Before we start, I remind everyone that there will be severe sanctions against anybody who uses their mobile phone or who allows their mobile phone to go off in this room. There will also be sanctions against those who drink tea or coffee rather than water. I hope that we will be able to take the Committee through in an orderly and quick fashion.

Ordered,

That—

(1) the Committee shall (in addition to its first meeting at 10.00 am on Tuesday 25 October) meet—

(a) at 2.00 pm on Tuesday 25 October;

(b) at 11.30 am and 2.00 pm on Thursday 27 October;

(c) at 9.25 am and 2.00 pm on Tuesday 1 November;

(2) the Committee shall hear oral evidence in accordance with the following Table:

(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedule 1; Clause 2; Schedule 2; Clauses 3 to 6; new Clauses; new Schedules; remaining proceedings on the Bill;

(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 1 November.—(Jane Ellison.)

We know that the first deadline for tabling amendments has already passed, but the Chair will consider accepting starred amendments in special cases.

Resolved,

That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Jane Ellison.)

Copies of the written evidence that the Committee receives will be made available in the Committee Room.

Resolved,

That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Jane Ellison.)

Good morning, everybody. We will now resume our public sitting and we will hear evidence from the Tax Incentivised Savings Association and the Association of British Insurers.

I remind Members that questions should be limited to matters within the scope of the Bill and that this session of questions cannot go beyond 10.45 am.

Will the witnesses please introduce themselves? Carol Knight first.

Carol Knight: Good morning. I am Carol Knight, the chief operations officer of the Tax Incentivised Savings Association.

Can I straight away say that you will have to raise your voice a bit more than that, because the acoustics in this room are notoriously bad?

Yvonne Braun: I am Yvonne Braun. I am director of policy, long-term savings and protection at the ABI.

Thank you. I think Peter Dowd has the first question.

Q This is to Ms Knight. In a press release response to the Budget, you welcomed the lifetime individual savings account and said:

“The Lifetime ISA will encourage further tax-exempt saving and a dedicated account to save for a home and save for retirement.”

How do you perceive the marketing of the LISA in relation to traditional pension products?

Carol Knight: We do not really see the lifetime ISA as a direct competitor to pensions. We believe there is a cohort of the public for which the LISA will be an attractive proposition, particularly those who are in low-paid income and who fall outside the bracket for auto-enrolment. Self-employed people have an opportunity with the LISA that is not available with a workplace pension. So we believe there are a number of people who would be attracted by a matching proposition and who do not automatically have the opportunity to benefit necessarily from a pension product.

Ms Braun, would you like to comment on that question?

Yvonne Braun: For us, what is most important is that there is no confusion between automatic enrolment and the lifetime ISA, so we see it as a complementary product. What is quite important is how it is communicated to people, particularly employees, because we are very clear that there is no employee who will be better off if they switch out of their automatic enrolment pension into a LISA, because with automatic enrolment in a workplace pension scheme they get the employer contributions. If they decide to switch out of that into a LISA, they would lose quite a lot; in fact, we calculated that they could lose up to a third once they get to the age of 60. We think that is really, really important. Communication will also be very critical by the Government, by the guidance services and through providers themselves.

Q You mentioned the potential confusion. How do you think that could be avoided, because there is concern that these things will either meld or send out a confusing message?

Yvonne Braun: I think there are a number of mechanisms, such as what the Government put forward in terms of what the LISA is for, but also using the new guidance service, which will be the successor to the Money Advice Service, the Pensions Advisory Service and so on and so forth in 2018. That could also steer people and help them to make the right decision for their circumstances because, as Carol just said, for some people—the self-employed, people who have already maxed out the employer contributions on their pensions or people who may be fortunate enough already to have used up their annual allowance—it is a very positive thing, but it is important that every person makes a decision based on their own circumstances. For most people, switching out of a pension into a LISA will be a very bad decision.

Q To follow up on Carol’s comment earlier, you have expressed disappointment about the early withdrawal charges.

Peter, sorry, can you please project your voice? There may be people at the back and at this end who are finding it hard to hear.

Okay. In the past you have expressed disappointment about early withdrawal charges. What would you suggest instead?

Carol Knight: We believe that the necessity to pay back a bonus if money is withdrawn outside the allowed circumstances is a great enough disincentive to withdrawal at inappropriate times. We believe that the 5% charge across the whole of a savings account is disproportionately difficult, particularly if we are looking at this as a product for people who are low paid and accessing a savings product that they would not use other products for, because of the 25% bonus.

A person’s life circumstances might mean that suddenly they have a need to take their money out. There are all sorts of events that happen during the course of a life, when someone has an urgent need to get some cash to help them through difficult times—for example, being made redundant. To have a 5% charge seems to us to be an inappropriate and harsh penalty to pay. We understand that it is there to encourage people to keep their money in it. As Yvonne said, we would not want to see the LISA used as an alternative to a pension. We believe that it is a complementary product, so keeping the distinction between the two is important. However, we feel that that can be addressed by means such as having to pay back the bonus, rather than having a 5% charge across the whole account.

Q Okay. It has been reported that many financial providers may not want or be able to offer a lifetime ISA by the time of its launch. Some have ruled out participating in it altogether. What is your organisation’s view on that?

Carol Knight: There are some organisations that will be ready in April. There is always the need for a lead-in period for people to get systems in place and get trained. To have clarity on the guidance and regulations at the earliest possible opportunity is critical. We have had a short lead-in period for this particular product and some people will be ready, some will not—unfortunately, that is the nature of the game.

Q Do you think that the proposed lead-in time is reasonable?

Carol Knight: We would normally ask for a year, but we have not had that opportunity this time.

Q I will come to Ms Braun in a second, but on that point, what is your assessment of the awareness of employees and employers of this particular scheme—the lifetime ISA? It is a short run-in period.

Carol Knight: We do not think it will affect employers. This is a personal individual savings account. We do not see it being marketed as an alternative to auto-enrolment. We do not necessarily see it being offered by employers.

Q How about awareness, given that you think the run-in period is pretty tight?

Carol Knight: Yes. The publicity to get the scheme in place is important for the public as well as for the industry. There has been a lot of publicity about it. Getting that clarification for people is really important, but the whole question of advice and guidance needs addressing. There is a lot of work going on in other areas looking at this, but it is really important to put more work into enabling people to get the information they need to make informed decisions. Those need to run hand in hand alongside each other.

Yvonne Braun: If I could come back on the lead-in times you mentioned, this was announced at the last fiscal event in April, to be coming into force next April. As the Tax Incentivised Savings Association has done, we have worked with the Treasury and HMRC officials over the summer, to understand better how the detail will work. We are still waiting for clarity from the Financial Conduct Authority about what the conduct rules are going to be. That inevitably puts pressure on providers who are trying to get this ready for next April. As I have said publicly, there will be quite a few who will not be ready for next April. That does not mean that they do not want to offer it, just that from the perspective of their own lead time and systems build time, they need longer.

Q I will ask you both to answer this one, if I may. Would you welcome a deferral for a period of time, beyond the suggested introduction date?

Yvonne Braun: In terms of the monthly bonus contributions from Government, there is an argument to defer it until April 2018.

Carol Knight: At this point in the game, a lot of people have put a lot of work into getting it delivered for April 2017, so a change at this point is going to be detrimental to those firms. I think it is too late in the game to make that change, personally.

Q I wonder whether I could follow up on the point about some financial providers choosing not to participate in the scheme at all. Do you have any further information on that? Do you have any percentage figures for organisations that are either not going to be ready or are not choosing to participate in the scheme at all?

Yvonne Braun: No, I don’t.

Q May I pick up on a couple of points made by the witnesses? First, a powerful point was made that, although auto-enrolment has been a success, the self-employed do not have access to it, and this is an option, a vehicle, for the self-employed to improve their long-term savings. Could you expand on that?

Carol Knight: I think that is absolutely true. However, some of the data from the Office for National Statistics indicates that 15% of our workforce are self-employed. But of that 15%, over 50% are over 50 years old, so the lifetime ISA is not a vehicle available to them. To enable those people to benefit from it, there is an opportunity to expand the age at which you can open a lifetime ISA.

Yvonne Braun: I would make exactly that point. A lot of self-employed people do not fit the age restrictions on the product, so for them it is not going to be available. Of course, if they are higher rate taxpayers, the pension tax relief on offer to them looks better than the bonus they would have received under the lifetime ISA. That is also worth saying: for self-employed people, the lifetime ISA is particularly attractive if they are basic rate taxpayers, but not so much if they are higher rate taxpayers.

Q I am grateful—it is 15% and 50%. I am a glass-half-full type of person, but I am sure the points were noted.

The other point I want to tease out is the reference to not everybody being ready, and the potential for delay. Hearing what Carol was saying, in particular, I take it that there is no sign that there will be an insufficient number of people to provide a market. There will be a market, and if people have to catch up they will have to catch up. We are offering a good product at an early stage—would that be fair?

Yvonne Braun: That is absolutely right. Our members very much want to make this work for their customers.

Q A lot has been said about auto-enrolment and those who have been left behind in the process up till now—the self-employed. Given that we know there is going to be a review of auto-enrolment in 2017, is there an argument for postponing this until we deal with auto-enrolment and those who need to be included?

Carol Knight: Not necessarily, no. We need to monitor the effects, without a doubt. We need to look at the take-up of auto-enrolment to see whether there is any discernible drop-out and a corresponding number of people going into the LISA. There are so many unknowns with auto-enrolment that it is difficult to say that we should postpone the LISA because of that.

There are a lot of people who are not going to get caught by auto-enrolment. One of my biggest concerns is about people who earn too little to even fall into that bracket. An increasing number of people have multiple income streams, each of which is too low to get caught. Auto-enrolment is not going to solve the problem for them, but a lifetime ISA could.

Yvonne Braun: I think that question of people with multiple employment will be one that we will have to return to in the automatic enrolment review, because I think that is the very point of the review—to see whether some tweaks need to be made to make it work better for more people.

The point that Carol made about monitoring the outcome is absolutely right. I think the view has been expressed that the risk of higher opt-out rates from automatic enrolment is small, because that has not occurred with the introduction of the help to buy ISA. However, I think it is important to remember that the help to buy ISA is quite a different proposition, because the maximum bonus is much, much lower, and also the bonus is not paid into the actual account, whereas here it actually goes into the individual’s account. So I think the experience with the help to buy ISA should not give us false comfort that the lifetime ISA will not have an impact on automatic enrolment.

It will be really important that we look at what happens from next April, when the lifetime ISA is introduced, and, as I said earlier, it will also be really important that the information and guidance that people receive is very, very clear about the importance of the employer contribution and about not losing that through a switch into a lifetime ISA.

Q How concerned would you be on that issue, Yvonne, particularly given what you said previously—that nobody will be better off with an ISA than they would be with investing in a pension scheme? I think that the figures that you gave to the Work and Pensions Committee were quite illuminating, because they demonstrated that someone earning £25,000 a year and putting 4% of their salary in over a 40-year period would be 33% worse off with a LISA. How concerned are you that people may be seduced into investing in a LISA over the opportunities and the benefits of investing in a pension?

Yvonne Braun: I think that is absolutely not the intention of the policy, because the Government have been very clear, from day one, that the LISA was not intended to supplant automatic enrolment but was intended to work as a complement to it. I think that if we can stay with that, and if the communication to people is clear on that point, then that risk is mitigated, although we should still monitor what actually happens on the ground, because it is easy to get confused about the numbers. We are talking about 25% Government bonus, which sounds better than 20% basic rate tax relief but is in fact exactly the same.

So clarity of the message is really important in all of this, and as I said, we think it is important that we use the guidance services for that, and also that the work that is done by the financial advice market review on rules of thumb considers what could be communicated to people about a workplace pension vis-à-vis a lifetime ISA. I think the two should be seen as the lifetime ISA being on top of—in addition to—the workplace pension, rather than there being some sort of binary choice.

Q In order to achieve that, how would you architect the guidance and advice that consumers need to get, to make sure that they don’t fall into the trap of investing in an ISA when a pension would be better for them?

Yvonne Braun: I think there needs to be a strong signpost towards the guidance services, and the guidance services need to be clear about the complementary nature of the two products—that it is not an either/or, much like it should not really be an either/or for people whether they save for retirement or for a house deposit.

Q I want to continue along very similar lines to the previous questioner, because I was also very struck by the evidence that the Association of British Insurers submitted to the Work and Pensions Committee. I particularly note that a £25,000-a-year salary would be roughly the average female salary in this country. There has also been quite a lot of talk today about people on lower incomes, and it seems to me quite striking that if you are a person on an average or below-average salary, it is unlikely that you are going to “max out” your employer contributions or your annual allowance in any given year. So it does not seem to me that there are many advantages for a low or average-wage person in the LISA, and it seems that they would be better advised to invest in a pension. Looking at the discrepancy pointed out in the evidence, that could be £53,000 over a lifetime’s saving. Is it really advisable from a financial perspective to encourage anyone to invest in a LISA if they are on a low or average income?

Yvonne Braun: I think what is also important here is that we consider people’s individual choices. As long as people are clear about what they are giving up, we cannot stop them from potentially opting for a lifetime ISA if that makes sense. Ultimately, this is about giving people more options—that is the intention—but I think there has to be a very clear message of, “If you opt for a lifetime ISA over a workplace pension, the downsides look like that.” That is quite important to draw out.

Carol Knight: That is absolutely right. When you are looking at a workplace pension where you have got the employer contribution going in, that definitely changes the dynamic. So I think it would be very hard to justify anyone using a LISA as an alternative to that because of that extra contribution going in. However, for people for whom that is not an option—those people may be comparatively young and not necessarily have any sure view of how their life is going to pan out—the concept of putting money into a pension that is completely locked away might just stop them saving altogether, because their lifestyle is such that they want the option to be able to have access to money at a point at which they need it, and within a pension they cannot do that. The lifetime ISA gives them that flexibility, where they have the opportunity to save money and the opportunity for a 25% bonus that is easy to understand—matching contributions is an easy concept—and, if their lifestyle is such that a crisis arises where they need access to money, they can get to it. The lifetime ISA will give them that, but a pension will not.

Q Would you agree that there is a serious risk of mis-selling in this context?

Carol Knight: There is always that risk. It is down to how it is communicated to people, and I think that clear, simple guidelines are going to be really important for people to help them understand the difference between the two and the benefits of both.

Q This is continuing on the same point but looking at it from the other point of view, as someone who has been involved in the housing market a lot. Surely it is not unreasonable that a young person who lives in an area where property is very expensive has an opportunity at last for their savings to be protected, other than in extreme circumstances, from house price inflation, and to be able to play catch-up. The biggest problem in the boom years was that you could save, but prices would be roaring ahead of what you could realistically save. Therefore, quite understandably, someone in that position who is many decades from retirement might think to themselves, “I’m going to put everything into this, because I am desperate to get a home. It is very expensive, but this is an opportunity.” To me, it is surely not unreasonable for someone in that position to make that choice.

Yvonne Braun: As long as they are clear about what is involved—to me that is the key.

Carol Knight: I think a lot of evidence shows that for a lot of young people the focus is their home, without a doubt.

Q Obviously if someone gets on the property ladder with a capital repayment mortgage at the age of, say, 25, in theory when they retire they should not have any housing costs—that was the old idea. So we should remember that there is an extra benefit in this. There are many other benefits to home ownership and many aspirations, but I take your point that we have to have the advice in such a way that anyone making the choice knows what the choices are. That, as always, will be the challenge.

Yvonne Braun: I think there is an additional point that it is important not to overlook. We know that the earlier you start retirement saving, the less effort you have to make later. If you start at 20—the rule of thumb always is that it is about half your age when you start saving—it will cost you an awful lot less and it will be an awful lot less painful to save for retirement than if you start at 30 or 40. That has to be in the equation for people. Actually, at the moment opt-out rates are lowest for young people, so automatic enrolment has worked very well for young people especially, and it is important that that success story does not get stopped.

