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The Bill’s narrow focus means that it will not help the vast majority of families and households to build up savings and protection for their future, because it is targeted very narrowly on people in receipt of benefits
or on low incomes. The Bill will do little to repair the savings culture in the UK, which the Government have allowed to decline over the past 11 years; nor will it help families to switch to paying for big-ticket items from savings rather than from debt, or restore saving as a mainstream habit rather than an eccentric interest. In short, it is no answer to our nationwide addiction to borrowing.
Mr. Redwood: Like my hon. Friend, I think it very important to encourage a savings culture. Did he notice how, when I asked the Chief Secretary what return people could expect on their savings, there was no answer? The concentration was on the bonus element from the Government. Do we not also need to concentrate on what return over the longer term people might enjoy on their savings?
Mr. Hoban: My right hon. Friend makes an important point. The Bill does not stipulate that the account provider should provide interest. In this time of low interest rates, I would expect account providers to pay relatively low—if any—interest, so savers will be dependent on the bonus on maturity to provide a return. One of the challenges that emerged from the pilot which the Chief Secretary did not mention was that some savers need to be advised that if they put their money into a straightforward savings account, they will not get the same rate of return as from a saving gateway account. Some financial education needs to be attached to the Bill’s implementation to ensure that people know what rate of return they are likely to get when the account matures at the end of the two years.
The proposal is important in tackling the financial exclusion of families in receipt of benefits. It should provide an incentive to them for creating a saving habit.
Ms Keeble: The hon. Gentleman says that the Government have done nothing to encourage saving, but does he accept that measures such as individual savings accounts have provided some incentives in the tax structure for people to save? The saving gateway account helps people who do not pay tax—who are below that income threshold—so it makes an important addition to a suite of Government products to encourage saving.
Mr. Hoban: It is a welcome addition to a suite of products, but the savings rate in this country has fallen from 9.6 per cent. in 1997 to 1.8 per cent. today. The Government’s measures have not been effective in encouraging people to save. If they had been, we would see more families with savings, not an increase in the number of families who have none. The Government’s measures have not been effective in creating a savings culture. Instead, people have moved from seeing savings as a way of protecting themselves from financial uncertainty and unexpected changes in their income to depending far more on credit to see them through. We need to address the cultural change, which is one of the factors behind the decline in saving.
It is important that we give people an incentive to start a saving habit, and the gateway account recognises some important truths about the way people save. People are more likely to save more if the money is put into a
separate account, rather than staying part of their current account, preferably with an incentive to discourage access. The scheme works in that way by rewarding savings with the 50p in the pound bonus based on the highest account balance. We understand and support the concept of heavily incentivising long-term savings, while recognising that people may need to withdraw savings to meet short-term needs—indeed, that concept underpinned the proposal in our 2005 manifesto of a lifetime savings account. There is some common ground in our understanding of the approaches that need to work if we are to encourage and rebuild the savings culture.
We need to ensure that the scheme can demonstrate a change in cultural attitudes—that it can encourage people to save. People must be able to save while the account is in existence, and they must be able to increase their net worth, not just over the saving gateway account period, but in future. We also need to make sure that banks, building societies, credit unions and the Post Office participate in and promote the scheme. Interestingly, the pilots indicated that the further away someone lived from a bank that offered the saving gateway account, the less likely they were to open the account. That is why it is important to ensure a network of providers.
In her opening remarks, the Chief Secretary to the Treasury said that the Post Office was interested in providing the accounts. It would be helpful to know which other institutions are prepared to set them up. Banks and building societies have said a lot of warm words in support of the saving gateway account, but I am not aware of anybody else who has made a definite commitment to establishing a saving gateway account.
The hon. Member for Northampton, North (Ms Keeble) mentioned the Government’s other measures to incentivise savings. Stakeholder products were introduced following the Sandler review of savings, but take-up of some of the basic products has been poor because of flaws in their design. The child trust fund could contribute significantly to saving, but the proof will come when the fund starts to mature and we see what 18-year-olds do with the amount that has built up in their account.
Rob Marris: I think we know what they will do with it.
Mr. Hoban: I suspect that we all know what they might do with it, but perhaps we ought to think about how we stop young people doing that. How do we encourage them to reinvest the proceeds in savings, so that a positive benefit results from the child trust fund?
The saving gateway is another of the Government’s initiatives—some of which have been successful, and some of which are unproven so far—to try to tackle financial exclusion. We have had to wait an awfully long time for the Bill, which was a manifesto commitment in 2001. The Minister has not really said why it has taken so long to get to this point; perhaps the Economic Secretary to the Treasury will explain why in his winding-up speech. There were two pilots before the scheme was approved last year, and it was re-announced three times.
