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There have been two pilot projects, and changes have been made to the maximum that people may have in the savings account. It has now fallen to £300, and the matching amount has fallen from £1 to 50p. There might be good reasons for some of the changes, but one consequence is that whereas under the first pilot if one had saved the maximum amount and received the bonus one would have ended up with about £800 in capital, the
maximum now would be £450—a significant difference for people on low incomes. The first press release suggested that there would be a saving period of up to five years, but then the period was cut to three years and now we are left with only two years. If, as the right hon. Member for Wokingham (Mr. Redwood) asked, we are trying to create a long-term savings habit, will a two-year period be sufficient to change people’s behaviour? That is a legitimate question to which the Government might return.
The evidence is disappointingly mixed for somebody who supports what the Government are trying to achieve. The second pilot certainly showed that there was no statistically significant evidence of a positive saving effect. The best evidence was qualitative, not quantitative—what people said in focus groups rather than hard statistical evidence, which was more mixed. In the eligible subset, people on higher incomes tended to respond more to the opportunities, but to substitute their saving gateway account for their savings in other accounts—quite logically, because there was a much higher return. People on lower incomes did not participate to the same degree. Other Members have expressed concern that the scheme might have a deadweight or displacement effect and will not really target the people we need to reach.
Different opinions were expressed about whether people would continue to save after the two-year period. Our most pressing concern is that the saving gateway will simply be a flash in the pan for some people and that they will not begin a lifetime of thrift based on the Government’s two-year programme. That raises a wider issue. When we look across the world and at our own history, we see that the creation of a savings culture is often associated with the creation of new institutions—a point touched on by the hon. Member for Weston-super-Mare in relation to credit unions.
In the UK, the great flowering of saving, especially among the working class, came with the creation of friendly societies in the 18th century. Working-class communities were often frightened of ending up in the workhouse and developed their own saving institutions to avoid that circumstance. In the 19th century, the creation of a savings bank became a national movement targeting those on lower incomes. Those banks were not just financial institutions—there was a real movement, with a sense of evangelical zeal, to protect working-class people from a lifetime of penury. The creation of municipal banks was similar, and there are still six of them in Scotland.
In the 20th century, post offices had a role, as we saw in countries with high savings rates—Japan in particular and Korea. Post offices have a large footprint, with many branches close to people. As the hon. Member for Fareham (Mr. Hoban) pointed out, people who lived closest to the Halifax—the bank used in the pilot—were more likely to participate. The presence of a local financial institution in the community is critical to the propensity to save. Postal banks in Japan and Korea and the local Landesbanks in Germany—state-owned savings institutions—have played a critical role in creating a long-term culture of saving.
We in the UK had the Post Office Savings bank. Created in a different form but initially associated with the Post Office, we also had the so-called “people’s bank”—the Girobank, which was one of the most innovative banks in history. It was the first bank to
develop an ATM network and, I believe, the first to develop telephone banking in the UK. The Girobank broke the monopoly of the traditional clearing banks and forced them to open themselves up to the working classes.
When considering the saving gateway, the Government should ask whether there is a case for creating a new institution alongside the account. That idea has recently been floated by the Business Secretary, Lord Mandelson, who has asked whether we could build on the Post Office’s existing financial services—the Post Office savings account it offers in conjunction with the Bank of Ireland and the ISAs it offers in conjunction with a friendly society—and create a new institution.
Credit unions present an interesting alternative. They have developed in much the same way as the savings banks, starting from local and disparate grass-roots voluntary activity. Critical to the savings banks’ success in the 20th century was their development of a national umbrella body and a clearing network, enabling them to spread the risk. I am sure that that is one of the Government’s concerns about credit unions; as I am sure the hon. Member for Weston-super-Mare is aware, about 30 have become insolvent in the past six years, resulting in real concern about whether people’s money is safe in credit unions, which often overreach themselves in their lending. Is there an opportunity to create an institutional umbrella—not just the existing Association of British Credit Unions, but a risk-sharing national body that could try to develop credit unions further than they have been able to develop hitherto?
Kelvin Hopkins: I am listening with great interest to the hon. Gentleman’s history lesson. Is he not really suggesting that we should have a national, publicly owned savings bank, driven by the interests of the public and not by the interests of shareholders? Does he agree that such an institution would benefit from economies of scale and be cheap to administer, and therefore greatly benefit depositors?
Adam Price: I agree with the hon. Gentleman in this sense: I have great doubts about the willingness or the ability of private sector banks in the UK—what is left of them—to deliver the saving gateway programme. In addition, there may be a lack of trust in the sector among the target audience. I am not convinced, and those banks certainly do not seem to be champing at the bit to provide the product.
When the Institute for Public Policy Research studied the pilot projects, it suggested that the saving gateway should be delivered exclusively by the credit union movement. I am agnostic about whether the programme should be delivered by a publicly owned national savings bank or by the credit union movement. The history of the trustee savings bank movement suggests that there is a positive role for voluntary, locally generated activity.
