts offered by credit unions, building societies, banks and National Savings and Investments through the Post Office.[351]

109. Professor Kempson argued that a general weakness of the Government's approach to financial inclusion was that they allowed too much complexity and variety in products, so that customers became confused.[352] She argued that the Saving Gateway ought to be kept simple and not have too many providers.[353] The Minister has noted the importance of proximity to a Halifax branch in determining whether individuals participated in the second pilot projects, with those living closer more likely to participate, and drawn attention to the valuable role that local organisations such as housing associations and credit unions could play in reaching the hard-to-reach.[354] In evidence to us, he acknowledged the value of avoiding complexity in administration, while again stressing the value of local and trusted organisations such as credit unions in attracting customers.[355] We are not convinced that the Saving Gateway product is suitable for development in a competitive market. We would not wish to see potential customers confused by a multiplicity of offerings. However, we recommend that, in designing what should be a single, unified product for a national Saving Gateway, the Government have regard to the desirability of ensuring that the product can be promoted by, and accessible through, as broad a range of financial institutions as possible.

Overall conclusions

110. The Government is expected to make further announcements on the next steps for the roll out of the Saving Gateway in the 2007 Pre-Budget Report.[356] The Minister noted that any decision on a national Saving Gateway had to take account of the public expenditure implications.[357] However, the pilot projects for the Saving Gateway have provided strong evidence to suggest that a national Saving Gateway could achieve some of the Government's aims of promoting saving among low-income groups. The Government has noted that the pilot projects indicate that the Saving Gateway "can encourage genuinely new savers and new saving".[358] It can bring some individuals into contact with mainstream financial institutions for the first time.[359] It can kick start a savings habit which continues even when the incentive of Government matching is no longer available.[360] It can have a positive impact on participants' attitude to saving, particularly amongst those with little or no prior experience of saving.[361] It can allow individuals to save without dictating what they save for.[362] It can give individuals a sense of security and a sense of worth.[363]

111. The Institute of Public Policy Research has provided some estimates of the first-year costs of a national Saving Gateway scheme, assuming eligibility criteria based on eligibility for Working Tax Credit and the qualifying benefits for those out of work,[364] and individual contributions averaging £16 per month. On this basis, it is estimated that the first-year costs of a national scheme taken up by 50% of the eligible population with matching at 50 pence for every pound invested and pound-for-pound matching for the first two months would be £249 million.[365] For purposes of comparison, the Government estimates that ISA and Personal Equity Plan savings are supported by £2.1 billion in tax relief each year,[366] and employee tax reliefs for pension contributions were valued at around £5.3 billion in 2005-06.[367]

112. We recommended earlier that the Government's approach to saving and financial inclusion ought to be based on the aim of increasing the level of saving among low income individuals and households.[368] The introduction of a national Saving Gateway would be the most important single step towards achieving the aim of increasing the level of saving among low-income individuals and households. Although a national scheme would involve a substantial public expenditure commitment, this seems likely to amount to little more than one tenth of the annual subsidy for Individual Savings Accounts and Personal Equity Plans and little more than one twentieth of the annual subsidy for employee pension savings, both of which categories of subsidy are less likely to be utilised by those low-income households for whom shorter term saving is most important and beneficial. We recommend that the Government launch the Saving Gateway on a national basis at the earliest practical opportunity.


304   Saving and Assets for All, paras 5.17-5.26, pp 19-20; HC (2004-05) 848-I, paras 103-104 Back

305   Delivering Saving and Assets, para 2.34, p 10; Saving and Assets for All, para 5.22, p 20 Back

306   Delivering Saving and Assets, paras 4.25-4.29, pp 23-24 Back

307   Final Evaluation of the Saving Gateway 2 Pilot, p 9 Back

308   HC (2005-06) 848-I, para 103 Back

309   Final Evaluation of the Saving Gateway 2 Pilot, p 9. The five pilot areas were Tower Hamlets in East London, Gorton in East Manchester, Cumbria, Cambridgeshire and Hull: Final Evaluation of the Saving Gateway 2 Pilot, p 9, note 7. Back