Carol Knight: I think that is absolutely right. When you look at the savings culture in this country, a lot of savings go into cash and a comparatively small percentage go into investment. It is difficult for people to understand the investment cycle, and they are scared of it because it is not easy to understand. In something like auto-enrolment, it is done for you. It is a nice, easy way to enable people to move into that market. If you can inculcate a savings habit at an early age, it gives them a really good building base to go on. Auto-enrolment does provide people with that platform to get into an investment environment that they may be a little wary of going into individually. That is why we think that the lifetime ISA is complementary rather than “instead of”, because you have to choose that actively, whereas auto-enrolment is there for you if you are in that cohort of people who are caught.

Q I am concerned about the whole idea of persuading people to save when they are young. Is it not the sensible way forward to have a compulsory state scheme for everybody based on income? Young people with either high rent or a mortgage or children are constantly up against it financially—even those with an income better than £23,000 a year, which is a tiny amount for mortgages in particular. Is it not time to say that the Government have got it completely wrong, that all these complicated schemes will not actually benefit the people who really need help—those on low incomes with high expenditures they have to meet—and that replacing all those schemes with a compulsory state scheme with defined contributions and benefits at the end would be much better? If the better-off want to go and invest somewhere else, that is fine, but we are talking about ordinary people on relatively low incomes. Do tell the Government that they have got it completely wrong if you want to—no need to be too polite.

Carol Knight: Would you like that honour, Yvonne?

Yvonne Braun: I think that is the state pension, though. Ultimately the state pension is your safety net. Everybody is going to get the same, and especially for people on lower incomes, the state pension provides quite a good replacement rate.

If we look at some of the projections that the Department for Work and Pensions did, I think, two years ago when it looked at the adequacy problem in the population at different salary ranges, it found that the problem is between £22,000 and £52,000 of annual income. Lower than that, you have a lot of replacement income through the state pension, and higher than that people can usually sort themselves out. So that is where additional savings are more important.

I would say that the Government have not got it wrong. Automatic enrolment is a very good policy, and making it compulsory is also perhaps not terribly British, I suppose. The state pension provides the underpinning that you describe of an income that is there for everybody as a safety net.

Q But the state pension is not earnings-related; it is for everyone. I agree with you—a much higher basic state pension would be a good idea as well—but earnings-related income on top of that means that those on better incomes do not suddenly drop down to the basic state pension when they reach retirement. They are compelled to save so that they can have a comfortable retirement.

Yvonne Braun: That is in many ways how automatic enrolment is supposed to work—it is a percentage of salary, so people with higher salaries will contribute more. There is then a question about whether 8%, as it is meant to end up in 2019, is the right percentage. We firmly believe it is not; it should be quite a bit more. That is the subject of the automatic enrolment review that will happen next year.

At this point I would not argue that it needs to be compulsory. Because the opt-out rates are so low, there is a question as to why you would go for a compulsory savings scheme.

Q I have just one more question. If it were a compulsory state scheme with defined benefits, it would not be stock market-related; it would be a state fund. It would be extremely efficient, like national insurance is extremely efficient in how it works, and the whole thing would be better for those retiring at the end of their working lives and also provide a wonderful fund for Government investment in infrastructure or whatever, which would have returns. It is not a new idea. Barbara Castle, a great hero of mine, was talking about this sort of thing 40 years ago, and we are still fiddling around with all sorts of complicated schemes that do not actually provide the benefits that they should.

Yvonne Braun: I doubt that the Government would wish to take that on their balance sheet.

Q I agree that the Government would not wish to do it for other reasons, but would it not be a sensible idea?

Carol Knight: I think it is a fiscal question more than anything else. It is a hard one to justify, if you could actually cover those costs.

I have made my point.

Q The Bill provides that you can take your savings out to buy your first home. Are there any other circumstances in which you think you ought to be able to take your money out?

Carol Knight: Yes. We ran a survey to get feedback from consumers and the industry. There were two, or maybe three, other areas where the feedback indicated that including additional lifetime events would be beneficial. One was critical illness and the other was redundancy. Those are incidents that are outside people’s control and that place a huge demand on finances. The other one was buying a second home, too. It is not just about your first-time purchase, but when you start a family and want to move on. Those are three additional lifetime events that we believe could be incorporated within the scheme.

Q If you were an independent financial adviser and you were assessing the risk for a client, on a scale of one to 10, where 10 is the most risky and one is the least risky, what would you assess the risk as?

Yvonne Braun: The risk of?

Of investing in a lifetime ISA.

How risky is the investment?

Carol Knight: A lifetime ISA can have anything within it, so the risk would be determined by the assets you choose to put in it. They will go from low to high. There is no restriction on the investments that can go into a lifetime ISA. It depends on what you choose to put in it, really.

Is there anything that you would like to add?

Yvonne Braun: I completely agree that it will depend on the asset mix in the lifetime ISA. I am sure that an adviser would also take into account that 25% will be added, which will help to balance out the risk a bit. We are not sure that, beyond a first home purchase and terminal illness, which are currently in the Bill, additional lifetime events need to be included. If you take redundancy, there are other savings vehicles for that, so I am not necessarily sure that the state needs to step in with a Government contribution to support that. I would probably say the same for buying a second home—I take it that by that you do not mean buying an additional home, but moving the next step up and buying a bigger home.

Carol Knight: Not a holiday home, no.

Yvonne Braun: I think that the main pressure point in terms of housing seems to be for people to get on to the housing ladder in the first place because they are taking so long to get their deposit together. I think that issue is alleviated once people make the second step up.

Q I want to pick up on something that Ms Knight said, and I have two questions as a result. First, the complexity of this product has been talked about. If you add the critical illness and redundancy rationales for withdrawal, have you not just made it more complex and are you not turning it more into an assurance or insurance-based product as a result?

Carol Knight: I think it depends on how much you want to support people going through their life, and if it is going to be the fundamental of the lifetime ISA to help fund those important events as people go through them. It is a balancing game, really.

Q The second point was with regard to your suggestion to permit the product to be used for second home owners. Is there not a danger that we already have challenges as it is with first-time buyers getting into the housing market? Effectively giving Government subsidies to help second home purchasers would perhaps strike some as a bit much. What is your observation on that comment?

Carol Knight: Housing is a big problem in this country, without a doubt, and I think it needs to be part and parcel of a much bigger picture. People use housing as part of their retirement planning, which is an important factor to throw in. When you talk to people about how they are going to fund their retirement, the value of their house is very often part of that. The whole question of how housing is used as a source of income on retirement is very important.

It is very difficult for people to get a clear view of how much income they can take out of their home at the point of retirement. If they are not in a position where they can gradually build the value of their home during their working life, they will have less available through an equity release product or whatever mechanism is available to them. They will have less available in the way of funds for retirement. It is part and parcel of a much bigger picture. We should be looking at retirement saving as a whole and helping people to put different types of assets towards funding later life.

Thank you.

Q I want to come back to the issue of risk. We all know that when you invest in a pension scheme, the trustees will then look at the appreciation of risk that you would expect to take on board. They obviously look at the timeline of when you expect to retire and gear any assets according to that assessment.

If we have a situation here where an individual can invest in an ISA, and can invest up to 100% in equities, they may decide to draw down that pot at any time for a particular type of event. We know that there is always a risk of a downturn in the market. Most actuaries will tell you there is a one in seven year risk of a downturn in the market. Are we not inadvertently exposing consumers to risk? Does it not come back to the point that was raised by my hon. Friend the Member for Banff and Buchan that we are exposing consumers to risk, not just of mis-selling, but of investing in an asset where there could be a risk of a downturn in the market seriously impacting the choices that they then make?

Carol Knight: There is always that risk, but I do not think we are looking at the lifetime ISA as an alternative to a pension. We are looking at it as complementary to a pension. Firstly, the lifetime ISA could go into a cash ISA, but as a long-term savings product it is generally accepted that cash is not necessarily the best way to do that. Again, it points to getting good guidance and information to people to help them make informed decisions as to the type of assets they are going to put into that product.

Q You have talked about some of the issues around signposting and also discussed the pros and cons versus pensions. That is clearly a very big issue. This issue is not quite as big, but do you have any views about the LISA versus the help to buy ISA, and any potential confusion that could cause in the minds of first-time buyers?

Yvonne Braun: As I understand it, the help to buy ISA lapses in 2019. This is the successor vehicle. It is important that the lifetime ISA, from the perspective of a house purchaser, is structured in a much more attractive way, because you actually get the payment of the Government contribution into your account, whereas with the help to buy ISA, the Government contribution goes through your conveyancer or solicitor towards the house purchase. It is a completely different ball game.

This is why I was saying it is difficult to draw comfort from the experience with automatic enrolment and the help to buy ISA, because it is not as attractive as the lifetime ISA. But yes, I see it as a successor vehicle. There is still a question around the transition and transfer of funds that sit in help to buy ISAs into lifetime ISAs, but I am sure that will be resolved.

Carol Knight: The other difference is that the help to buy ISA is just a cash ISA, whereas within a lifetime ISA you can have investments which, in the longer term, are generally considered to be a better option.

I am afraid that brings us to the end of the session. On behalf of the Committee, I thank the witnesses for assisting us in the way that they have.

Examination of Witnesses

David Wren and Tom McPhail gave evidence.

Good morning and thank you for coming along. Can you please introduce yourselves? First, Mr McPhail.

Tom McPhail: Hello. I am Tom McPhail. I am the head of retirement policy for Hargreaves Lansdown.

And Mr Wren.

David Wren: Good morning. I am David Wren from the British Bankers Association, where I look after tax policy.

Q Mr McPhail, in the information you provided, you give your views on the Bill, and then you say:

“However, in the longer term we believe that the LISA is a misguided policy, emerging from a fudged review of pension taxation and that its introduction makes the decision making process for investors harder rather than easier and that it will therefore potentially undermine savings behaviour.”

Could you elaborate on that, please?

Tom McPhail: Yes. The context the lifetime ISA came from was a review of pension taxation, which was aborted, to a large extent, in that it did not ultimately change the overall structure of the taxation. It largely left pension taxation unchanged and it introduced a new product as an alternative.

An important point to acknowledge is that all the problems, inconsistencies and illogicalities that exist within pension taxation are still there and still unaddressed. What we have instead is a product that, as we heard from the previous witnesses, will serve purposes for some investors in some circumstances—for a minority of self-employed people, for example, and for people who cannot benefit from an employer contribution into a pension. It will have some benefits but, in the process, it will make the investment landscape more challenging for most investors.

We are in danger of sending ISAs down the same road as pensions, making them more and more complicated. Our business is to make it simple for people to save and invest and do the right thing—to invest responsibly for the future—and when clients ring up now and say, “I’ve got £100 a month I want to save,” we are going to be faced with asking, “Do you have access to a workplace pension? Do you want an individual pension? Do you want a cash ISA, an innovative finance ISA, a stocks and shares ISA or a lifetime ISA? Are you saving for the short term or the medium term? How soon will you need to have access to the money?” It is getting more and more complicated and, frankly, in terms of the big picture in the long term, I think we are going down the wrong road.

Q You referred to the fact that there are more challenges for investors, and to the effect that those challenges will have. Can you elaborate on what the effects of the challenges will be?

Tom McPhail: The more complicated you make the decision-making process, the more you put people off doing the right thing. One of the things we have worked very hard at as a business is to make it simple for people to save and invest. Going back 10 or 20 years, a typical pension application for someone who wanted to save for their retirement would run to 20 pages. We have stripped that down to one sheet of A4, and more people are investing in pensions as a consequence. We have 800,000-plus private investor clients—ordinary individuals —and more of them now log into their investment accounts using an app rather than online. We are making it simple for them to save and invest. Every time we have to ask them another question, every time we knock them back by making them think about one more thing, it slows the process down and we lose a few of them. It makes it more complicated. So half of the challenge for all of us here is to make it as simple as possible for people to save and invest for the long term.

Q Are you concerned, in the light of the fact that you believe that the area is becoming increasing complex, that there is the capacity out there to give the good information and advice that we seem to be getting told we need? It seems to me that the answer to everything we asked was, “More information, more information, good information, good information,” without it being said exactly what that meant. Would you agree?

Tom McPhail: A lot of the time, the answer is less information. I could send you a 50-page document and you might well not read it. We had that problem with the open market option on pensions: people would get to retirement and we would send them a big stack of papers saying, “You have a right to shop around,” but there was so much paper that people did not shop around, so they bought a poor-value annuity. Actually, the answer is to send them less information but to make sure it is the right information. The Government’s recent work around the financial advice market review was enormously encouraging. It gives us more latitude to give people simple, helpful information that will steer them towards making a good decision.

However, your point is absolutely right: if we do not give them that information and that support to steer them towards the right answers, risks do exist. We heard about workplace pensions earlier and the risks of people opting out of them; that is a good example of where it is really important that we support them with good information, to make sure that they do not do the wrong thing.

Q I have a final point and, if I may, Chair, I will ask Mr Wren to make an observation as well. You say that this will potentially undermine savings behaviour, which is exactly the opposite of what anybody wants. Could you tease that out more? It is fine to say that it is complex, but could you put some more meat on the bones? Why will this undermine savings behaviour?

Tom McPhail: We have a lot of people putting long-term money into cash. They are being excessively conservative. The bulk of ISA money sits in cash accounts. Auto-enrolment works from an inertia point of view: it gets people into pensions and it is proving to be a great success. The challenge thereafter is to encourage people to take some responsibility for that pot of money, to take an interest in their long-term savings and, as they move into their 50s and 60s, to think about what they are going to do with that pot of money, whether it is adequate, whether they have been saving enough and how they are going to apply it to draw an income in retirement.

Currently, we have a lot of people just putting money into cash ISAs—short-term money—and sometimes it ends up sitting there for 20 years. That is not a good outcome. It is about striking that balance: making it simple for people, but also drawing them in and getting them increasingly engaged. So the answer to your question is that the more complicated it is, the more we will lose people and the greater the risk that they will just make no decisions at all, as we saw with the open market option on annuities, for example.

Mr Wren, have you any observations on that question?

David Wren: Yes, I think a few of the questions that Tom has answered are things we are concerned about. The introduction of the lifetime ISA adds considerable complexity to a market that is not simple anyway. This will be the sixth type of ISA on the market. It directly competes with the help to buy ISA for certain savers with certain aims, and it has an overlap with pensions, savings and various other products. The hybrid nature of the product—between saving for a house and saving long term for retirement—also adds considerable complexity for people who are choosing where to save and what to do. For a single product to try to do both things, which are often competing aims in terms of what someone is saving for, is really challenging.

One of the things Tom spoke about was whether you save in cash or in stocks and shares. Saving for retirement is typically a long-term activity. Stocks and shares are probably a better investment for many people in that context, if not funds and others. Saving for a home was historically a short-term activity. Unfortunately, for many people it is probably becoming a mid-term activity, but the security that cash and similar investments bring is still probably more suitable. Balancing that within a lifetime ISA is going to be very challenging for savers and for organisations that want to offer them to their customers.

Q In the information you provided, you say:

“There are concerns that savers may end up with the wrong investments leading to the wrong outcomes as a result of the route through which they enter the market rather than as a result of a conscious investment decision.”

Again, it is important to try to unwrap that. Could you unwrap it a little more for us, please?

David Wren: Absolutely. There were some questions in the previous session about the risks in a lifetime ISA. Ultimately, the lifetime ISA is a wrapper around some assets, and the assets are for you to decide. There will be people who offer only cash lifetime ISAs; they do not offer stocks and shares to any customers, and they will not be offering it for this. There will, presumably, be people who offer only stocks and shares lifetime ISAs. The fact that you have picked up the phone to someone who offers only one particular product may not mean that that is the best product for you. There will hopefully be information out there, and we very much hope the Government will work with us to provide good information to customers on getting the right product.

To answer Tom’s point, to have cash sitting somewhere for 20 years is probably a bad idea, particularly with interest rates as they are at the moment. Similarly, going into stocks and shares for three years is a bad idea—there were questions earlier about the risks that people were exposing themselves to. Helping people get the right access to the right product at the right time is going to be a critical part of making sure that the lifetime ISA is successful.