The Government announced three ideas at the same time in 2001: the child trust fund, the saving gateway, and the universal bank, which the Post Office was meant to deliver. We never got that universal bank. The Government need to re-examine that, because clearly the market is failing when so many people are financially excluded from the mainstream, and the Government
are well aware of that. However, there is only so much that they can do by way of exhortation of financial institutions and people.
There is an institutional gap. There is a case for looking at new financial products and tax incentives that can be built up around them. We should consider how we can create new institutions with which people can identify, and which can mark an important new phase that we hope we will enter, as part of a national savings plan. Clearly, the Bill is targeted at a particular segment of the population.
I noticed that take-up was very high—82 per cent.—in the first pilot project. If 82 per cent. of 8 million people take up the saving gateway account in the first few years, the Government’s figures will be way out. The amount will be about 10 times the £130 million that the Government have put up for year one. Perhaps the Government hope that take-up will not be as high as it was in the pilot project.
As hon. Members have said, we need a far wider programme and strategy. We need a national savings plan. We need to start changing the culture, by creating new institutions. People must see themselves as savers—that is fundamental to the process. People’s self-concept is the key to creating behavioural changes. That change will be very difficult, as a number of hon. Members have said. Who will see themselves as a saver over the next 18 months, as people face the storm of the worst economic recession for many generations? It is an incredibly high incline on the uphill struggle that we face. Having said that, the measures are a small, important step in the right direction, and they are part of a far broader debate that we desperately need to have.
5.27 pm
Mr. Charles Walker (Broxbourne) (Con): I rise a disappointed and unhappy man, because I like nothing more than coming to this place and giving the Government a good old-fashioned partisan lashing; that is the very oxygen of politics. Today, however, I find myself agreeing with a lot of what the Government have done. That is disappointing from a personal perspective. Even if I wanted to pick a fight with the Government, there is only the hon. Member for Luton, North (Kelvin Hopkins) on their Back Benches to pick a fight with, and he is quite a good friend of mine outside this Chamber. I would not want to pick a fight with him anyway.
I am disappointed because I have to say to the Government that the scheme is a pretty good idea. Of course, the devil will be in the detail. I imagine that I will serve on the Committee. If not, I shall be deeply disappointed once again.
Saving is the cornerstone of good financial planning. It does not matter whether one is at the bottom, middle or top of the income scale: putting money aside for a rainy day is a very good discipline, because, as we are discovering, rainy days do come, and they strike people at any point on the income scale—from the highest paid banker right down to someone who, tragically, loses their job on the factory floor.
For those on a low income, it must be very difficult to save. I talk to many constituents who are left with a few pennies at the end of the week, once they have set aside money for the essentials in life, such as food and heating. We must be aware of that, and we must not be guilty of
patronising people. Education is critical to the ingraining of a savings culture in our society, and Members on both sides of the House have recognised that.
Financial literacy is crucial, and we must start educating young people while they are at primary school—perhaps in year 5 or 6—about the importance of managing their money and budgeting. The process of education must continue throughout secondary school, and even beyond. Many hard-working families find it difficult to budget. I am a relatively prosperous Member of Parliament, and I find it difficult to budget and could probably manage my finances far better. Financial education is critical to making the measure work and ingraining a savings culture, and the taxpayer has a limited role to play. It is a useful allocation of taxpayers’ money in the short to medium term to support or reward savers for setting aside a small amount each month. Although it is a small amount, for many people it is a considerable sum from their monthly income.
Confidence is another critical part of encouraging a savings culture: people must be confident that their money will be there when they need it. One of the disasters of Farepak was that it damaged confidence among people on low incomes. It was a disaster not only for people who had put money aside in the Farepak scheme, as all their Christmas savings were wiped out and their thrift was penalised, but because of the message it sent to other families on low incomes about the benefits of setting money aside and saving for the important things in life. People must have confidence in the institutions in which they place their money.
The last thing we want to do is to drive people to the doorstep lenders, who fill a vacuum left by mainstream lenders. If there is a criticism to level at the banking sector it is that it has not done enough to help low-income communities. Until the beginning of this year, banks were making enormous profits. They talked merrily about their social responsibility, but Members know full well that in the most deprived communities that we represent the high-street clearing banks were conspicuous by their absence. As the banks try to restore their credibility with taxpayers and the citizens of this country, they should take a good, hard look at themselves and the way in which they work with the poorest communities. That is a good place to start on the road to rehabilitation.
Thrift should be rewarded throughout the income scale. I very much like the suggestion that we should ensure that the income and returns that people generate from their savings in interest accounts remain tax free. We all know pensioners in our constituencies who are not rich by traditional measures, but who have saved in the belief that it would allow them a comfortable retirement. However, the interest that they have earned on their accounts has diminished and, on top of that, they continue to pay tax. It would therefore be a good idea if we rewarded saving throughout the income scale.