Even today, after such a long gestation period, lots of details are missing from the Bill. A lot of the key points are deferred to regulations, but so far we have seen only two sets of draft regulations—on tax credits and on the
definition of UK residents. When will we see the other draft regulations? Will we see them before the Committee sits in a couple of weeks?
Questions remain. The Bill does not require banks or other account providers to pay interest. We do not know whether there is an expectation that providers will pay interest. If there is, it will clearly be a financial disincentive to the providers who are setting up the accounts. We need to be clear about the Government’s expectations. What will happen to the money in the account at the end of the two years? Will it automatically roll over into another savings account, or will it transfer to a current account?
Mr. Redwood: Again, it is such a pity that the Chief Secretary to the Treasury will not engage with this important issue. The Government appear to think that there will be some interest, because the worked examples show interest, albeit at a tiny rate, below even the current very low market rates. That is one of my concerns.
Mr. Hoban: I suspect that, despite the worked examples, the expectation is that no interest will be paid on the accounts and that the return for investors will purely be the matching bonus paid for by the taxpayer—not interest paid by the bank, the body with custody of the money. The return will be off the back of the bonus that the Government will provide.
One challenge, and one issue that we need to flush out—not necessarily today, but in Committee—is to understand the economics of the model for the provider. Will other bank account customers end up subsidising the provision of the saving gateway accounts? We need to understand the issue clearly, because the extent to which the product is uneconomic for banks will limit its availability. That was one of the lessons of the Sandler review on savings and basic stakeholder products: because it was uneconomic to provide them, no one did so. That undermined the Government’s initiative to try to tackle financial exclusion.
John Penrose: Does my hon. Friend agree that if interest is not offered on those accounts, the following lesson or habit is likely to result? People will become subsidy farmers searching for bonuses from the taxman, rather than search for economic returns on their savings, so we will not necessarily succeed in creating a savings culture. Does he agree, too, that further to his earlier point about the distance that people must travel to account providers, if there is not sufficient local competition, especially where there is low bank penetration and there are not many branches, interest is even less likely to be offered?
Mr. Hoban:
My hon. Friend makes a number of interesting points. Consumer access to banks and post offices selling those products is important. The only organisation that has indicated that it might launch the products is the Post Office, but post offices are closing across the country, and that makes it more difficult to find access points. It would be good to see a vibrant market, so savers must be given information and guidance about the accounts, enabling them to understand what will happen at the end of the two-year period and what standard returns they can expect from other savings accounts. They need to recognise that there is a value in
savings that are not simply about returns, although they are important. We must look carefully at that, but my hon. Friend has made a brave bid to serve on the Public Bill Committee, and perhaps in its evidence session he will openly put some of those questions to witnesses. My hon. Friend the Member for Reigate (Mr. Blunt), who is the usual channel today, will have noted his comments with interest.
Sammy Wilson: I accept the hon. Gentleman’s point about whether the accounts will pay interest, but the important thing is that there should be an incentive for people to start saving. If a 50 per cent. bonus is available, and even if in the first two years no other interest is available, that will be an incentive. If people wish to obtain a return after the two years have elapsed, they will have a fund of savings that they can put into an account that offers a return. The essential point of the initiative, however, is to give people the incentive regularly to start putting money aside. Will the hon. Gentleman at least concede that the Bill provides that incentive?
Mr. Hoban: We all share the Bill’s laudable aims. Through that incentive, it will create a savings culture and encourage people to save regularly, giving them the confidence to plan their expenditure and protecting them from uncertainty. One of the challenges is to make sure that that happens, so we must consider what needs to be in place to ensure that it does. The Minister presented a rosy view of the pilots, but the outcome was not as clear-cut as she suggested, and I shall come on to that in a second. Yes, we want a strong savings culture to emerge from the measure, and for many people the bonus may be enough in itself to encourage them to save, but they must accept that they are likely to obtain a low return once the account matures.
Rob Marris: Before the hon. Gentleman generously accepted a series of interventions, he was discussing what would happen at the conclusion of the two-year period. I agree that clause 16 is not entirely clear, but if he turns, as I am sure he has, to paragraphs 81 and 92 of the explanatory notes, he will see that the Government’s intention is that funds in the accounts should go into individual savings accounts.
Mr. Hoban: Yes, and the Bill certainly enables any roll-over to be treated as a subscription for ISAs, but it will be for account holders to decide what happens to the money—whether it goes into their current account or into a cash ISA. In many cases, the money will go into a cash ISA by default, which will have a lock-in effect. The evidence from the pilots was that many people were keen to put the money that they had built up into their current account and revert to more informal methods of saving.
I was about to raise some questions about the amount of interest that institutions have shown in the account. I dealt with that in my comments about the Post Office and the lack of any clear evidence from the banking sector of a willingness to participate in the scheme. Without interest from the financial services sector, it will be a challenge to make saving gateway accounts widely available.