Q Tom, I want to go back to your point that this would make the market too complicated and crowded in terms of what products are available. Is it not true that for a long time, many people have been left out of savings altogether—I am particularly thinking of people on low incomes, the self-employed and those with multiple, low-paid occupations? Actually, there is a lack of culture around savings; it is just not the norm for some people. While the auto-enrolment pension will go some way to addressing the pensions issue, as we heard in the previous session, this is in addition to, not instead of, auto-enrolment. Is it not that the product is right, but the key is getting that advice available to people so they can make that decision? This will open up the market to people for whom savings have not been an option before.

Tom McPhail: Given where we are now, six months before the intended launch, our starting point would be to go ahead with this. However, in the longer term we are still of the opinion that it is not going to achieve those aims you have just described.

We also looked at the 2017 auto-enrolment review as an opportunity to adjust some of the thresholds to recognise the changes that have come about as a result of the pensions freedoms and the importance of giving more people more access to retirement savings, to bring some of the lower paid into the pensions system. We have looked at ways to revisit those questions that were not answered around pension tax reliefs and ways to reward people for saving for retirement, but the lifetime ISA is not going to achieve that.

You heard some numbers about the self-employed. Actually, two thirds of the self-employed are already ineligible for the lifetime ISA. So we have a situation where the one group of the population that, more than any other, sets to benefit from the lifetime ISA is ineligible for it. In what way is this a good policy?

You are right about the low-paid: we need to do more for them. We think there are ways we can do that through the pensions system. I am sure you will hear later about Help to Save, which is not an area I want to comment on, but there are other ways to address that. The lifetime ISA is not going to fix those problems.

Q You say that in the short term it might work, but in the long term it is not going to help. Why is that?

Tom McPhail: Just because we keep moving the goalposts. It was really interesting doing some consumer focus groups around the pension freedoms. When we talked to people about all the risks around pension freedoms, we thought they would say they were worried about running out of money or not knowing where to invest, but pretty much everybody we spoke to said that their main worry was that the politicians would move the goalposts again, that they would change the rules again. It happens particularly with pensions, but it happens elsewhere as well. Every time this happens, it undermines people’s confidence and trust in the system.

The recent decision around the secondary annuity market was interesting. We think that was a good decision. We are actually quite glad that the Government made the decision to pull back from the secondary annuity market, but what did we see then? We saw headlines in the Daily Mail saying, “People have been denied pension freedoms—once more the opportunity has been snatched away from them”. Every time we do this, it chips away at people’s confidence. We need to think about how and when we make these decisions and these changes. Our preferred option would be to go ahead with the lifetime ISA, because this is where we are at now, but in the longer term to move towards consolidating all these different ISAs we have been hearing about into one simple super ISA and, separately, to go back and address the questions around pension taxation that we failed to deal with last time around.

Q To push you a bit further on that, a lot of people only have a pension thanks to auto-enrolment. Do you not agree that anything that gets people saving and that encourages them into a culture of saving, whether it be for their first home or for later in life, is a good thing?

Tom McPhail: But it is not a zero-sum. We could give people a 100% top-up on their money, but we cannot afford to do that, so we have to make choices about how we go about doing things.

Q Is it not better that they have a savings scheme rather than not save at all?

Tom McPhail: We need to get them into the auto-enrolment system. That is the way to help them save for the longer term. If we want to address their short-term savings, there are other ways to do that.

Q I can see why lifetime ISAs are a very attractive savings option for the very wealthy, high-earning young people, and those who have maxed out their pensions allowance, but to my mind, the real challenge has been encouraging people on low and middle incomes to save for retirement purposes. From what I have heard in evidence so far, you seem to agree that auto-enrolment is an important step forward. Reflecting back on the questions I asked the earlier panel, would you agree that most people on low and middle incomes would be better advised to invest in pension schemes?

Tom McPhail: The numbers overwhelmingly point to the fact that, if you have any kind of employer contribution, you are almost invariably better off going through the auto-enrolment system at work and saving in a pension than going into a lifetime ISA. Separately, we think that there is more we can do with the incentives to save in a pension that would improve that equation even further. Yes, absolutely, for most people most of the time, for long-term savings, the pension should be, and is, a better answer.

Q Could you say a bit more about the sort of incentives that you think might actually help?

Tom McPhail: There was a lot of work done last year around the idea of a flat-rate incentive—breaking the link between pension incentives and the tax system altogether. There was quite a lot of support across the industry for that concept, with talk of around a 30% top-up as an alternative to tax relief. All contributions would be made out of net income, and when you made a contribution to a pension you would get a flat-rate top-up. I think there was quite a lot of traction for that idea.

I think we can go further, and it would be quite desirable to weight those incentives particularly towards younger savers. You could get the benefit of compounding. If the incentive were progressively reduced the older you got, it would provide a behavioural incentive, because with every year that passed, you would lose out. That is a very powerful message that the industry and the Government could harness: to say to people, “If you wait another year, your incentive will drop a little bit.” We have been working through some ideas on how we could develop that as an alternative incentive. Either way, you are taking it away from the current messy, unfair, lumpy, illogical tax-relief system that continues to operate today.

David Wren: I think complexity is definitely the enemy of success in getting people to save. There are lots of subdivisions of pensions and savings. Helping people to find the right place within that for their needs is really challenging. The risk of complexity is not just that people go into the wrong product for them at the start, but that they are put off by the whole experience. To give an analogy, it is very similar to internet sign-up processes: each additional question you add to an internet sign-up process puts off a disproportionate number of people from continuing through that process. Having a dozen different products out there with different features does not necessarily push people to the wrong one; it encourages inertia, where you simply cannot decide and therefore do not invest in any of them.

Q You keep touching on the complexity of this product. I have read the blurb in the overview of the Bill and I understand the eligibility criteria—I am too old—and the withdrawal terms. I am inviting you to bamboozle me, as it were. What is so complicated about this product that I am missing?

Tom McPhail: To the credit of the Treasury team that worked on this, they listened to feedback from the industry and were really good at working to create as simple a product as possible. My answer to you is that it is a lot simpler than it might have been.

When you ring us up, we will still have to walk you through the circumstances in which you will be eligible to take the money out without a penalty, and the circumstances in which you will be able to take money out but would have to pay a penalty, so there is still a customer engagement process that will have to be undertaken at the front end. I think I made the point in the brief written submission I sent in ahead of this session that the problem is not the product itself. The product itself is reasonably simple—there are simpler products, such as the cash ISA; that is really simple—but you have dropped a moderately simple product into a complicated landscape, and you have just made it more complicated.

That is exactly what happened when we launched stakeholder pensions getting on for 20 years ago. Stakeholder was simple, but it was dropped into a complicated landscape, and—guess what?—it made life more complicated. This is analogous to that.

David Wren: That is what will really cause the challenge. When someone tries to open one of these products, the first question is going to be, “What are you saving for? Is it a home or a pension?” If it is neither of those, this is probably not the right product for you. If you pick house purchase, you have to decide between the lifetime ISA and, at least in the short term, help to buy. People have said that the lifetime ISA looks better, because you are getting the Government top-up and earning growth on that, but you cannot have the money back without a Government penalty. The help to buy ISA does not have that, so if you need flexibility, help to buy might be better for you. If you go down the pensions route, we need to ask about whether you have maxed out auto-enrolment and taken full advantage of employer contributions, and whether a different pension route might be better for you, again recognising that there are different features as to whether you benefit or not.

It is worth adding that I have been involved in this since it was announced in March—my work has a tax background—and it is not immediately obvious to me whether I would be better off topping up my pension or putting money into a lifetime ISA. The reason for that is that I would need to know what tax rate I would pay on that money when I retire, and I do not know that. It is far from simple in any one of those particular places to work out which is the right thing for you. It requires value judgments about a number of the elements. The risk is that complexity leads to inertia and dissuades people from saving at all. There is not just the risk of going into the wrong product.

Just one final thing, which the previous panel touched on: because of the Government penalty on withdrawals—you lose not only the bonus, but 6.25% of your contributions, because of the way the numbers work—there is no easy exit route from a lifetime ISA. If you make a mistake and a month down the road you say, “Gosh, I’ve made a terrible mistake. I should have gone into a different product,” you will lose some of your money in getting that money back out and into another product. Again, we have real concerns about that and what it will mean for customers.

Q I have one more question. This takes me back to my misspent youth, more than 25 years ago, when for four years as a student I worked for Abbey National as a cashier and customer service adviser. We would sell this type of product. We had a whole suite of products that had penalties if, say, you were five years into a bond and withdrew early. This is not rocket science. We could explain that to our customers, and that was without the benefits of the internet. I am still a bit sceptical about why this landscape is so complex to your members; it does not seem that different, and we were easily able to sell things 25 years ago.

David Wren: The landscape has probably changed slightly in 25 years. We very much welcome the Financial Conduct Authority consultation on this, because its view on how we engage with customers and make sure that they get the right protections is really important. Yes, a range of products are available, but as Tom said earlier, a lot of people will now buy online, through a call centre or through an app, so they are not going to see someone face to face. Again, we need to make sure that people are given access to the right information to allow them to make the right decisions. That is absolutely doable, and, as I said earlier, we hope that the Government will work with us on getting the right information to people. It is the landscape that is complex, as opposed to the individual products.

Q David, in your submission, you say:

“In particular, there is a concern that cash held in LISAs will only be suitable for those looking to buy a home, whilst stocks and shares will be more suitable for those investing for later life, looking towards retirement.”

Is there not a risk that if an individual invests in stocks and shares and then buys a home at the wrong time because the market has fallen, we inadvertently expose consumers to risk as a consequence of this policy?

David Wren: I think that is exactly right. That is exactly why we need to make sure that people are getting the right support in picking a product, and in the underlying investment for that product. I am sure that Tom is more expert in this than I am, but for pensions, stocks and shares are typically viewed as the right investment. Those ups and downs will average out over the course of your life. I assume that most people are saving for a home in a relatively short time-window—five to 10 years. Stocks and shares are inherently more risky. The point at which you are starting a family and want to buy a home may be the point at which the market is not going through a particularly buoyant phase.

We also need to recognise that for a lot of people—bear in mind that lifetime ISAs are available from 18—buying a house is a medium-term activity. That may well be over a more than 10-year timeframe. That becomes a very challenging time. It is not obvious that cash is the right investment; it is not obvious that stocks and shares are the right investment. That is a very difficult decision for someone to make.

Q There was this debate about moving from “exempt, exempt, taxed” to “taxed, exempt, exempt”, which was taken off the table. Was this not really just a back-door way for the previous Chancellor to bring forward this policy?

David Wren: I do not think I could comment on what the previous Chancellor was thinking when he introduced this. This is a “taxed, exempt, exempt” product. When I said earlier that it was difficult for me to work out whether I should open a lifetime ISA or pay into my pension, it is for exactly that reason: it is the difference between the money being exempt when I take it out, hopefully, at 60, versus paying tax on a pension at 60. Having both products in the market is incredibly complicated. Explaining the concept of “taxed, exempt, exempt” or “exempt, exempt, taxed” to someone is challenging. The Institute for Fiscal Studies wrote a very good study earlier in the year, in March-time, in which they talked about how this worked for different investments, but it is a thick document, and it requires a dark room and a lot of peace and quiet to really get into the detail.

Tom McPhail: We did some client research early this year on entry; everybody was under 40 and did not own a house. However, they were all Hargreaves Lansdown customers, so I cannot claim that this is representative of the population as a whole. Having said that, 14% of them said that they would look to use the lifetime ISA to save for a property, and 68% were looking to save for their future, so there was an emphasis on the longer term there.

The majority who expressed a preference did so for stocks and shares investing, rather than looking to cash, so there was a weighting—a sense that people were seeing this as a longer-term savings product, rather than a short-term cash product, in contrast to something like the help to buy ISA. This suggested to us that they were seeing it as being closer to a pension than a help to buy ISA. Clearly, there was a bit of both going on in there in the mix.

On your point about taxation, clearly we have different personnel at the helm now, so perhaps priorities and agendas have changed, but I think that it is worth reiterating that all the reasons why pension taxation was examined in the first place are still there and are unresolved.

Q I want to carry on with this point about complexity, because it seems to me that you are using the word “complexity” where others might use the word “flexibility”, dare I say. As we discussed with the previous witnesses, it is surely not unreasonable for a young family to be entirely focused on buying property, particularly if they live in areas that are very expensive. Perhaps they are on a short-hold tenancy with less security, and so on. Therefore, when presented with a savings option, they will want to opt for a deposit.

I take your point about help to buy ISAs, but they are going in two years, we understand. Do you accept that the flexibility that comes from a pseudo-pension product that could be used for a mid-life event—in other words, buying a house—is what makes LISAs unique, unlike auto-enrolment? There is a big market for this, and there are a lot of people who would welcome that choice.

Tom McPhail: We think there are other and better ways of addressing that problem that would be simpler and more sympathetic to investors’ needs. We support the auto-enrolment agenda, and we think it is important to get as many of the people you have just talked about as possible into an arrangement where they are saving for their retirement. Some of them may choose to opt out of a pension and eschew the benefit of an employer contribution, and to save into an ISA instead. For some, that might be a logical, rational and appropriate decision to make. That would, of course, mean that they were not saving for retirement in the most tax-efficient way available to them. In fact, potentially, they would not be saving for retirement at all, if they had opted out of a pension to achieve that goal.

One of the risks is that the lifetime ISA will subvert the pension-saving agenda. It is critical that pension providers and human resources managers—anyone involved in pensions—are communicating effectively around those trade-offs, the risks of giving up the benefits of the employer contribution, and the long-term consequences of that.

The help to buy product gave people taxpayer support in buying a house. There was actually relatively little wrong with it. It was there as a vehicle for saving in the short term, to build up a cash pot specifically to buy a house. The idea of trying to have your cake and eat it—of trying to save up for a house and for retirement within one product—that is where the complexity comes from, and that is where you are trying to do two things with one bag of money. If you use it to buy your house, it is not a savings product anymore.

We have already talked about eligibility for the lifetime ISA, and the fact that most self-employed people—for whom this could be a really good idea—are not eligible because of the age restriction. So I agree with you, but I am not sure that we are going about this in the best way.

David Wren: We really like the help to buy ISA; it is clear and unambiguous. Are you saving for a house? Are you a first-time buyer? Put money in. It is cash, and there is no confusion about whether you are also saving for your pension at the same time, because that is not a feature of the product. It is a really nice, neat product, which says, “Here’s what I do; here’s how I help you; and the Government will provide you with some help to buy your first house.” It is a shame that it will be removed in 2019. It has been very successful, and something like 250,000 were opened in the first six months of the product. That kind of really clear labelling and signposting that others have talked about is something that help to buy really had, and that the lifetime ISA risks not having.

Q From an industry point of view, which product would make you most money from selling it, a lifetime ISA or a pension scheme?

Tom McPhail: We make the same money on all of them.

Even a lifetime ISA?

Tom McPhail: Correct. We have the same platform charge, irrespective of the arrangements you are going into. Where we lose money, or where we potentially end up having to charge the customer more money, is when things get complicated. The more complicated it is, the more it costs us money, and the more, potentially, we have to pass on to the customer in costs, but we will make no more money on any of these products.

David Wren: As a trade body, I do not think that we have access to that kind of information.

Q I have listened to you both with interest. I have to say that this scheme will do nothing for a high proportion of our population who are less well off and less sophisticated. Again, all these schemes seem to be designed for the better-off and the more articulate. I have had to ask to have my life insurance schemes explained to me two or three times, but I have not got a clue what those who explained it were talking about—and I am a graduate in economics and mathematics. Half the population are not numerate, and a fifth of the population are not functionally literate. We need a state automatic scheme to help people like that, going beyond auto-enrolment—a defined-benefit scheme, and that can only be done in the state sector.

Do you want to comment on that?

