Savings (Government Contributions) Bill

Written evidence submitted by StepChange Debt Charity (SGCB 01)

Summary

1. StepChange Debt Charity welcomes the Help to Save (HTS) scheme. Boosting accessible cash savings among lower-income group is vital to keep struggling families out of debt. Having £1,000 in accessible cash savings reduces the likelihood of a household falling into debt by 44%. If every household in Great Britain had at least £1,000 saved it would reduce the number in problem debt by 500,000 [1] .

2. We are the UK’s largest specialist not for profit debt advice and solutions provider. In 2015 we were contacted by over 500,000 individuals in financial difficulty. Problem debt costs the UK £8.3bn through the damage it causes to family life, mental and physical health, productivity and employment prospects and costs to the welfare state, the NHS, local government and other agencies [2] .

3. We believe the HTS scheme will be a key tool in helping boost savings. A survey we commissioned specifically about the scheme demonstrates its importance [3] .

4. Over three-quarters (78%) of respondents said they need to pay an unexpected cost at least once per year, with this cost on average between £201 and £300. Without savings many respondents cut back spending on essentials such as food or heat (37%) or borrowed money (21%).

5. We believe with some amendments HTS could be even more effective.

6. Our submission below suggested amendments that would reduce the time period before account holders could receive a bonus to six months, allow account holders to save an average of £50 per month (rather than a maximum of £50 per month) ensures a greater number of 25s could access the scheme and protect bonus payments from insolvency or creditor action. We also suggest an amendment to allow access to HTS accounts through auto-enrolment.

7. The purpose of these amendments is to maximise take up of HTS accounts by the target market, so that the number of account holders is closer to the 3.5 million who are eligible, than the 500,000 HM Treasury estimate will take the scheme up.

Two year wait for bonus

Proposed amendment:

Schedule 2, Part 4, Paragraph 14, Sub-paragraph 4(b) insert after "out" -

"after periods no more than six months apart"

Purpose

8. We believe the proposed two year time period over which a HTS account will run before account holders will receive a bonus may disincentivise applicants:

· Firstly, because the process of ‘hyperbolic discounting’ means that individuals tend to under-appreciate financial benefits the further away they are likely to arrive [4] . This is one of the key motivations for pension auto-enrolment. We are therefore concerned that if individuals perceive they will not receive their bonus for two years they will not see the potential benefits of the offer.

· Secondly, because the target audience for this product suffer economic shocks on a much more regular basis than every two years. Our survey shows that 42% of those who may apply for the scheme face an income shock every six months and 78% face an income shock at least once per year.

9. Given the aim of the HTS policy is to boost savings among low-income working families, the bonus needs to be structured to ensure as big a take-up as possible. In order to do this the bonus needs to make the two year period the account runs for look less daunting to people who operate on a financial cycle that is much shorter than that.

10. Therefore the best option would like be a bonus crystallises at least every six months, meaning account holders could access the bonus every six months. This would result in the highest amount of bonus for groups who are likely to have to withdraw amounts for essential bills on a semi-regular basis. Our survey shows this option would work best for the target audience. Respondents said a bonus would be most attractive if they could receive it every month (35%) or every six months (31%).

Payment above £50 monthly limit

Proposed amendments:

Schedule 2, Part 3, Paragraph 10, Sub-paragraph 1(a) substitute the word "maximum" with the word "average"

Schedule 2, Part 3, Paragraph 10, Sub-paragraph 2 substitute the word "maximum" with the word "average"

Schedule 2, Part 3, Paragraph 10, insert new sub-paragraph 1(c) –

"1(c) if an account holder pays in less than £50 in one month, then in the subsequent month they can pay in an amount to make the average payment over the two months £50"

Purpose

11. We believe HTS should allow ‘top-up’ monthly payments above £50. Again, the aim is to not disincentivise saving, as many people in the target group income will have fluctuating income. According to our survey respondents, 34% would prefer to be able to pay in an average maximum of £50 per month. They want to be able to ‘overpay’ in order to catch-up previous lower payments made in previous months (necessitated by lower income in that month) to maximise their bonus payments.