310   Final Evaluation of the Saving Gateway 2 Pilot, p 1. The pilot areas and the rules governing the account were set out in HC (2005-06) 848-I, para 107 and Table 1. Back

311   Q 300 Back

312   HC (2005-06) 848-I, para 110 Back

313   Treasury Committee, Eleventh Report of Session 2006-07, Unclaimed assets within the financial system, HC 533, paras 2, 6, 11, 28-29 Back

314   Q 81 Back

315   Q 329 Back

316   Saving and Assets for All, para 5.18, p 19  Back

317   HM Treasury and Department for Education and Skills, Saving Gateway, 2002, p 4 Back

318   Personal Finance Research Centre, University of Bristol, E Kempson, S McKay and S Collard, Incentives to save: Encouraging saving among low-income households: Final report on the Saving Gateway pilot project, March 2005, pp 6-7 Back

319   Institute for Public Policy Research, The Saving Gateway: From Principles to Practice, S Sodha and R Lister, November 2006, pp 47-48 Back

320   Final Evaluation of the Saving Gateway 2 Pilot, p 1 Back

321   The Saving Gateway: From Principles to Practice, p 46 Back

322   HC (2005-06) 848-I, para 108 Back

323   Qq 43, 63 Back

324   Final Evaluation of the Saving Gateway 2 Pilot, p 7 Back

325   Q 300 Back

326   Minister's Bristol Speech, para 40 Back

327   The Saving Gateway: From Principles to Practice, Figure 2.1, p 37 Back

328   Saving and Assets for All, para 4.4, p 15; Delivering Saving and Assets, para 2.34, p 10 Back

329   Delivering Saving and Assets, para 2.34, p 10 Back

330   HC (2006-07) 437, p 14 Back

331   Minister's Bristol Speech, para 28 Back

332   Q 43 Back

333   HC (2005-06) 848-I, Table 1 Back

334   Final Evaluation of the Saving Gateway 2 Pilot, p 5 Back

335   Ibid. Back

336   Ibid. Back

337   The Saving Gateway: From Principles to Practice, p 67 Back

338   Ibid., pp 67-68 Back

339   Q 300 Back

340   Q 305 Back

341   Delivering Saving and Assets, paras 4.17, 4.19, p 22 Back

342   Final Evaluation of the Saving Gateway 2 Pilot, pp 1, 9 Back

343   Qq 73-74 Back

344   Q 73 Back

345   Minister's Bristol Speech, para 56 Back

346   Delivering Saving and Assets, para 4.3, p 19 Back

347   Delivering Savings and Assets, para 4.4, p 19 Back

348   Ev 60 Back

349   Ev 49, 53; Q 188 Back

350   Ev 69 Back

351   The Saving Gateway: From Principles to Practice, p 68 Back

352   Q 58 Back

353   Qq 70-71 Back

354   Minister's Bristol Speech, paras 41, 57 Back

355   Qq 303-304 Back

356   Minister's Bristol Speech, para 61 Back

357   Q 300 Back

358   Financial inclusion: the way forward, para 3.36, p 35 Back

359   Final Evaluation of the Saving Gateway 2 Pilot, p 4; Financial inclusion: the way forward, para 3.36, p 35; HC (2005-06) 437, p 14; Minister's Bristol Speech, para 51 Back

360   Qq 57, 67-68; Ev 60; HC (2006-07) 437, p 14; Minister's Bristol Speech, para 39 Back

361   Minister's Bristol Speech, para 33 Back

362   Q 57 Back

363   Q 42 Back

364   On which see paragraph 100. Back

365   The Saving Gateway: From Principles to Practice, pp 61-62 Back

366   Budget 2007, HC (2006-07) 342, para 5.42, p 115 Back

367   http://www.hmrc.gov.uk/stats/pensions/table7-9.pdf Back

368   See paragraph 55. Back


 
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