Tom McPhail: I am not sure that it was a question, but I think the simpler and more accessible we can make things for investors, the better. It is beyond my remit to talk about the state pension here today.

If there are no further questions, may I thank our two witnesses for a very informative session?

Ordered, That further consideration be now adjourned. —(Stephen Barclay.)

We will now hear oral evidence from StepChange and the Centre for Social Justice. Would the witnesses please introduce themselves for the record? I call Ed Boyd first.

Ed Boyd: My name is Ed Boyd and I am the managing director of the Centre for Social Justice think-tank.

Joseph Surtees: Joseph Surtees, senior public policy advocate for the StepChange debt charity.

Welcome to this afternoon’s hearings. I call Peter Dowd to start the first set of questions.

Q 4747 The proposal for the lifetime individual savings account followed a wider public consultation about the future of tax relief in pension provision. How do you think the LISA, as proposed, fits into that wider public debate? Mr Surtees first.

Joseph Surtees: I am afraid that, as an organisation, we have no particular views on the LISA. We are very keen on any proposals that the Government can bring forward to boost both short-term and long-term savings, and I think with the LISA we are still going over detail.

Ed Boyd: I am afraid I will not be much more help. Our focus has very much been Help to Save, and that is what we have been doing research on. I can give a personal view, but it probably won’t be too beneficial.

However, the one thing I think it would be worth saying on the LISA side, and it is more of a comment than anything else, is that if you look at the panoply of savings products within LISA and Help to Save, in 2021, only 8% of those funds are budgeted in the impact statement to go towards Help to Save. That falls within an approach that this is about the “just about managing”. Those who are on universal credit—they are kind of in-work, but we would love them to be earning more and trying to progress up the earnings ladder—are the “just about managing”, I think. The majority of the people on universal credit when it is fully rolled out will be in deciles two to five. So it’s just a question about the balance between the two—LISA and Help to Save—but I am afraid I have no detailed comments on the LISA itself.

Q Given that response, I will try another angle. Some of the suggestions that we have had about the LISA are that although it might well be a simple product on its own, in the context of a wider market full of God knows how many products it just complicates things. Do you have a view on that?

Joseph Surtees: I suppose that in terms of how it fits into the wider market, the point Ed makes is very interesting, which is that if you refer back to the ISA itself, people earning about £80,000 are twice as likely to have an ISA as people earning the average income, which is £26,000. So the savings crisis, if I can put it like that, is among the very low earners. When products come forward in tandem, like LISA and Help to Save, it is important to ensure that they both have equal weight and an equal offer, and that they both appeal to the right markets.

Q Okay. If we’re talking about encouraging people to save in one fashion or another, do you think that Help to Save adds to that in any substantial way? Will people save significantly more as a result of it?

Ed Boyd: So the question is: do we think that it will help? I think the answer is yes. There are always little bits to tweak and improve, I guess, as the Bill goes through, but as a whole—I mean, the idea of Help to Save is a fantastic one. When you look, as the CSJ does, at the root causes of poverty, we very purposefully have as one of the five—alongside worklessness, addiction, family breakdown and things of that ilk—problem debt. The majority of the people who we are talking about, especially when they have just moved into work, are only working 16 hours on the national living wage, which this will apply to, and will often have very little savings.

It is about the unexpected shots, and StepChange’s research on this is brilliant. It shows that every six months or so there might be something, such as a washing machine that breaks down, or something else, and if you have no savings, the effect that can have on you—not just in terms of, “Oh, we have to go to slightly higher-cost credit”, but on your mental health, and how productive and efficient you are at your work because your mind is continually filled with the debt problems that you are trying to carry—is hugely significant. So, anything that can try to create a culture of saving and provide some Government backing to incentivise people to save more is a wonderful thing. It is a great thing to add to the armoury.

Joseph Surtees: I certainly agree. We are very big supporters of Help to Save. The research that we carried out, which Ed is referring to, found that if a family has £1,000 saved, that reduces the chance of them falling into problem debt by 44%—so we think that Help to Save will really help in this area. To agree with Ed again, there are little tweaks that would help to increase its appeal. When it was introduced in the Budget, the potential eligibility for the scheme was 3.5 million, but the impact assessment says that it will probably only reach about 500,000. When looking at the Bill and the way that Help to Save and its features are going to be rolled out, the question is: how do we get that 500,000 closer to the 3.5 million figure?

Q Can I just ask, on that basis, how well targeted you think Help to Save is on those with the lowest income? It is all very well to say “Save”, but if you have no money because you are on benefits or have a low income, how well targeted is that particular product?

Joseph Surtees: I think it is almost as well targeted as it could be without putting a huge onus on banks and, in a scenario in this case, running de facto means testing. We could possibly open up the eligibility. I know that the Institute for Fiscal Studies has done some work on this—which I have one or two questions about—but as a basic proposition it is pretty well targeted at the group that needs the savings the most. If you look at the figures, almost half of families with an income below £14,000, a category that a lot of the Help to Save target families fall into, do not have savings. We have one specific issue, which is to do with how it will help people under 25. That is very much to do with the benefits rules, which I can either discuss now or come back to later.

Q I want to touch on one of the points raised in our previous evidence session, which was that someone can withdraw money from this lifetime ISA if they want to buy a home, but if they want to withdraw money for any other reason—you touched on some examples, such as if their washing machine breaks down or they have an urgent need to get money quickly—they face a penalty of between 5% and 6%. Are there certain criteria you would like to see where there are other options to withdraw money without hitting a penalty?

Ed Boyd: As I said before, the detailed knowledge, in terms of the research that the CSJ has done, is on the Help to Save side rather than the ISA side of things. There is a valuable question about the accessibility and flexibility of accessing savings within Help to Save. I could give a comment on that—perhaps it is applicable across to ISAs. I would need you to be the judge of that.

Q But do you think that there should be an option for those people to withdraw money quickly rather than just having being able to buy property as a penalty-free reason?

Ed Boyd: On ISAs?

Yes, on the lifetime ISA.

Ed Boyd: We have not done the research on the ISA, so we do not have a view. I can probably only help with the Help to Save side of things.

Joseph Surtees: On that point, I would say—and this is applicable to both—that a lot of the behavioural research in this area talks about a process called hyperbolic discounting, which is to do with the fact that the further away something is, the less appealing it will be. So, any mechanisms we can have in any of these products that allow people to access them before two years, in the case of Help to Save, or before much further in the future, in terms of the LISA, will appeal and widen the eligibility a lot more.

Q Some of the evidence we have taken this morning has already been more about long-term savings. In the evidence you presented just now, you emphasised the issue of accessibility and the need for people to be able to access their savings quickly to deal with external shocks. What kind of products do you think would be beneficial for people on low and average incomes for longer-term saving?

Ed Boyd: On the flexibility point in terms of accessibility of savings, there is a question. We produced a short paper on Help to Save off the back of a round table of experts in this area. One of the questions that kept coming up was whether there should be some friction for people taking out the money. For example, if someone starts to save for two years with the best intentions to make sure they get their Government bonus, but has one day of giving up on that plan, it would completely undermine it and they would not get the Government bonus. Potential frictions can be put in such as a 24-hour delay in taking out the money. I think that would be completely reasonable.

Where appropriate, someone could name a third party—a family member, husband, wife, carer or whoever—and when they say, “I want to bring it down in 24 hours”, that person is texted to make sure that there is enough friction to ensure that when the money is drawn down as a rainy-day fund, it is used for rainy-day activities and things that they really need the money for, rather than just for general expenditure. This would encourage people to save and make sure the money is used to help stop them getting into problem debt.

Joseph Surtees: I think there are two interesting points here, one of which is on Help to Save. There is a system in the UK that has proved very good at encouraging low-income people to save over a long period, and that is pensions auto-enrolment. So far, the opt-out rate for that is far lower than anticipated. It is only 10% when it was anticipated to be a quarter. People who are enrolled and have not opted out are those just above the enrolment limits.

That sort of approach is incredibly useful in this area, particularly for low-income people. When you look at products such as Help to Save, such as LISA, perhaps, if you can look at how to incorporate an auto-enrolment element into that—with Help to Save, you can in particular do it through the universal credit system. Universal credit has personal budgeting support which helps you to do that. Those sorts of little behavioural incentives will help to make it appeal and work better for these lower-income individuals.

Q I am conscious that half of UK adults have less than £500 set aside for emergencies. Do you believe that the financial services market has done enough to attract and incentivise savers who are perhaps struggling with income? Do you think that the Help to Save initiative will help to plug that gap?

Joseph Surtees: In answer to the first question, I do not think the financial services sector has done enough to attract these customers and offer them a service. I will give two examples.

You may have heard of a product called prize-linked savings, which has proved to be incredibly successful in the United States. I can send you some information later, if that would be useful. It is incredibly successful at appealing to low-income families. For many years, people have talked about introducing such a system into the UK—a sort of slightly better premium bond offered via commercial providers. This was introduced in the UK by a bank, but only for people who already had £5,000 saved. To me that says that they were not really thinking about lower-income consumers.

The second example is Help to Save itself. One of the suggestions was that it would be offered by commercial high-street providers. Without giving anything away, my understanding is that most commercial providers displayed absolutely no interest in offering this product, but did display interest in taking on these customers once they had £2,000 saved at the end of two years.

Ed Boyd: There is a big problem here, which is that people are getting stuck in problem debt. It is a growing problem. I will check my stats on this—30 million people in the UK lack savings to keep up with essential bills for just one month if their income dropped by a quarter. Within the confines of that, rather than saying, “Do I think it is the financial services’ fault that we have not done enough, or the Government’s, or someone else’s?”, there is a real opportunity with products such as Help to Save for everyone to pull together and do what they need to do to help solve the problem together.

There is an opportunity for credit unions and community development financial institutions to play a big role, as well as mainstream financial institutions, not just in helping people to save but in helping to ensure that they are financially included. You have wider debates around issues such as the poverty premium—that is, the fact that people who have insecure incomes end up paying far more because they cannot do direct debits.

I do not think it is as simple as saying, “It’s just the financial services sector that needs to deal with this and help more.” I think there is a contribution needed from Government, from the private sector and from the voluntary sector as well to work together to help increase people’s ability to budget, to increase people’s incentives and ability to save and to ensure that people are financially included as they go on that journey.

Joseph Surtees: On that point, I always think about the famous Morecambe and Wise sketch: all the right notes, but not necessarily in the right order. Actually, out there you have lots of the products and approaches such as Help to Save, LISA and auto-enrolment and there are banks—and especially credit unions—that do very innovative things in these areas, but I think it is important to bring these things together so that people have access at the time they need it and can see the products laid out in front of them and make the right choices.

Q Have you made recommendations to Government about how they can link up with benefit payment providers, local authorities and the third sector to ensure that the market we are talking about is signposted adequately to this type of product?

Ed Boyd: Not in the work that we did, but we are really happy to help where we can. For example, we have an alliance of 350 front-line poverty-fighting voluntary organisations and they are a great avenue through which to ensure that things are articulated well to clients who might benefit from products such as this. If we can help in any way, we will be really happy to.

Joseph Surtees: We work very closely with the Money Advice Service on these issues; we worked very well with them on the single financial statement, which includes the savings element, throughout the process of Help to Save. We have also spoken to quite a lot of Treasury officials on this and I think they listened to what we had to say. There is one issue emerging from Help to Save that people and the Treasury may want to look at going forward: a very technical issue about financial advice and how debt advice providers and financial advisers can recommend products and whether they will be able to recommend things like Help to Save.

Q Have you done any analysis of how many in this target market are currently in the area that would benefit from auto-enrolment? How do you see the interaction between auto-enrolment and Help to Save in that regard? What comments would you make on the incentives there for pension investment against the incentives there for Help to Save?

Ed Boyd: Before I come to that question, there is a point of context. One of the important things we stress in our research briefing is not seeing Help to Save in isolation. We are big fans of auto-enrolment as well. You look at the success with pensions and say, “This is important. Why wouldn’t we use that mechanism here, or at least try to tie that in?”

That brings up a question in our minds looking at things like contributory benefits. Over decades and decades and all kinds of Government, the generosity of them has slightly reduced continually and, actually, if you look at universal credit, the architecture is very different from legacy benefits, ensuring that people have the appropriate support if they fall out of work through their national insurance contributions. It is difficult to see how that ties up. One of the potential answers, and the reason I mention that, is to look at auto-enrolment and rainy-day guarantee funds being set up through employers in the same way you have done with pensions to provide insurance for people against smaller income shocks such as washing machine breakdowns and also for larger ones such as falling out of work.

To consider Help to Save in isolation from that wider debate would be a mistake. There is a great opportunity here to tie together different things that are happening around Government to ensure that you have a very clear, succinct, offer and approach to people who are in work but on low incomes, who we are encouraging to save. Combining those things together through Government thought would be useful.

As an organisation, we are not at a point yet to say, “Here is how we think it could work and here is the big solution,” but we are developing a lot of our agenda on this at the moment. Again, as the Bill is going through we are happy to contribute, but it feels like a really important thing to discuss as the Bill goes on its passage through the House of Lords and the House of Commons.

Joseph Surtees: In terms of the success and appeal of auto-enrolment, I referred earlier to the National Employment Savings Trust figures and auto-enrolment figures that say that there is more success and less opt-out from those with less income than from those with higher income. I would also refer you to a lot of work done in the United States by a couple of academics called Madrian and Shea, who looked at how auto-enrolment increases savings rates in businesses through payroll deduction. They found huge impacts, such as the number of people saving within a company doubling within a very short period of time once auto-enrolment was introduced.

On Help to Save, as I have said, auto-enrolment would really help, especially from the benefits side of things. There are even smaller tweaks that will help get that 500,000 figure closer to 3.5 million. Moving the bonus to getting it every six months would have a huge beneficial impact, as would allowing people to pay in an average of £50 a month rather than a maximum of £50 a month and looking at the issue of under 25-year-olds being excluded from Help to Save by the benefits rules concerning working tax credits. There are small changes you can make now that would have a big impact.

Q Thank you for that. Those were interesting answers from both of you. Ed, when you talk about how you see that auto-enrolment can deal with some of the challenges that you have outlined, I wonder whether you would see as an example something like an insurance wrapper that would give the kind of benefits that you are talking about as an advancement of auto-enrolment.

Ed Boyd: Could you say that again? I did not quite get that.

Maybe something like an insurance wrapper could give the kind of benefits that you are talking about—people losing their job and benefits and what they could get. There are things you could do perhaps to auto-enrolment that would give the kind of opportunities for people that we are talking about.

Ed Boyd: There is a number of ways you could do it. We have not yet got to the point to say, “This is specifically how you should do it.” We are at the stage of saying that maybe your question implies that there is an opportunity to do insurance wrappers or auto-enrol. There are a few different approaches that you could take. That is definitely one you would look at; I think that is what we would say.

Q I just wanted to ask you about the interaction with debt. You are talking about people who will potentially have payday loans or whatever. First, will there be legal protection for the savings that they have in respect of those lenders? On the other hand, it may well be the case that the most sensible thing for them to do with their savings, once they get bonuses et cetera, is to pay off some of their debt, especially if it is at a very high annual percentage rate. I wondered what sort of advice there would be.

You mentioned universal credit, where there is quite an important point. The thing that is really good here is that you are getting people into a habit but this is initially clearly for short-term savings, which I think will actually incentivise them more on the realisation that it can help them. It is a matter of how it interacts with the debt dynamic, because a lot of them will be in that area.

Joseph Surtees: That is a very good point because there is a very specific point here about the risk that these accounts are under if somebody who has one either goes insolvent or does not go insolvent but falls into debt. That will mean they are at risk both of having the money taken during insolvency proceedings or taken by a third-party debt order. In the same way that was done with pensions under the Welfare Reform and Pensions Act 1999, where there was a wraparound of pension savings, it would be useful to have a think about whether the bonus, or even all the money in the account, should be protected if somebody begins to go insolvent, or is threatened by insolvency or their creditors.