Working Tax Credits

Proposed amendment:

Schedule 2, Part 2, Paragraph 5, insert new sub-paragraph (b) –

"(b) applicants under 25 will qualify for an account if they fulfil the Working Tax Credit eligibility criteria for applicants over 25"

Purpose

12. We are concerned, that if eligibility is based on current criteria for claiming Working Tax Credits (WTC) this might discriminate against those under 25. Currently those under 25 only qualify for WTC if they work at least 16 hours a week and qualify for a disabled worker element, or are responsible for a child.

13. This means that it would not be possible for anybody under 25 who does not qualify for a disabled worker element, or is not responsible for a child, to have a HTS account.

Third party debt orders and insolvency

Proposed amendment:

Schedule 2, Part 3, Paragraph 12, insert new sub-paragraph 4(a) –

"(4) (a) Where a bankruptcy order is made against a person with a Help-to-Save account any bonus paid into the Help-to-Save account will not form part of a debtors estate during insolvency proceedings"

Schedule 2, Part 3, Paragraph 12, insert new sub-paragraph 4(b) –

"(4) (a) any bonus paid into Help-to-Save accounts will not be liable to be taken as repayment via third party debt orders"

Purpose:

14. We believe HM Treasury needs to look closely at the debt collection and insolvency implications of the scheme. Given the target audience of HTS it is likely many will face financial difficulty whilst holding a HTS account. Indeed many will face difficulty while still in the process of building an adequate buffer against a future financial shock. This will leave them vulnerable to third party debt orders and potentially insolvency.

15. Given that a key purpose of the HTS scheme is to promote long term financial resilience it would be counterproductive if creditors could take money saved to satisfy existing debts, in particular if they can also take the bonus. This would result in creditors benefiting from public money intended to help low-income families build precautionary saving.

16. Therefore we believe that government should protect money in HTS accounts from third party debt orders or insolvency proceedings. At the very least any bonus accrued should be protected. There is precedent for such an approach with the Welfare Reform and Pensions Act 1999. This legislates that approved pension arrangements do not form part of the bankrupt’s estate thus the Official Receiver has no claim over the majority of pensions or any accruing benefits.

Auto-enrolment

Proposed amendment:

Schedule 2, Part 3, Paragraph 11, insert new sub-paragraph 2(e) –

"2(e) provisions for eligible persons to be auto-enrolled into Help-to-Save accounts from benefit entitlements"

Purpose:

17. Some incentive schemes use defaults to overcome the inertia and procrastination that prevents many people saving. An ‘auto-enrolment’ workplace saving scheme sees an individual automatically signed up. He or she then must ‘opt-out’ to stop money being deducted from their pay or benefits into a savings account.

18. Allowing HTS to incorporate an auto-enrolment function, either through benefits payments would be a big driver in increasing take-up of accounts.

19. Such an approach has proved successful abroad. According to Madrian and Shea one auto-enrolment savings plan they studied in the US increased participation rates from 49% to 86%. Other plans in the US ensured participation rates of over 90% [5] .

20. In our survey we found that an auto-enrolment approach should be successful among the target group. When asked, ‘If you could choose to have savings automatically deducted from your salary or benefits, would this make you more likely to save?’ – 41% of respondents answered it would make them ‘much more likely to save’ and 20% said it would make them ‘a little more likely to save’.

October 2016


[1] https://www.stepchange.org/Portals/0/documents/Reports/BecominganationofsaversStepChangeDebtCharityreport.pdf

[2] https://www.stepchange.org/Portals/0/documents/media/reports/8_billion_challenge.pdf

[3] Survey methodology: we surveyed 1,551 StepChange Debt Charity clients online between June 28th and July 11th. The client sample contained 25% clients who are in receipt of Working Tax Credits, 25% clients who are in receipt of Jobseekers Allowance, 25% clients who are in receipt of Employment and Support Allowance, Incapacity Benefit or Disability Living Allowance/Personal Independence Payments, and 25% clients who receive no benefits but earn less than £21,000 a year. We believe this best captured the potential target audience for HTS in 2018, given the fluidity individuals show in switching between such conditions.

[4] http://www.behaviorlab.org/Papers/Hyperbolic.pdf

[5] Madrian, B. and Shea, D. (2001), The power of suggestion: Inertia in 401(K) participation and savings behaviour, The quarterly journal of economics, Vol. 66, no. 4

 

Prepared 25th October 2016