There are questions that get to the heart of whether the scheme will work. Will it boost long-term savings, and will it change the behaviour of account holders? The pilot scheme demonstrated some benefits, but it
demonstrated some challenges too. In an article that he wrote for this week’s Parliamentary Brief , the Economic Secretary stated:
“The evidence is that it works.”
That is an emphatic statement, given that the pilots were not quite as emphatic as that. We know that user participation was high—seven out of 10 users contributed in 16 out of the 18 months of the trial run—but participation is not enough.
What are the long-term benefits? What are we getting in return for the quite generous bonus that we are giving to savers? For the scheme to work, first, the savings made under it must be new savings, rather than a transfer of existing savings with a match from the Treasury, and, secondly, at the end of the life of the saving gateway account, savers must continue to save through other financial products. In other words, saving must become a permanent feature of people’s lives, not a one-off opportunity for a windfall.
In the second pilot, questions were raised about whether the scheme was effective in meeting those two objectives. First, there was no statistically significant evidence that, in delivering genuinely new savings, the saving gateway accounts delivered higher overall net worth. The number of anecdotes, rather than hard evidence, used to support the proposal is interesting. It appears that money was moved from one set of savings to another, perhaps from a current account to a savings gateway account, simply to secure the Government match. Despite offering a significant programme of financial education about the availability of saving gateway accounts, fewer than half the participants said that they would save all the money that they had accrued when their accounts were closed.
Financial capability is an important part of tackling financial exclusion. The accounts should not be opened unless support is available. There was substantial support in the second wave of pilots. We must ensure that people are equipped with the knowledge and skills to judge the trade-off between paying off debt and saving—how to manage their bills and to save. People need to understand that the generous incentives offered by the saving gateway account are not replicated in other savings accounts. Tackling financial capability will help with saving gateway accounts, but it should be seen as an important part of rebuilding the savings culture.
Tax incentives have a role in encouraging savings, as we recognised in our plans to scrap the basic rate of tax on savings for basic rate taxpayers in the 2009-10 fiscal year. That was a sign of our commitment to rebuild the savings culture. We also advocate an industry-funded national money guidance scheme to help improve financial capabilities. The Government announced today some partners in their roll-out of pilots, but the current financial crisis demonstrates how important it is that there should be a national money guidance scheme, so that people will be able to think more carefully about how they manage their money, so that they will be more likely to save and so that they will have greater confidence in savings and investment. There is a range of measures that we need to take if we are to rebuild the savings culture and the long-term health of the economy.
The saving gateway could be a valuable tool if the incentive to save through the matching contribution creates a savings culture and results in a long-term
increase in net wealth, but we need to be bolder in our vision. If it is right to encourage people on benefits to save, should not we be looking for ways to encourage people across the income range to save for their future, to cushion them against unexpected changes in their income and outgoings? The Government’s record in the past 10 years has been one of presiding over a collapse in savings. We have talked about the calamitous decline in the savings ratio since 1997 and we need a change in Government if we are to change Britain’s savings culture.
4.20 pm
Mr. Jeremy Browne (Taunton) (LD): I am grateful to have the opportunity to contribute to discussion on a Bill that commands broad support in principle from hon. Members on both sides of the House. I share the concerns that others have expressed, including most notably the hon. Member for Fareham (Mr. Hoban), about the declining savings ratio in Britain, so in that regard the Bill is timely. We are now seeing the product of a decade of encouragement for instant gratification, excess consumption and excess credit. We are all now reaping the consequences of that in the form of a significant recession, which may last for an extended period. Therefore it is right to step back and consider how we can try to encourage a broader savings culture across all stratas of society and income scales.
I remember that when I was in my teens and becoming more interested in politics the big buzz phrase was “a share-owning democracy”. I was supportive of that concept, as were other hon. Members who were here at the time and who vocalised their support, because in order to have a more socially mobile society and to have greater opportunity for people to have a stake in society, we need to ensure that more people have assets and do not live on a day-to-day or week-to-week basis in terms of their finances, and that they have a more entrenched and permanent stake in the society in which they live. If people look back, they will see that in the 1980s there was a broadening of the asset base in the UK, but it was largely, although not exclusively, broadened to people who could loosely be defined as middle class. There is nothing wrong with that. I make no criticism of that; I merely make the observation that many people on middle incomes who previously had not had assets acquired assets, particularly in state-owned companies—utilities—that were sold in the 1980s. Interestingly, this legislation seeks to improve the savings culture and incentives for people lower down the income scale who in most cases did not take advantage of the opportunities that presented themselves during that period.
Mr. Charles Walker (Broxbourne) (Con): Will the hon. Gentleman accept that most people’s most important asset is their home, and in the 1980s millions of people were given the chance to buy their council homes, and that is now their most important stake in society?
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