Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60-79)

PROFESSOR ELAINE KEMPSON

1 MAY 2007

  Q60  Mr Fallon: Did the first pilot go as far up the income scale?

  Professor Kempson: No, it did not, absolutely not; it was up to tax credits.

  Q61  Mr Fallon: So one of the purposes of the second part was to test how far up the income scale you might have to go?

  Professor Kempson: To test against whether matched savings would have an incentivising effect further up the income scale and whether differing match rates would have equal effects in incentivising saving. The pilot itself is so complicated that I am not sure that its design would enable you to answer those questions.

  Q62  Mr Fallon: Is there any academic evidence as to the matching effect as to where that tails off up the income scale?

  Professor Kempson: There is not on the matching effect and how far up the income scale.

  Q63  Mr Fallon: Do you have an instinct for roughly where that should be, how far up we should go?

  Professor Kempson: I do not because I would approach in a different way. I would say that if we want to persuade people on low incomes to save, then we need a different way of presenting the rewards of saving. We talk about incentivising. The rewards of putting money into a savings account if you are on a low income are minimal. If you put it into an ISA, you are probably not paying tax or very little tax and so any rewards to you are very small indeed. It is people's perceptions of the benefits of saving. It may be by making it simpler you might have a greater effect further up the income scale but from my perspective, it becomes more important the further down you go because the other route of traditional rewards simply does not operate in that market. That does not quite answer your question but I have looked at it rather differently.

  Q64  Mr Fallon: You have to have a cut-off somewhere, do you not?

  Professor Kempson: I would put it probably at the tax credit level for the matched savings, but I cannot give you empirical evidence to back that up. Maybe the second pilot will give us that.

  Q65  Mr Fallon: One of the criticisms of the tax credit system is that it goes slightly too far up the income scale.

  Professor Kempson: Yes, but this is not child tax credit; it is working tax credit.

  Q66  Mr Fallon: What would the average household income be for that?

  Professor Kempson: I am afraid I cannot remember exactly where that would cut off now. It depends on the family circumstances. It is something like £25,000. It is certainly a lot lower than £50,000.

  Q67  Mr Fallon: Is there enough evidence yet from the pilots that the matched funding has a sustained effect in kick starting the savings habit rather than simply a short-term benefit?

  Professor Kempson: There is some, although there would have been greater value in doing more longitudinal tracking of the original Saving Gateway of participants, although some of them have re-joined and been allowed to re-join a second pilot. We did find when we followed people up six months after the end of the first pilot of Saving Gateway that a significant proportion—and I cannot remember the percentage, I would need to check it for you—was still saving.

  Q68  Mr Fallon: That is half of them?

  Professor Kempson: It was about half; it was a significant number that were still saving. They were saying that it did become a habit. If you are on a very low income, you set money aside for different purposes at the beginning of the week. You put money aside towards the rent, perhaps towards the Provident loan, towards gas and electricity or charging up the key meters. What had happened was that saving had joined that queue. People described it as being addictive, as being a habit and, once you got into that habit, then you just continue doing it because you can see the real benefits of having some money by you. About eight in ten had retained at least some of the money and about half had retained all of the money from their Saving Gateway in the account still six months later. If we look to Australia where they have Saver Plus, which is slightly different but it is a matched saving scheme for very specific purposes, people do continue to save at the end of the programme. There is no question that once you have got into that habit, you have become used to putting the money away and used to living without it, then why would you stop? For most people, it makes a lot of sense to continue.

  Q69  Mr Fallon: We have been promised an announcement on the next steps by the Government this summer. What would you like to see in that announcement?

  Professor Kempson: I would like to see the design of the first pilot rolled out nationally for people up to tax credit level.

  Q70  Mr Fallon: You would keep most or all the elements of the first pilot?

  Professor Kempson: I would. I think delivering it through community groups is difficult and that could never be rolled out nationally. I think there would have to be a slight variation. You may not recall but in the first pilot some of the accounts were delivered direct from a Halifax branch; for the rest, people just signed up through community organisations. I would like to see community organisations playing a very supportive role in promoting the Saving Gateway but not being the conduit through which people are recruited because, quite simply, if you did that, there would be large numbers of people who could never join the scheme because there would be no suitable organisation in their neighbourhood.

  Q71  Mr Fallon: You would like to see the Government just go to providers and say—

  Professor Kempson: They should go to one or more providers but certainly not to a lot of providers. I think it needs to be kept much simpler than the Child Trust Fund was. Maybe there should be two or three key providers to ensure good national coverage.

  Q72  Mr Fallon: Is there anything else you would like to see in that announcement?

  Professor Kempson: On the Saving Gateway?

  Q73  Mr Fallon: Yes.

  Professor Kempson: No. I would keep the matching as it was. It was very simple and incentivising. I do not think I would even extend the saving period. I would, however, maybe give people the option of signing up for a second period, not just for one period of 18 months. I would have said two years was about as long as people could manage without touching the money, and the vast majority, I might say, did not withdraw. That came as a complete surprise to me. I thought there would be a lot of small withdrawals and there were not. People were able to keep it on one side for that period of time. They 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.

  Q74  Mr Fallon: You think that 18 months is probably about the right time?

  Professor Kempson: That is certainly what we were told by the participants.

  Q75  Angela Eagle: This is a quick question about your observation on the Child Trust Funds and keeping things simple. Again, it is the interaction, is it not, with the financial services industry as we have it at the moment, which is incredibly complex and competitive that creates the complexity. You are basically saying that you want the Government to pick one or two providers and ensure that they are the ones that offer these simpler services to lower income families, be it Saving Gateway or Child Trust Funds.

  Professor Kempson: Can we go back a little bit? I think the main complexity of the Child Trust Fund is having three different types of account.

  Q76  Angela Eagle: So with a single account—

  Professor Kempson: The stakeholder account was by far the most sensible thing to do, for any parent to put the money in there. To have the complexity of the other two types of account was needless.

  Q77  Angela Eagle: So you recommend a simple, stakeholder style or model with a minimum number of providers?

  Professor Kempson: You could have more providers if the product itself is kept simple.

  Q78  Angela Eagle: That would be a simple product like the scandalous products which the financial services industry hate because they are a different model to the one that they make so much money out of, so they throttle them. Is that not the problem?

  Professor Kempson: That is why I think you may need a small number of providers who are committed to that style of working, who do want to develop it and will work with the Government to ensure that the scheme is rolled out nationally. You are right, across the piece not all Child Trust Fund providers share an enthusiasm for it. Our report to HMRC shows that. Some got into the marketplace because they simply feared that they would lose existing customers and so they are not enthusiastically embracing it. Others, Children's Mutual has already been mentioned, have always embraced it wholeheartedly. You will always find two or three, maybe half a dozen, providers that really want to deliver a product. That's why I would favour a narrowing because then you would get the promotion of it.

  Q79  Mr Breed: I think you are absolutely right: it is the ease with which people can undertake the whole idea of saving to begin with that has to be simple. How important then is the role perhaps of other helpers in that, like employers and such like, who encourage their own staff that work for them through their own schemes? We have payroll giving for charity. What about payroll saving and in a much more extensive way encouraged by Government because that is a good relationship. The money is taken out before you receive your pay. It is nicely joined up and you do not even know it has gone to a certain extent.

  Professor Kempson: I think that has a lot of mileage in it. I would support employers becoming involved and setting up savings schemes for their staff, but of course that will not serve those who are not in work. For those in low waged employment, yes, I think people will welcome it and they will save regularly if it is deducted at source.


 
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