On the second point, this is an ongoing conundrum. I know you are seeing Martin Lewis later and he will probably have a slightly different view on this. All of the research and lived experience of organisations such as ours show that, while it is crucial to pay back your debts, people also need some savings or fall-back for sudden shocks. That does not only do their financial position well; it does their mental health position incredibly well. It has been proven by the work of the single financial statement that you can save while paying back debt. Yes, in terms of a purely rational decision, occasionally people saving instead of repaying debt may not be 100% the best thing to do but, in terms of the common-sense best thing to do, I think it should be allowed.

Ed Boyd: Likewise, if someone has a significant level of debt and we say, “We think you should save the full amount because you have just moved into work. You’re working 18 hours at the national living wage on universal credit,” for example—the advice needs to be tailored case by case. That is why I think the training experience of work coaches as they engage with these people is going to be absolutely crucial. You can say, “This is what the advice should be,” but the people who are advising people face to face and saying, “These are your options in terms of savings, paying off debt” are absolutely crucial. It will be really important to get that interface right.

This links with a programme that is being rolled out by the Department for Work and Pensions called universal support, which is the idea that when somebody comes into a jobcentre, they will not just get advice—“This is a job you can go for and we’ll try to push you into that”—but we will try to understand the root causes of why they are out of work. Debt is often one of those causes, so making sure that people have appropriate support for debt is really important.

I do not think I can say this is how it should happen in every situation. Building up savings is important, but you would not encourage someone to save the maximum amount in their scheme they could if they were paying off lots of debs separately. You would encourage them, if they have some spare capacity in terms of income, to use that to pay off the debt as part of the repayment plan. The interface with the work coach becomes very important to make sure that the advice is right.

We have four minutes now and three Members who still want to ask questions. Can we bear that in mind?

Q I have a quick question. I am pleased that the line of questioning has taken us to problem debt. I am slightly worried that the way in which we are viewing this is through a prism where people are in regular work, on reasonable incomes and perhaps where, if they experience debt, it is a one-off emergency. In fact, a lot of families experience debt over an incremental, lengthier period of time, so they are regularly exceeding their income and then find themselves in a difficult position.

When it comes to the lifetime ISA, is it not the case that lots of people on lower incomes and struggling are not going to get the best deal? They will take the cash LISA rather than the investment ISA and will not benefit as much as other people who are in regular work, who are higher earners and already in a much better financial position than people on lower incomes.

Ed Boyd: On the general point, the reason why our focus has been on Help to Save rather than LISAs is that if you look at those who are just about managing, those who are really in need of just building up savings because they could be hit hardest by some of these shocks, the overwhelming majority of people who will be on universal credit when it is fully rolled out are in deciles 2 to 5. If you are thinking about those people who would really benefit from this, this is the avenue through which we should be pouring our support and efforts in order to try and help them. As I said before, we have not looked specifically at LISAs so it is difficult to comment on the cross-over and effect that they will have on that group, but going back to the previous question of targeting, Help to Save targets that group pretty well.

Joseph Surtees: It is an excellent point that most or a lot of saving products, certainly up to now, have not really thought about the best way to appeal to low- income consumers and the best way they can work with their lives. That is certainly a problem with ISAs and should be a slight problem with lifetime ISAs as well. The really good thing about Help to Save is that it has thought about how to appeal to this group and the bonus is the way that it has settled on that. All the evidence shows that that is overwhelmingly a great incentive and a much better incentive for this group, rather than interest rates or tax deductions or tax relief.

Other things could be looked at in future, such as prize-linked savings or even more innovative ideas such as adapting the auto-enrolment pension system, so that it has an accessible savings pot within in. I think that is slightly further down the road.

Q You have identified that the two different measures, the LISA and Help to Save, are targeted at different people in society. If that is the case, do you see these measures as adding not complexity to the system but more choice?

Joseph Surtees: I would agree that they would both be useful. I emphasise that we are big supporters of Help to Save. It is introducing an option for these low-income families that does not exist at the moment, so it is not more complexity; it is, for many, their only choice.

Ed Boyd: They are both hugely welcome, especially Help to Save.

I have another question, but I presume that that is it.

I am sorry—that brings us to the end of the time allocated for the Committee to ask questions. On behalf of the Committee, I thank the witnesses for their evidence.

Examination of Witness

Bryn Davies gave evidence.

We will now hear oral evidence from Union Pension Services Limited. Will the witness please introduce himself for the record?

Bryn Davies: My name is Bryn Davies. I am the director and actuary of Union Pension Services, which is a specialist consultancy helping trade unions with a range of issues involving pensions, both state and occupational, and of course saving.

Q I wanted a sense in the round of how you think the proposals in the Bill for LISA and Help to Save demonstrate a coherent approach to the Government’s objective of making it easier for everyone to build up savings as they need. How do they fit into that landscape?

Bryn Davies: It has to be recognised that these measures come out of the more fundamental review that was undertaken of taxation and provision for retirement. I do not think it would have come out now and in this form, particularly the LISA, without that preceding process. That process identified that it is difficult—the whole issue of how tax advantages are used to encourage people to provide adequately for their retirement is difficult. There was plenty of speculation in the press that the last Chancellor had made up his mind about some fundamental changes, primarily in pension taxation. He pulled back from that and came up with the three-pronged approach of increasing the ISA limit, introducing the LISA and Help to Save—which, set against that background, are relatively minor and unco-ordinated. I do not think anyone would say that they are a comprehensive approach to making sure that people provide properly for their retirement.

The LISA is functionally equivalent to the proposed pension ISA, which was much debated, though it has a different name. The particulars may not be as was proposed by the arch-proponents of a pension ISA, but functionally it is a pension ISA. Seen globally though, it is a pretty trivial contribution towards the much bigger problem. There is widespread acceptance that pension tax relief is a problem that needs to be dealt with. In that context the LISA is pretty limited, and Help to Save is obviously a very limited proposal that does not really fit within that scope at all. In terms of a comprehensive approach to the problems of making sure people save what they need, it is lacking—and I do not think anyone would be able to pretend otherwise.

This is something that I do not often say, but I very much agree with Richard Graham MP that we need a comprehensive approach. He has spread it a bit wider than I would: he is proposing that there should be a commission on saving. What I have argued for is that there should be a continuation of the Pensions Commission in one form or another to tackle the specific issue of tax relief. The Pensions Commission, which must be regarded in many ways as a great success, pulled back from tax relief—they sort of dodged it—but I think they or some successor should take on that issue and produce a comprehensive review. Set against that, the LISA is too little and too early. Unless you undertake a fundamental review of pension taxation, I do not think that the LISA really makes a lot of sense.

Q In that sense, given that there does not appear to be any appetite for any substantial review of the sort that you are talking about, let us take it at face value that that will not happen. Do you get the sense that this is—I will not say a gimmick, but simply the Government feeling that they have got to do something by chucking another product into the market as a smokescreen, or call it what you will?

Bryn Davies: I would not like to use the word “gimmick” but it was a policy in search of a solution rather than the other way round. The proposal for the LISA was seen as something that could be said to have come out of that earlier process, and not coming out with anything would have given the appearance of a significant failure in policy making. In that sense, it was seen as the least that could be done as part of that process.

The problem with it is not just that it does not fit—the argument I am making is that it does not fit within this broader review of how savings for retirement should be tackled—it is also problematic in itself. I watched your sessions this morning and I think the case has been made. There was some evidence in support but also, to my mind, powerful evidence pointing out the problems with the LISA, particularly in the context of the roll-out of automatic enrolment, which is a major concern in the trade union movement.

It is absolutely crucial that whatever comes out of the legislation should not in any way interfere with the completion of the process of automatic enrolment. It is particularly concerning that LISAs will start hitting the streets, as it were, at the same time as automatic enrolment is going to face its biggest test, when the contribution rates go up from their present very low rates to the full joint 8%. That is my major concern.

There will be such mixed messages that a lot of people will make wrong decisions at that time. The two processes should be disentangled. That is the simplest way. I know we are a long way down the road and evidence this morning from the industry was strongly that they just want to get on with the job and get these things delivered, as promised by the Government, from next year, but sufficient concerns have been raised about the interaction with automatic enrolment that it would be worth putting it off, to disentangle those two processes of people starting to sell LISAs at the same time as people start getting these increases in their contributions from the current level, as far as individuals are concerned, of up to 5% gross.

Q Can I take this in a slightly different direction? I suppose it is linked, to some extent, to some people’s concern about self-employment. That is perfectly legitimate and okay, but there are many people in effect being forced, de facto, down the self-employment line to take pressure off employers to pay national insurance and so on. Are there concerns that employers will encourage their employees to choose a LISA instead of a workplace pension, in effect reducing their contributions?

Bryn Davies: Of course, there are rules about enticing people away from automatic enrolment, and we want to see those enforced. The implication is that if people were offered a genuine choice, LISA would have to be better than the automatic enrolment offer. I am sure there will be some employers who decide to go down that road.

On the question of the self-employed, it has been identified that automatic enrolment does not really work for them. It is possible that something like a LISA would offer them something that can work alongside automatic enrolment for employees. That is leaving to one side the whole issue of whether this growth in self-employment is genuine self-employment or just a way of evading employment law by forcing people into self-employment when they should be employed—but that is a much broader issue, on which I am not an expert.

Q Mr Davies, could you help me a little? I have not come across Union Pension Services Limited before. Is there a formal link to the trade unions or do you represent anyone?

Bryn Davies: No, no—I am just an honest professional working to make my bread, but working just for trade unions. I work as a consultant to individual unions.

So your clients are the trade unions?

Bryn Davies: Exactly.

Q That means my next question is relevant—I wanted to make sure. I would have thought that, for a lot of trade union members who are trying to save up, perhaps for their first home, the LISA would be absolutely tailor-made. Also, for those trade union members on very low wages, Help to Save should be a boost to help them save and get some income in place. Is that welcomed by the trade union movement that you represent?

Bryn Davies: I think my function here this afternoon is to pour on a bit of cold water, on the whole. To be helpful, I should be the doubting voice. You have heard a lot in favour. It is quite clear that many people do welcome the LISA, and I am sure there are many trade unions among them. After all, who would not favour being able to buy £5 notes for £4? It is a no-brainer. Whether that has a proper role within an overall system of providing people’s retirement income is a separate issue. So, if they are there, I am sure they will be popular.

However, I would reiterate that there is a big concern that the introduction of the LISA, in the ways that are perhaps being suggested, interferes with the successful expansion of automatic enrolment to its full extent, to everyone paying the 8%. That would be of major concern. It is universally the view within the trade union movement that the best approach to providing people with retirement income is through collective schemes of one sort or another—perhaps a defined-benefit or defined-contribution scheme under automatic enrolment. There is a tension between those two objectives. There is no objection to a LISA in itself; it is where it fits within the overall landscape of provision for retirement that is the major concern.

On Help to Save, again, it is difficult to attack it. As usual, the House of Commons Library has provided a very useful briefing, which highlights the report from the Institute for Fiscal Studies. It has identified that of the 3.5 million people—I am not sure how the figures match up—more than half already reach the level of rainy-day fund, to put it crudely, that is sought by the policy. It strikes me that it is more than likely that the great majority of people who will go for Help to Save are people who are already in that position.

What the whole Help to Save discussion misses is the sheer difficulty of managing a budget on low and variable incomes and the ability to help people in that situation. The reason they do not save, obviously, is because they are poor, and poor people have to make all sorts of difficult decisions, some of which might not seem all that sensible to those who are more comfortably off. Should you spend your rainy-day money on having a summer holiday? That sort of decision is incredibly difficult and it is difficult to put yourself in the position of people of who have to make it.

It is also worth saying that the £70 million is not to be sniffed at, but in the context of public policy it is an insignificant amount. It could well be that a better way of helping the families that are truly under pressure—who do not have, and will not be attracted to, a rainy-day fund—is to look at the way in which the social fund, if it is still called that, helps families in poverty. To me, that seems a much better way of spending the money, but I have broadened out your question much wider than it started.

Q Perhaps I can just ask one more question—maybe it is more of a point. Surely one of the issues is that Help to Save will be targeted at many people who will be on benefits, but what has not been offered is a commercial product that treats them exactly the same as some of the people who may read the adverts in the financial press, who may not require help so much. Again, I would have thought it would play to the sector that you are representing that, all of a sudden, those people are in the game as well and being supported.

Bryn Davies: Yes, I do not want to be too much of a wet blanket. I am sure there are some people out there for whom the Help to Save scheme will be of great assistance. I do not think it will be that many—I do not think it will be a lot of help—and many of them are not the people who do not already have a rainy-day fund. Did I get that the right way round? Most of those it will help already have a rainy-day fund. So how is that money actually being used effectively to provide more people with rainy-day funds? We really do not know, from the evidence that is available.

Q I wonder, Mr Davies, whether you would agree that it is unlikely that there could be a scenario where a saver would be better off in a LISA than they would be in a workplace pension scheme. Could you just comment on the fact that we have not got the final architecture of automatic enrolment, in so far as it affects low-paid workers and the self-employed, and there is a danger in the short term, if this were adopted, that workers could be seduced into taking out LISAs when their best interests would be served through a workplace pension?

Bryn Davies: There is no doubt that the LISA is an attractive offer. People will be attracted by it, although whether they are seduced—that suggests it is against their best interests. It is difficult to know exactly how it will work.

One of my main criticisms of the LISA is that it is a sort of bait-and-switch for a change in pension taxation, because its finances are unsustainable. Those of you who are familiar with the jargon will know that the existing occupational pension scheme taxation is known as EET—exempt, exempt, taxed—so the roll up, the accumulation, is tax free and then it is taxed when the money is paid out. That is compared to an ISA, which is taxed on the way in and the roll up and pay out are tax free. You are either taxed at the beginning or taxed at the end. The oddity about the LISA for a standard rate taxpayer is that there is no tax at all—it is actually EEE—and, as such, I do not think it is a sustainable basis. That is why I am saying it should be looked at as an overall view of how people save for retirement.

A system that was entirely based on the pension LISA system for provision for retirement would be economically unsustainable. In that sense, it is a loss leader. It is not sustainable as a long-term policy, because it is so generous. That is the answer to the question. It is very generous and possibly some people in the short term might do well, depending on the expenses that are charged. We do not know how expensive LISAs are going to be. They could offer a financially attractive deal, but if that is at the cost of destroying an adequate pensions system in the long term, the whole of society will be losers.

It is not difficult to sustain a case that everyone will lose out because they choose a LISA rather than an automatically enrolled pension, particularly if employers choose to contribute to the LISA as well. There is nothing to stop them, if they see it as a way of avoiding the legislation.

I call James Cartlidge. Four people still want to ask questions and we have nine minutes.

Q In respect of Help to Save, it seems to me that there is a real crisis of people who are living week to week, who are often using payday lenders or other forms of debt which are not sustainable for them and who are near the precipice all the time. I take your point that some may not have any spare income at all, but if a savings product such as this, which is so generous, is not going to help them save for those emergency funds that give them greater independence and less reliance on the lenders, which is important, what possibly could?

Bryn Davies: You are right. The work done by StepChange and the Centre for Social Justice very much endorses much of the evidence that you received in the previous session. There is no doubt that it can help people. How targeted it is on people who do not already have a rainy-day fund is unclear. The first point is that many of those people who would take it up already have their rainy-day fund. In that sense, the extra money is not solving that problem.

The other problem is the sheer difficulty of operating on limited budgets. It is not a case of saying, “Let’s give everyone the opportunity to save for a rainy-day fund and that will solve the problem.” I think that underrates the difficulty people face in running their day-to-day budgets and the competing demands that they have. I think that reflects the point that was made here earlier.

Q We are old colleagues from the TUC, so I have to say that I have great sympathy with everything you have said so far. It has always struck me that these alleged savings schemes—tax-exempt special savings accounts, personal equity plans and ISAs—help at the margin with people who are relatively comfortably off, but do not help those people who cannot save anything at all because they are too poor. Is this another of those schemes, which will help some people but not those in the most desperate need? They will be the people who are slightly better off and can afford to save something. Would it not be better to have some sort of universal state scheme for pensions, for one thing, but also, on the other hand, to have an emergency scheme where you can give more money to poor people one way or another? Raising their incomes is what the problem really is.