May I conclude by saying that we all recognise that budgeting is difficult? I bet that in our own lives we all tend to take the best-case scenario when setting our budget. Perhaps we gloss over the things that we do not like to think about, such as the car breaking down or a pipe bursting. As part of the education process to encourage people to save, we must not be frightened to say that bad things can happen: the washing machine, dishwasher or car might break down, a pipe might burst
or we might lose our job. The good times do not last for ever, and any Government who try to convince the electorate otherwise should be shouted out of court.
Let us embrace the Bill, examine the detail and regard it as one very small step, probably in a generational process, to re-entrench saving as the cornerstone of good financial planning in this country.
5.35 pm
Kelvin Hopkins (Luton, North) (Lab): I apologise for not being present for some of the earlier speeches, but I have heard some interesting contributions while I have been in the Chamber, and I have been provoked into saying a few words myself. I take an interest in general terms in savings and especially in pensions and income for pensioners. The Bill is a step in the right direction, as others have said, but we will have to go a lot further, not just for people at the lower end of the income spectrum, but for those on middle incomes in particular, for whom the savings habit has died.
I come from a long line of devout Puritans who saved money. Even when I had pocket money, my friends suggested that I had only a very small amount, even though I came from a prosperous family. That was because my family believed that we should work for our income. If we wanted something, we saved up for it. I did save up over weeks for things, and it was a habit that our family had. Friends, even from less prosperous families, had fivers thrown at them from time to time in a rather casual way. That attitude is not common in many other cultures. In Germany and Japan, for example, people are much more keen on saving.
A number of important issues have been touched on, such as confidence in where we save. In the longer term, we will have to consider a state savings bank for everyone, where our money is secure, the administrative costs are very low and we get good returns over time. We do not want to see people in Christmas clubs that go bust, like Farepak. We want people to have absolute confidence in where they put their money.
In time, some people may have to be compelled to save if there are not to be millions of people of pensionable age living in penury, even though they had good incomes during their working lives. At the lower end of the income scale, we must aim to raise the basic state pension significantly and for it to rise considerably faster than the rate of inflation or earnings to get back to the kind of ratio between pensions and earnings that we saw before the link was broken in the early 1980s.
At that time the basic state pension was 25 per cent. of average earnings, and we should get there again so that the basic state pension is well above the poverty level. Currently, it is below the poverty level. At the same time we could eliminate all the means-testing, perhaps progressively over a period, so that other savings would be additional to the basic state pension, which we can all take for granted. That is the way forward.
For many other people on higher incomes, the drop from having a reasonable income to the basic state pension would be pretty catastrophic. For those who have lived a fairly modest life, a good basic state pension might be regarded as sufficient, although they might want more. For people who have not saved and have had big incomes, it is a matter of regret for them, perhaps when they reach the age of 65 or whatever state pension age will be in future, that they have not saved properly.
We will have to look towards a universal, comprehensive, compulsory SERPS system for everyone, with defined contributions, as a proportion of earnings or whatever, and defined benefits so that we know what we will get and so that that is not related to the state of the economy, the stock market or anything else. If we had a savings bank, we would know what we were going to get back. That should be defined and not interest-rate related. Other countries have much higher basic incomes than we do for people of pensionable age. The gulf between the rich and the poor will have to be narrowed by looking seriously at the incomes of poorer pensioners in future. At the moment, we are just nibbling at the edges. We are not taking the matter seriously. I want to see much more radical action from, I hope, a Labour Government, this one or future ones, substantially to raise the level of incomes of those who have retired at the lower end of the income scale. That may mean some redistributive taxation from the very rich to the very poor, and I would not disagree with that. [Interruption.] I do not want to go into my usual speech about what the income tax rates were back in the days of the Callaghan Government under Denis Healey. I have made that speech several times so I shall not trouble the Minister with it now. We are starting to take seriously the problems of the poor, particularly when they become older, and the Bill is a step in the right direction. I welcome it, but we must go much further.
5.41 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to wind up this Second Reading debate, perhaps a little earlier in the day than one might have expected, but it was interesting and informative. We have had a number of contributions, which I will take in reverse order.
The hon. Member for Luton, North (Kelvin Hopkins) gave a brief but interesting speech. He regaled the House with tales of his childhood savings habit, and almost entered into one of his usual speeches on the subject of taxation in the 1970s. He has two entertaining speeches, one on that subject and the other on the European Union. I tend to enjoy the latter slightly more, but none the less they are always a valuable contribution to the House. I note that he was the only Labour Member to make a speech in this debate, which is somewhat surprising given that this is a Government measure. One might have expected greater enthusiasm from the Labour Benches. However, I appreciate that we have had nearly three and a half weeks’ break for Christmas, which may not have been long enough for every hon. Member.
In contrast, my hon. Friend the Member for Broxbourne (Mr. Walker) made quite a return to the House. I note that the ConservativeHome website commended him as man of the day for his speech to the House yesterday on the subject of mental health. It also carried a photograph of him taken shortly after he became a Member of the House, demonstrating the success of the diet that he has undertaken during the past three years.
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