Bryn Davies: Yes, absolutely. These people do not save because they are poor. A hyped-up social fund would do much more directly to help people with these crisis problems. As was mentioned, it is the day-to-day grind of being poor that is the problem. It is not just crises—people are not just poor in crises; they are poor all the time. In those circumstances, there are very tough decisions to be made about how people use their money. Saving is sometimes seen by those people themselves as a luxury. They would rather run the risk than go without some relatively innocuous discretionary spending. We should, in a sense, respect their decisions. We may warn them that they are heading to a crisis but, ultimately, we need to trust people to make their decisions.

On the broader issue, you well know my views on state provision. I think that the market does fail and that it fails, in terms of saving and pension provision, for a much larger proportion of the population. There are very few people who could get by with just the new state pension. Everyone needs to save something for retirement but the market is a bad way of saving for a large proportion of the working population. I could speak on that at length.

I would like to ask several more questions, but I will not.

Q In your professional capacity, do you advise your clients to have pensions or savings or do you advise them to have both?

Bryn Davies: I do not give independent financial advice. I have to be very careful on that. I always promote the advantages of collective schemes and point out the advantages of having occupational schemes, and support unions when they are negotiating the best possible collective provision. I do not advise individuals about how to use their money.

Q I am interested in why industry experts seem so against these schemes to encourage people to save, when we have heard from the experts in social mobility that these are good schemes to start people off on the savings process. Do you have a reason why that difference would be?

Bryn Davies: It is this interaction. There are all these different vehicles for providing it and the way they interact is not entirely clear. That is why we do need some sort of overarching review—a review of saving sounds quite attractive—specifically of pensions tax relief, so that we do not have these one-off initiatives where it is unclear exactly how they fit into the overall approach of encouraging saving. Taken individually, you could well say this is a good idea, but it is how they all work together that is the problem we face. That is why I am saying that, at this crucial stage of automatic enrolment, we should take a bit more time over introducing LISAs.

We have two minutes and two Members who want to ask questions. Jeremy Quin.

Q You mentioned earlier, Mr Davies, that we had to respect the decisions made by people. I am totally with you that pensions are the right way for most people to save for their retirement. You have spoken eloquently about the problems and difficulties faced by the people who most need to save but find it most difficult to do so. Do you really want to deprive them of that ability to get £5 from £4 for another year?

Bryn Davies: No, no. I am not saying that this should not be included in the Bill. I do think probably that it is a bit tokenistic and that stronger measures to deal with poverty and crises caused by poverty within the social security system would be a more effective way of using the money, but I am not saying don’t do it.

You would not stand against the principle of doing this, but you would like to do more things— I hear that.

Q I have just a brief comment. Does Mr Davies have any modelling or research that he has done to support his concerns around the interaction of these products and auto-enrolment? It would be useful if we could have that.

Bryn Davies: The short answer is that I do not and would not pretend that I did. If I were the only person saying this, I would be worried, but there is a broad swathe of opinion, not least including at least one Member in your own party, expressing these fears, so I do think they need to be taken seriously.

Order. If there are no further questions, I thank the witness. Will he now make way for the next panel, please? Thanks very much.

Examination of Witness

Calum Bennie gave evidence.

We will now take oral evidence from Scottish Friendly. Could the witness introduce himself for the record?

Calum Bennie: Good afternoon. My name is Calum Bennie. I am a communications manager at Scottish Friendly.

Q You have indicated in the past that,

“We at Scottish Friendly, while recognising LISA will not garner universal support, are enthusiastic about the initiative. It deals with one of the biggest problems society faces in the UK: trying to get under 40s to engage with planning for their retirement.”

Could I ask the hon. Member to speak up?

Yes, I beg your pardon. When Paul Johnson of the Institute for Fiscal Studies came to address the Treasury Committee, he said he did not think that the lifetime ISA would encourage new savers. There seems to be a difference of opinion, although I am not saying that there is. Why are you so enthusiastic about it?

Calum Bennie: New savers are one issue, but we are supportive of the LISA because what it could do is attract people who are currently put off saving for life after work. They are not enamoured of pensions—they have been put off pensions for whatever reason, be it a bad experience of their own or bad experiences that their families have had. They are not interested in pensions per se. The lifetime ISA could be a way of them putting money aside for their retirement, which otherwise they would not have done. That is where we come from here.

Q Following on from that—I was trying to tease this out earlier—I get the sense that this is another product: “This one hasn’t worked, so let’s introduce another one; that one hasn’t worked, so let’s introduce another one,” or, “People aren’t saving for retirement, let’s introduce another one.” It begins to sound as if we are saying, “Let’s just try another thing. None of them work particularly well, but let’s just chuck this into the mix.”

Calum Bennie: I do not think we would disagree with that. As several people have said in the time that I have been in the meeting this afternoon, a more holistic approach to savings and pensions—or saving for life after work, as we would perhaps put it—needs to be looked at. In the meantime, though, we need to do something to get more people putting money aside for that period in their life. As has been raised several times, a key group of people who have not been saving for life after work or have been disadvantaged in doing so is the self-employed. There is a clear benefit from the lifetime ISA, at least for that group. From our point of view, it is quite clear that there is a group of people who are not interested in pensions. They have been put off pensions. This represents a way for them to put money aside for their future.

Q I have another quick question. The witness speaking before you was asked about evidence. I would ask you, what is your evidence that this will make people save? What evidence is there? You say that there is a flexibility in the system, but what is the evidence for encouraging this specific product to encourage people to save more? That was clumsy, but you get the gist.

Calum Bennie: When you introduce a product or investment that has clear advantages, as this one does, it will attract people to save. We have got quite a long experience of incentivised investment products for all sections of the community. In particular, our focus is on those with low to modest incomes. As a company with roots as a friendly society, for the last 30 years we have focused, initially, on friendly society tax-exempt savings plans. There was a clear tax advantage with those.

Twenty-five years ago, the minimum investment was £10 a month, and that attracted a substantial proportion of C2 and DE investors to put their money in those plans. In more recent years, the child trust fund was introduced. That is certainly going to help a reasonable group of people when they reach 18 with a reasonable start in life, and that has obviously then translated into the junior ISA. We were also a proponent of the insurance ISA that is no longer here, which attracted a mid-group part of the population that may have been put off by stocks and shares ISAs before.

That is why we are pretty certain that this product will also be taken up. It will not be by everyone, because there are going to be clear wealth warnings against it. If we were to introduce it, we would certainly need to make clear what you would be getting yourself into if you decided to try to access the fund before age 60—if you were saving for that length of time. But, all things being equal, savers do know what they are letting themselves in for. In our experience, a lot of savers like the discipline that they cannot touch the money. We have done focus group after focus group and that constantly comes up. That is why they like some of the products we offer—because they are long-term—and that could be a key incentive for something like this.

Q I was very interested in your main point. May I just clarify? Obviously there is this attraction for those who are self-employed, but are you suggesting that, perhaps because of a lack of faith or trust in pensions, even those who might actually be better off focusing on the pension side will simply be attracted to this, as it is something they have more trust and understanding in? Is that your basic point?

Calum Bennie: Yes. There are clearly some people who just do not want to touch pensions for whatever reason. The fact that we are having to force people into pensions is almost an indication that for many people, pensions are broke. We are not saying that pensions are bad and LISA is good; we are just recognising what is out there with people and that some people are very comfortable with ISAs.

We were one of the first friendly societies to introduce several ISAs in 1999 when they came out. More recently, we have moved away from friendly society tax-exempt plans, because they were inflexible, to a much more flexible ISA. We launched that five years ago. That was quite a risk. We did not quite know whether the market that we were aiming at—as I said, that is very much the low to mid-income group of people—would take ISAs, because it is a stocks and shares ISA that we market; it is not a cash ISA, because we are offering people growth potential. So there is a learning experience that people perhaps have got to think about before they invest in this, because it is a stocks and shares ISA, but it has been very successful in terms of the take-up of those ISAs.

In our experience anyway, because we are not focusing on the wealthy and well-advised, people are comfortable with ISAs; not everyone is comfortable with pensions. Therefore, this product, in the short-term perhaps—until a more holistic set of savings plans and investment plans, which perhaps has cross-party support, comes about—could attract lots of people who would otherwise not put money aside for life after work.

Q When this measure was originally brought in, the point was made by the previous Chancellor about the lack of consensus for the big, overarching reform, so these sorts of reforms were proposed. I do not think anyone disputes that they are not a complete answer. Of course, another part of it is Help to Save. You talked about many low-income savers. I just wonder what you think the impact will be of Help to Save on those on the really low incomes, who we want to see saving more.

Calum Bennie: We do a quarterly survey called the disposable income index survey and we look at people across the UK, and it is quite clear that particularly the 18 to 25 group are really struggling financially. About a quarter of them are spending more than their income. That is not to say that they are all in debt, because they may have other savings or family support to fall back on. Anything that can be done for them to help with a house purchase, which for young people today is a horrendous situation that they are faced with, compared with what many in this room faced when they were first buying their first house—they need all the help they can get, so Help to Save and the ISA are a boon for them.

Q You talk about some issues that people have with investing in pensions. Why do you think that is? You described pensions as “broke”. Can you just expand upon what you mean by that?

Calum Bennie: I said that for many people, pensions are broke. The reasons could be manifold. People I talk to have experienced problems, and their parents have had problems with pensions. They were saving in a pension and whatever has happened to it—maybe the company has gone bust, or something like that—they have not got the pension that they thought they would get. For many, final salary schemes have disappeared. The pension age has gone up. Women have perhaps been affected by the age going up quite recently, which they had not expected. It could be all those issues. Pensions have been tinkered with for quite a long time. The amount you could save and the lifetime limit had gone up, and now it has come down. Tax relief is being looked at. It is for all these reasons that some people feel, “I am just not comfortable with saving in a pension.”

Q A lot of these things, of course, are because of a change in Government policy.

Calum Bennie: Yes.

Q If you were talking to your clients about the advantages of an auto-enrolment pension, as opposed to looking at a lifetime ISA, how would you explain the different tax incentives?

Calum Bennie: We do not do pensions ourselves, and we do not give advice. We market our products directly to customers and they make their own decision. We do not actually give that advice. They would need to get that advice from a financial adviser.

Q So you do not sell pensions, but you would benefit directly from the offering of a LISA?

Calum Bennie: Yes.

Thank you.

Q You talk about the focus groups that you run, and there seems to be real interest in the LISA product.

Calum Bennie: ISAs in general. We have not specifically asked our groups about LISAs. Savings in general and the discipline of savings—that is the kind of thing that we have asked people about.

Q But your business has a keen interest in LISAs and believes that there is an opportunity.

Calum Bennie: In ISAs in general, yes.

Q We are talking about LISAs today. With the lifetime ISA, is your business keen and supportive?

Calum Bennie: In general, yes.

Q As you think about this product, you realise that the inertia out there in the financial services market is sometimes used by financial services companies in an unhelpful way. Clearly, this is an opportunity to help change people’s behaviours for the better. With your own operation, how would you seek to differentiate this product and get behind it to have the best possible success with your potential customers?

Calum Bennie: I think the key thing here is to make sure that people have enough savings before they commit to a LISA. Obviously, if they are investing in an ISA in general, there is always a risk that they could be disadvantaged if they take their money out in the early years. Even a stocks and shares ISA is very much a longer-term investment. You are talking about people being advised to put their money in a stocks and shares ISA for at least, say, seven years, and ideally 10 or more, but at least they are not going to be penalised with 25% coming off.

Any marketing that we would do on the LISA, and I have to clarify that the LISA would not necessarily be a focus of our marketing—our focus would be on our core products, which are our investment ISAs, as the LISA would not be for everyone—would certainly ask people to make sure that they have enough in their ISA to meet their general savings requirements, and any emergency fund requirements too.

Q Good afternoon. One of the key issues we are grappling with today is the potential for the lifetime ISA to derail or undermine auto-enrolment. I have been listening very carefully to your evidence. Am I right to infer that you see the LISA as a viable alternative to pensions, rather than a complement to pensions, for some low to modest income people?

Calum Bennie: Can I just clarify what you are trying to find out from me here? Are you asking whether we would be promoting having a LISA over and above a pension?

Not really. I am asking whether I am hearing you right when you promote the lifetime ISA to people as a product instead of a pension.

Calum Bennie: For those who do not want to go into a pension, it is there and it is complementary. We would certainly not want to take away from pensions. As they stand in the current framework, pensions are right. Auto-enrolment is right and is working for so many people; it is a success and has been more successful than the many detractors perhaps thought it would be. We would certainly not want to denigrate that at all. What we are saying is that there are some people who are just not attracted to pensions. They do not want to be forced into pensions and the LISA represents an alternative for them.

Q Thanks, that is a helpful clarification. I also wanted to come back to something you said earlier about self-employed people. We took evidence earlier today that around two thirds of self-employed people would not actually qualify for a lifetime ISA. I just wondered whether Scottish Friendly had done alternative modelling or had an alternative assessment of the market.

Calum Bennie: No, we have not.

Q I will follow up along the lines of what the hon. Member for Banff and Buchan asked. Earlier we heard evidence from the Tax Incentivised Savings Association and the Association of British Insurers and their view was very much that a LISA would be complementary to a pension, not in isolation from a pension. Can you clarify your view that people may not actually have a pension and may exclusively go for a LISA? Do you think that will be a secure route for them, in terms of planning for their long-term older age?

Calum Bennie: In essence, yes. The whole traditional world of retirement is changing and a range of products for people to put money aside for their later years makes total sense. We have done research. With the many customers we have who are saving in ISAs and in other savings plans, when we do the research to find out what they are saving for—financial services companies traditionally market for the holiday of a lifetime, a car, or a home improvement and things like that—our research shows that people are actually saving for retirement. They may have a pension, but they are also saving independently in an investment plan. You cannot just force people to save for their later years in pensions; they are saving in all sorts of vehicles for their later years.

Q But it is very much, for you, a complementary product to pensions—

Calum Bennie: Yes.

Not in isolation.

Calum Bennie: No.

Q I am somewhat sceptical about the myriad private savings schemes and have argued the case for a much more comprehensive compulsory state savings scheme for everyone, on top of which people could save in other ways as well as in stocks and shares. What would be the case against having a universal state earnings-related system with defined contributions and defined benefits, which would be extremely efficient to operate, easy to administrate and which everybody would know they were going to get a good deal from? What would be the argument against that?

Calum Bennie: I don’t think there is an argument against that.

Q I want to get to the bottom of the evidence that we were given earlier, especially from the experts and professionals in this sector, that these schemes—whether it is Help to Save or the LISA—are too complicated for those on a lower income really to grapple with, and therefore won’t be taken up and won’t be of use. What’s your experience? Do you think the way that these schemes are being set up is easily understandable and will encourage those on a low income to save?

Calum Bennie: We certainly don’t see any issue with that. If it’s us who are going to be promoting these schemes, then we will certainly make sure that our communications are clear and that they are researched in the first place. For instance, our ISAs—that is the basis of this product; it’s an ISA, with various add-ons—are as complicated or as non-complicated as you want them to be, and they are understood extremely well by our customers.

Q Can you understand why some professionals in the financial industry sector are so against these measures, and yet those who promote social mobility are quite supportive of them? Can you understand the rationale as to why some people in your sector are not so supportive?

Calum Bennie: Perhaps they haven’t actually had the experience of working with lower to mid-income groups.

Would any more Members like to ask questions? If not, I thank the witness for the evidence that he has given. We will now move on to the next panel.

Examination of Witnesses

Martin Lewis OBE and Jonquil Lowe gave evidence.

We will now hear oral evidence from MoneySavingExpert.com and the Women’s Budget Group. Could the witnesses please introduce themselves for the record? I start with Martin Lewis.

Martin Lewis: Yes, I am Martin Lewis, founder and executive chair of MoneySavingExpert.com.

Jonquil Lowe: Hi, I’m Jonquil Lowe and I am senior lecturer in economics and personal finance at the Open University, and part of the policy advisory group for the Women’s Budget Group.

Q I will make an assertion here: I think the consensus of opinion today is that the pensions landscape is broken. However, in the absence of more structural change to that landscape, any product that helps—even if it is only a little bit and even if it’s for a limited number of people—is welcome. Mr Lewis, you have made this comment about the LISA:

“For retirement savings it works the same way, but whether it beats a pension or not is a much trickier conversation.”

Could you give us a view about that consensus claim that I just made?

Martin Lewis: If we just look at lifetime ISAs as a pension product and ignore the homebuying element, which of course is a substantial element, based on pure numbers—well, actually there isn’t really anybody who should get the lifetime ISA, if you’re contrasting it with a pension. Certainly, if you are employed, you want to be auto-enrolled. If you are not employed and are a higher-rate taxpayer, there is a clear distinction—it is far better to be in a pension than it is to be in a lifetime ISA. If you are a basic rate taxpayer, the numbers are much of a muchness, but you have the two key factors: one, in your inheritance tax planning, the LISA is part of your estate, whereas your pension isn’t; and, two, LISA counts for benefit cap purposes, which could have a massive effect on many people, whereas the pension doesn’t. Those two factors mean that if you really break it down and make this a black-and-white binary decision, don’t put your money in a LISA.

Having said that, there are some people, especially self-employed basic rate taxpayers, for whom the idea of putting money away into one of these schemes is attractive, and therefore I support this as a good concept. Remember, we are only talking about pension saving there; not the other side, where it is a complete, utter no-brainer. Do you want a house? Put your money in a lifetime ISA. There are some arguments about whether Help to Buy is not in those transitional arrangements and I have issues with the help to buy ISA, but overall it is a no brainer.

I think my great concern over the lifetime ISA, though, is the one that goes back to the point about explaining a product that has a level of complexity, although it is not that complex. In my career, I have learned that what people want—I have just told you what it is—is a trusted source. That is enough for most people— a trusted source who says, “Don’t put your money in a lifetime ISA rather than in a pension unless you are a basic rate taxpayer who is self-employed.” There you go. People do not really need to know why. You have put the proofs: you’ve seen it on the website, so you are therefore on it. That is pretty much all you need.

All products are complicated, so we make them simple. You get trusted sources to do that, and it works. My great concern, and I have the same concern with Help to Save, is not the product in itself—I support both of them—but that there are certain dangers in misprioritising your finances. In the lifetime ISA, the danger is in wrongly opting out of auto-enrolment and putting your money into a lifetime ISA. In Help to Save, it is not paying off your expensive debts, and saving when you should be paying off the expensive debts.

I am aware that there is a new guidance system being set up, which is right and I approve of that. The problem with that is that you have to be proactive to go there. I would strongly urge you, when you set these up—it is much easier with the National Savings and Investments product—to ensure that at the point of application, whether that be online, by phone or in branch, the questions are asked, and that people are forced to ask them. So at NS&I, when you are setting up the Help to Save, it asks you, “Do you have debts? Are they expensive?”. If they are, some information is given about the fact that you may be better off paying those down. You do that not in a leaflet, but at the point of application.

With the lifetime ISA, which in many cases will be an online or on-the-phone product, rather than a branch product, I would say at that point in the online form, the question should be asked, “Are you an employee? Does the employer have auto-enrolment? Are you planning to do this instead of a pension?” and at that point, information is given that explains that generally you will not be better off with the lifetime ISA.

There is no problem with the product; there is a problem with how we communicate it and how we stop people making bad decisions. The way that you do that in the world that I work in is you signpost it once, you signpost it again, and then you signpost it a third time, and now you might just be starting to start the process. I will tell them when I talk about it on the telly or on the website; you will have it in a brochure for the product; and you will hear it from the pension guys. Then when you are signing up, you will have a final warning. If we do that, we will probably touch 50% of the people we should, but not all of them. That is my biggest caution to you today: just make sure that people know when it is not right for them. Then we can all be very excited about two new products that are out there, and which should, in general, be beneficial to the people who should be using them and are a good thing.

Q Can I pick up that last point on knowledge? That is another issue we have touched on today. In an ideal world, people have complete control of their faculties and decision making, and have capacity and so on, but out there, that does not always happen. The concern that has been expressed today is about that knowledge landscape, and people’s ability to grasp that, without it sounding patronising. Do you think that, out there in the world that this product will be sold in, there is enough information and knowledge for most people to make a reasonable decision?

Martin Lewis: I do not think there is now, because the products are not out there. The truth is that it is mainly people in this room and the industry, and a few nerds like me, who will be interested in them before they launch—why would you be? Once they launch, we need to get it right. For my TV show, next February, I have already got a lifetime ISA special booked in; it will probably be the second or third week of February—half an hour of prime time on ITV—and we will get the message out, because people need to understand how it works. We will get that out, but that communication needs to be right and consistent; the messaging needs to be right.

My concern is about product-provider level, where product providers and different people within businesses have incentives to sell products. Even in wonderful building societies, the savings managers do not ask their customers whether they have debts before they encourage them to save. Will you do it as a blanket? That is not the right way for anybody to go.

As we are starting two new products, we have a very interesting point where you can set up the regulation before we start to make it proactive, which is what I am encouraging. With Help to Save, the message is: “If you save £50 a month, after a couple of years, we will give you 50% on top.” Yes, I know there are complexities about exactly how much you have saved and whether you can take it out, but that is all you really need to know. For the lifetime ISA, it is: “You can save up to £4,000 a year. You have to be under 40 when you start it. Then you can use it towards a house, in which case we will give you the bonus then, or at the age of 60, when we will give you the 25% on top, with a maximum bonus. If you have ifs and buts, do your reading—but do your reading.” Those are all the messages that you need to get people interested in it.

These two products have a very simple advantage: it is called free money. Go and have a look at the green deal. Until the cashback section came in, no one was interested in the green deal. Once you started giving people free money, suddenly it became very popular. Well, you have two free money schemes. Done right, talked about right and communicated right, they will be very popular. Unintended consequences are possible—the lifetime ISA might pump the housing market, which is a concern, and we have already seen it somewhat with Help to Buy—but done right, this is free money for people. As for looking at this at a macroeconomic level—are we skewing it? Are we giving it to the wrong people? Does it have the right political consequences?—that is not necessarily my bag, but I have some concerns over it. However, if you are talking about whether you can communicate these products in such a way that people will take them up, free money does a pretty good job of getting people interested.

Q Thanks. I have a question for Ms Lowe. I do not know whether you have a comment on my original statement. If you do, please feel free to give it. Also, a distributional analysis by the Women’s Budget Group shows that by 2020, single female pensioners will experience a whopping drop in living standards. Is there anything in this product, for the sake of argument, that you think will help to deal with, alleviate or mitigate that?

Jonquil Lowe: No, we do not. That is the short answer. Martin touched on this: is the money being given to the right people? Certainly the lifetime ISA is less regressive than the existing system of pension tax reliefs, in that it gives a flat-rate 25% bonus to everybody. However, we still think that this is a very regressive way to use taxpayers’ money. Simply making a product available to everyone does not make it gender-neutral. You also need to take into account people’s opportunity to take up these products.

The lifetime ISA targets people who can already afford to save. There are huge swathes of people, mainly women but some men, who are contributing to the economy in the form of unpaid work, rather than paid work. Their decisions on care—caring for children and adults—mean that they are more likely to be in part-time work and are more likely to have periods out of work. When in work, they are more likely to be in sectors where their earnings are low, which tends to affect them not just at that time but for the rest of their working life. It is much more difficult for women to take advantage of these products, so we do not really see the lifetime ISA as a solution to women’s poverty.

We are also concerned, as Martin said, that the lifetime ISA may be a simple product, but it throws up complex decisions. The worry is that people may well choose to go with the lifetime ISA, rather than a pension, simply because it seems a simple product and they feel that they have more control, but in doing so, they are going to lose the employer’s contribution under automatic enrolment. They will be making decisions that are actually not in their best interests, which is a concern to us.

Q Mr Lewis, you mentioned some concerns about transitional arrangements between help to buy ISAs and LISAs. Could you expand a little on that? I then have a question to both of you. One of the issues with financial service products is getting younger people interested in them. The great thing about the lifetime ISA is that it applies to youngsters at 18. We have some young people in the audience from Macclesfield. How would we seek to get young people more interested in these products early on?

Martin Lewis: First, there is a difference between the two. The help to buy ISA is available at 16, which is one issue. The second issue is that help to buy ISAs are limited to properties worth £250,000, or £450,000 in London, but for the lifetime ISA it is £450,000 across the country, which is a good thing.

Here’s where it gets rather complicated. You can use a help to buy ISA effectively after three months. You need £1,600 in it; that’s £1,200 in the first month, and £200 each month for two months. We have some people who have done it in two months and thirty days. We are allowing people to transfer their help to buy ISA into the lifetime ISA within the first year, which is a good rule, because it allows people to move it across and then they can put more in their lifetime ISA. However, the lifetime ISA has a one-year minimum hold before it can be used on cash, so I could have had a help to buy ISA for three years, transfer it across into the lifetime ISA and then save more money in, and then suddenly discover that I cannot buy the house that I want and have found, even though I have been saving in the help to buy ISA for three years, because I have to have held the lifetime ISA for a year.

A simple arrangement to fix that would be to ensure that the trigger-point, if you transfer a help to buy ISA into a lifetime ISA, is the start-point of the help to buy ISA, not the start-point of the lifetime ISA, so you would have had your year. Those are the types of transitional arrangements I am talking about. They are not big-picture, I think, even at this stage of a Bill Committee, and they are ones that we have had a discussion on the phone about.

The other classic thing that I would be very wary of—I will throw this in while we are talking about this—is that, as I have suggested, both these products will not be perfect. There will be unintended issues, such as the help to buy ISA issue—that it was a mortgage deposit, and some people thought it would exchange. It always was at that point, but it was revealed by the newspapers. I would strongly suggest that with both these products, there is a pre-arranged one-year review, where minor terms can be tweaked to make better products, and where we discover the things that none of the clever people who have given evidence or who are sitting around the table have thought of yet. That’s a sensible way to introduce products such as these, which are so complicated—especially the lifetime ISA—to be honest with you. Those are the types of transitional arrangements I am talking about. Forgive me, what was the second part of your question?

Q With young people, how do you get them interested in these sorts of products early on?

Martin Lewis: Young people are interested in buying a house, but it won’t be their financial priority. For many of the young people who have help to buy ISAs, it is money put in by their parents, and we need to be straight on that. That has a distributional impact too, because the people who are able to do that are people whose parents have the spare money, and you have to question whether that is right or wrong.

With help to buy ISAs, it depends on your definition of young people. It is a great product for 18-to-30s. If that is “young people”, it is a good product, and potentially, once they have started saving in their lifetime ISA, they may then continue it for their retirement savings. I again sound the caution, because of auto-enrolment, that we want it to be a complement, as opposed to an either/or.

There are problems with the help to buy ISA. I cannot put more than £5,000 a year into it, so I then have to have another ISA product. I would not mandate that all providers had to do that, because if you did, we would have lower interest rates on the lifetime ISA than we would have otherwise in the savings version.

As an aside, I have to tell you that when I tweeted and Facebooked that I was coming here today, the big point that everybody made was that I should tell you—I’m sure you know this, but I will tell you anyway—that interest rates are horrendous. People cannot earn money on their savings. You are helping two small blocks at the moment. People feel that our interest rate policy is penalising savers right now. Even with all the tricks in the world that I can play, we have worked out that you can put £35,000 away at 2% interest. That is the best you can get with every single trick in the book played. That is it right now. That is horrendous—a disincentive to save. Of course, a 25%, 55% or 50% bonus is a great encouragement on the back of that, but savings in the United Kingdom at the moment are in a crisis that we have never seen before, and there is a bigger picture here than the two Government-supported saving schemes—I am aware what this Bill Committee is for—that are going on right now.

The honest truth is that this will encourage some, but it will not encourage many. Children’s savings—even Halifax Kids’ Regular Saver, the last bastion of good rates for children at 6%, has now dropped down to 4%. There are big issues in the savings market, and this won’t fix them. This will help some people.

Jonquil Lowe: Perhaps we ought to keep in mind what the whole aim underlying all these schemes is. Certainly, when you are looking at housing, it is affordable, high-quality housing for all. Will the lifetime ISA deliver that? Will it excite young people? I think it will not, because what we are likely to see is that the people who can afford to save can save in it, and the people who have wealthy parents will see their parents transfer money into it. I think it will be very important to evaluate this scheme, to see whether it really does generate new saving that improves people’s financial resilience.

Help to Save is very similar to Saving Gateway. I do not know whether you recall this, but the Institute for Fiscal Studies did some evaluation work on the pilots for Saving Gateway and, in contrast to some of the other evaluation, came to the conclusion that Saving Gateway did not generate new saving. What it did was encourage people who had already built up a stock of saving to transfer that into that scheme, and I fear that we might see that with the lifetime ISA as well. It is just shuffling the money on the balance sheets; it is not actually generating new saving.

I think the lifetime ISA is not necessarily going to help more young people to buy the house that they may aspire to. The money can be drawn out for use not only on new build housing but existing housing stock, so there is a danger that it will just push house prices up. Although it may help some people at the margin to transfer from being renters to being owners, for other people, it is going to put the dream of home ownership even further out of reach.

We also have another concern, which is whether this is just another part of the transition of moving away from the collective risk that society bears to individualising risk. The lifetime ISA legislation allows the Government to consider early withdrawals without penalty for reasons other than house purchase. At the moment, that is not something that they are going to do when the scheme is first introduced, but schedule 1, part 3 allows for that option.

That starts to look very similar to a scheme that was tried in the Netherlands and abandoned in 2012, called the life-course savings scheme. The idea was that employees could build up some savings, tax-free, through deductions from their salary, and that those savings could be withdrawn to pay for periods caring for a frail relative, for example, or for the cost of childcare. Again, that is absolutely fine if you can afford to save, but if you cannot, that form of welfare is not helpful and excludes a lot of people. The evaluation of that Dutch scheme found that, as you might expect, fewer women and part-time workers took part. The amount saved went up dramatically with earnings, and the vast majority of people said that they were doing it because it was tax-free and would allow them to retire early. That scheme did not really address the aims that had been set out and was, again, a very regressive form of welfare.

Martin Lewis: I do not fully agree with this analysis. I think there are certain parts, and on the distribution part, I absolutely accept where you are going. Of course there is an issue of distribution, but we have to be very careful. Certainly there is a feeling out there in the country that it is the people who struggle and push to sort themselves out on their own who get the least help. Some of this does go towards addressing that; it goes towards addressing the fact that those people who have struggled all their lives and would like their children to buy houses will get some help with that within the lifetime ISA.

Where I perhaps disagree most strongly is that I think the help to buy ISA has encouraged people to save for a home; some of them would not have done so anyway, and for some, it would have taken a lot longer and been a rather depressing period of their life with no wellbeing. We already have a problem with disaffected young people who feel that they are not being given a chance out there, and this does go some way towards redressing that. You paint too dark a picture; I agree with some of the analysis, but I think that is too dark a picture.

The help to buy ISA has been a very positive thing that people have liked. There was this glitch over the exchange versus mortgage deposit point, which I think was a communication glitch from some of the product companies. I know it was in our guide from very early on that it could only be used at mortgage deposit. Actually, the lifetime ISA allows you to do both those points. We need to be very careful. If we look at a product in isolation, we see there are certainly distributive problems and there are certainly gender distribution problems. Looking at this product and simply saying not to do it for those reasons, rather than redressing that balance in a more direct manner, is not the right way to go forward.

Yes, I think this will have an impact on house prices, but because it affects only first-time buyers and we are talking about a level of deposit as opposed to the overall price, it would take a far better economist than me to work out how much will trickle down into the system. I do not think that every £1,000 the Government put in as a bonus will increase the need for a deposit by £1,000. I do not think it will work on that basis. I suspect a far, far smaller figure—way below 50% and probably below 20%—will trickle across. I am not sure that is a reason not to do it.

We need to try something to encourage people to save and there is a bigger picture out there. Whenever I talk about saving on the television, I am asked, “Why are you helping all those people who have got money?”, and I get lots of people saying, “Who can afford to save?”. The fact is there are something like five to six times more savings accounts in the UK than debt accounts. Those people are a big part of our population and in many ways they have been relatively the worst done by since 2008 because of interest rates. Our policy is so down on people who have saved hard all their working lives to put money across. I think we must be very careful not to bite off our nose to spite our face.

I think you are right and all the points you make have some semblance of good distributional analysis and good economics, but the bigger picture is that these are not bad products that are trying to do good things. Yes, they will certainly help some people whom we should perhaps not be helping, but they will also help other people whom we should be helping.

Jonquil Lowe: The point is that taxpayers’ money is scarce, so you must be careful how you use it. There isn’t even a great deal of evidence that tax incentives work. After all, we have automatic enrolment because decades and decades of tax incentives did not persuade people to put enough savings into pensions.

Martin Lewis: But the help to buy ISA has been a huge success for a huge number of people.

Can we have one person at a time? Have you finished, Mr Rutley?

I think I have.

Six more Members want to ask questions, so perhaps everyone could be concise.

Q Thank you, Mr Wilson. We have talked about the need to save and the success of auto-enrolment. Should we not be targeting those who are being missed out, such as the self-employed and those earning less than £10,000—many women are caught up in that? That is the priority we should address first.

Secondly, when you talk about the exercise people will go through to apply for an ISA and those who can engage in auto-enrolment but choose not to, do you not think there will be an issue of people ending up in a LISA when they would be better off in auto-enrolment?

Jonquil Lowe: Is that for me?

Both of you.

Jonquil Lowe: Automatic enrolment, yes, is definitely superior. The employer’s subsidy is very valuable so it would be extremely concerning if people switched to lifetime ISAs. The problem for women with caring responsibilities is that they simply do not have a lot of money to save. It is very nice that they can have a bonus if they can save, but if they cannot save, where does that leave them?

The value of unpaid caring is huge. The Office for National Statistics tries to measure it and reckons the value of unpaid childcare is about £320 billion a year and unpaid adult care about £57 billion a year. The figures are huge—about a fifth of GDP. Countries address the problem in different ways. For example, Finland has a home care allowance that recognises the value of unpaid work and gives some income that can be used to buy childcare to release the woman for work, or perhaps for other matters, which might be setting money aside to save for emergencies or later life. Simply saying, “If you save, here’s a tax bonus,” does not solve the problem of the people who cannot afford to save.

Martin Lewis: It doesn’t, and some people should be paying off their debts, which again is a problem I mentioned earlier, especially with the Help to Save scheme. I would stretch Help to Save a little lower and allow younger people to engage in the scheme as well as people who work fewer hours but do work. If I were in charge, I would bring it lower down the net. I agree with you on that point.

The problem about the people who do not auto-enrol going into lifetime ISAs when they should auto-enrol is that products, once they become commercial—effectively Help to Save is not because it is from NS&I, but the lifetime ISA is—are sold, and they are sold to encourage people to engage. Therefore, you have competing sales messages.

That goes back to my original point of mandating messages at each point in the journey towards getting it to try to block people out. The person in charge of lifetime ISA savings at one of the big banks is incentivised by how many lifetime ISA savings he brings in and his staff, some way down the line, will be incentivised—or at least their jobs will be contingent on it—to get people to bring in lifetime ISA savings. They will not have a vested interest in telling you to put money in your pension instead, so you need to make sure that they cannot avoid doing so.

That is a subtle point, but it is about misprioritising. Every single product we have on the market, from credit cards to savings accounts and bank accounts, misprioritises someone’s finances if used incorrectly. That is not a reason for not doing the product, but this is the joyous point: we are creating a new product in our nice internet and app-based era where it is rather easy to mandate people to give certain messages. That is why I suggest you do so, in a way that you could not when everything was individually sold by incentivised sales staff sitting in a closed-room office of a bank branch, as it was 20 years ago. Now, most of these things can be automated, so make them automated.

Q Mr Lewis, this morning we heard from some of the representatives from the financial services industry, who seemed to think that this was a complex product.

Martin Lewis: They are not very bright people.

I will leave it to you to say that. My question for you—perhaps I should have asked them—is: do you think there is a danger that, as we advance and these products come on stream that people can follow by using the internet, all of a sudden fees will be lost, as people do not need their investment adviser? Perhaps that is why the industry pooh-poohs products such as this and dresses them up as “too complicated”.

Martin Lewis: One of the problems you will have with the lifetime ISA for pensions is that the vast majority of money will go into savings, not investments, which over a long period is probably not a good move. That is another issue, whereas pension money really goes into investing. I think most people who put money in a lifetime ISA will put it in a cash version and they will not need an investment manager because of that. I think there is an issue going on there.

Are these products complicated? All products are complicated; all products can be explained. I have always been anti the simplicity agenda—all that does is cut down choice and competition and take away flexibility of lifestyle to enable products to be different for different people. These products are no more complicated than those we have out there. It is always said of the state pension that there are only two people who understand it: one of them is dead and the other is still not sure whether he really does get it.

When you contrast these products with the state pension, they are pretty easy products to understand. They have to be explained and they have to be communicated. They will take time. We need to ensure that we use nice, easy and real terminology and not jargon when we do so. Certainly with the lifetime ISA, it is going to take five, six or seven years before it becomes a steady part of what people do. Certainly on the pensions side, the lifetime ISA is easier because it is really the help to buy ISA with some tweaks—that is all it is—and we have already started to do the education process on that.

The argument that they are too complicated is just a complete load of palpable balderdash. It sounds like an industry that is already making a lot of money from one product that does not want to see competition to it. I do not want to see competition to it when it is not right for punters, but when it is right for them and it is a good product, we should be offering it, and we should be slightly careful not to listen to people making bogus excuses because they are rent-seeking.

This will have to be the last question.

Q I want to come back to the potential gender differential impacts of the policy and of the LISA in particular, because generally how we ensure that women are able to benefit from public policy decisions is critical. You said that the Women’s Budget Group had concerns that not many women would be able to benefit from it. We also know that, in later life, women are far more likely to be on means-tested benefits because they have smaller pension pots or do not have an occupational pension at all. Has the Women’s Budget Group crunched numbers on that or modelled that in any consistent way?

Jonquil Lowe: No, I do not think we have the detailed number crunching that you are after. It would be a really interesting thing to do, but it is always difficult to have these discussions because you are talking about different cohorts of people. The women who are currently retired and on low pensions did not experience the same set of circumstances as women today. Certainly, the state pension system now has much better protection for people who are caring, which is unlike the private pension system—

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and, indeed, for the sitting. I thank our witnesses on behalf of the Committee for their evidence.

I beg to move amendment 92, in clause 26, page 26, line 18, leave out

“, or will expose the owner of the copyright to the risk of loss.”

This amendment and amendment 93 is a probing amendment to explore the impact of Clause 26 on account holders.

With this it will be convenient to discuss the following:

Amendment 93, in clause 26, page 26, line 35, leave out

“, or expose the owner of the rights to the risk of loss.”

See amendment 92.

New clause 3—Power to provide for a code of practice related to copyright infringement—

“(1) The Secretary of State may by regulations make provision for a search engine to be required to adopt a code of practice concerning copyright infringement that complies with criteria specified in the regulations.

(2) The regulations may provide that if a search engine fails to adopt such a code of practice, any code of practice that is approved for the purposes of that search engine by the Secretary of State, or by a person designated by the Secretary of State, has effect as a code of practice adopted by the search engine.

(3) The Secretary of State may by regulations make provision—

(a) for the investigation and determination of disputes about a search engine’s compliance with its code of practice,

(b) for the appointment of a regulator to review and report to the Secretary of State on—

(i) the codes of practice adopted by search engines, and

(ii) compliance with the codes of practice;

(c) for the consequences of a failure by a specified search engine to adopt or comply with a code of practice including financial penalties or other sanctions.

(4) Regulations made under this section—

(a) may make provision that applies only in respect of search engines of a particular description, or only in respect of activities of a particular description;

(b) may make incidental, supplementary or consequential provision;

(c) shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.”

This would amend the Bill to present an opportunity for the Government to fulfil its manifesto commitment to reduce copyright infringement and ensure search engines do not link to the worst-offending sites. There is an absence of a specific provision in the Bill to achieve this.

New clause 33—Pre-loaded IPTV boxes—

“(1) The Copyright, Designs and Patents Act 1988 is amended as follows.

(2) In section 107(1)(d)(ii) after “offers” insert “, advertises”.

(3) After section 107(1)(d)(iv) insert—

(v) installs, maintains or replaces, or

(ii) otherwise promotes by means of commercial communications, or”

(4) In section 107(1)(e) after “article” insert “, device, product or component”.

(5) In section 107(1)(e) after “work” insert “or which is, and which he knows or has reason to believe is, primarily designed, produced, adapted or otherwise used in a manner described in this section whether alone or in conjunction with another article, device, product, component, or service supplied by or with the knowledge of the same person for the purpose of enabling or facilitating the infringement of copyright”.”

This new clause allows the Government to fulfil its commitment in the IPO’s Enforcement Strategy to ensure that UK business and rights holders have the necessary legal means to protect their IP. It brings in language to cover the supply of IPTV boxes clearly being marketed or sold for the purpose of enabling or facilitating copyright infringement, recognising that many devices may not, themselves, infringe copyright, but are supplied in conjunction with information which enables users to infringe copyright.

Good morning, Mr Streeter. We now move to part 4 of the Bill. May I say first that it is a pleasure to serve under your chairmanship? I thank you and Mr Stringer for all the work that you have done so far in helping us to get through and scrutinise the Bill.

New clause 33 stands in my name and that of my hon. Friend the Member for Sheffield, Heeley. Although she is not in her place at the moment, I am sure that the rest of the Committee would want to join me in congratulating her on her efforts so far as a first-time Front Bencher. I only hope that I can come close to matching her assiduous scrutiny of—[Hon. Members: “Here she is!”] Right on cue, she makes an entrance so that I can complete my compliments for her efforts so far on our behalf and on behalf of the whole Committee in scrutinising the Bill.

New clause 3 is in the name of the hon. Member for Selby and Ainsty, but we have added our names to it because we think it a very good one. I hope that we can have a substantial debate about it this morning, because there are some real issues that we need to discuss.

This is quite a chunky clause. Amendments 92 and 93 are probing amendments. We just want to explore with the Minister the meaning of clause 26 and to clarify its implications. I should say at the outset that Opposition Members support the principle that there should not be any distinction between physical and digital copyright infringement, and therefore support the proposal in the clause to equalise the penalties for that kind of infringement.

For the benefit of the Committee, I point out that the penalty for digital copyright infringement will be increased, to equalise it with that for the physical world, from a maximum of two years’ imprisonment to a maximum of 10 years. That makes sense if we are to support the principle of there being no distinction between the two, although in supporting that principle we want to ensure that the penalty is used appropriately. Obviously, we want to hear about that from the Minister in his response.

It could be said that elsewhere in the Bill, because of its unevenness, is the implication that there is some kind of binary between the digital and the non-digital world. That, of course, is not true when we get into the real world. My hon. Friend the Member for Sheffield, Heeley, in her excellent scrutiny of the Bill from the Front Bench, has argued that we should have had a properly thought through digital future Bill, given all the issues in play, and that that would have done away with the false division that tends to exist between the digital economy and the general economy.

Instead, we have a bit of a Christmas tree Bill, on which the Government are hanging various vaguely related issues. That is what is in front of us, so that is what we must scrutinise, but the levelling of the law on copyright infringement is, I think, a partial acknowledgement of the point about the false division between the digital and the non-digital worlds. However, in increasing the penalty as the clause proposes, we must be sure that we do not leave a window cracked open for unscrupulous operators to be able to intimidate and take advantage of consumers, whom I do not believe the Government intend to target in the clause. I do not think that the Minister intends to target consumers, but he will tell us that in his response.

The issue is largely a matter of wording. Whenever we scrutinise legislation, however, we have to make sure that no aspect of the law is left unclear by muddled phrasing, so it would be helpful to the Committee—this is the purpose of our probing amendments—if the Minister explained the distinction made in clause 26 between

“the owner of the copyright”,

in line 18 and

“the owner of the right”

in line 35. What do the Government intend by the distinction?

Now we’re listening, Mr Streeter. Does my hon. Friend know what that represents in terms of sales?

I shall stick strictly to the amendment, but I think it is mainly in relation to live performances, rather than through physical or online sales.

The impact of copyright infringement is very difficult to quantify precisely because not every copy of a music track that is illegally shared necessarily represents a lost sale. Nonetheless, the scale of illegal downloading and streaming of music remains significant and it continues to undermine the economic health of the UK’s music industry. The Ofcom Media Tracker survey, average retail prices and academic evidence taken together all suggest that the losses from piracy to the UK recorded music industry are between £150 million and £300 million a year. That is a significant loss of value to the UK economy and legitimate music-related businesses.

Do not many of the search engines make their money by prioritising businesses and organisations that have chosen to advertise with them? It is therefore easily within their power to change their algorithms at will to meet the requirements that my hon. Friend suggests.

My hon. Friend is absolutely right: it is within search engines’ ability to change the algorithms. I had always thought that the problem might eventually solve itself, because when advertising is placed next to the results of an online search, the companies whose products and services are being advertised appear next to websites that are run in the shadows, often by criminal networks. Surely reputable businesses with statements of corporate social responsibility would not want their advertisements to appear next to a search that turned up an illegal website run by some gangsters somewhere in Russia. However, it turns out that search engines do not solely or even principally make their money from advertising; it is data that are valuable to them. As one of my hon. Friends said earlier, data are the new oil. It is the data acquired on individuals through search engine practices that are so valuable and that enable companies to put product placement in their advertising and search engines to tailor searches to individual consumers online. Embarrassingly, that fact once resulted in a Conservative Member criticising a quote of mine on the Labour party website because the advertising content that appeared next to it was to do with dating a certain type of person. The Member in question subsequently found out that the advert had been placed there not because the Labour party was short of money but because that advert was tailored to his personal search activities. Members should beware when making such criticisms.

My hon. Friend the Member for City of Chester is absolutely right that it is perfectly within search engines’ power to solve this problem. Some efforts have been made by Google, and they worked for a short time, but a search engine search for widely available music by some of the most popular artists in the UK will still return a lot of illegal results. The hon. Member for Selby and Ainsty may wish to cover that point in his remarks, so I will not go into further detail, but BPI research certainly indicates that.

The voluntary approach is not working. We have seen this movie before; we have downloaded it many times, and it always has the same inconclusive ending. New clause 3 would provide it with an ending to match one of the best last lines in the movies, which is “Shut up and deal.” Any offers from Government Members? It is from Billy Wilder’s great film “The Apartment”; Shirley MacLaine says it. The new clause would enable the Government to say to the search engines, “Shut up and deal,” because there is no incentive for search engines to do so at the moment. We are being helpful to the Minister, as is his colleague. We are trying to put a bit of lead in his pencil, and he should welcome this cross-party effort to ensure that progress is made.

One further point: I have a sneaky feeling that the Minister actually agrees with the new clause, although he will not agree with it today, and will want to make this change to the Bill but to do so in the House of Lords. If my prediction is wrong, I will take it back in due course. The only thing that I would say is that it does not do this House’s reputation any good when Governments behave that way. I accept completely that all Governments do it: they know that they want to make a concession on a Bill, but they decide to do it in the House of Lords rather than the Commons. Ultimately, although we hear all the talk about the House of Lords being such a wonderful revising Chamber, the Government should accept once or twice that hon. Members, including those of their own party, come up with amendments that are perfectly sensible and should be incorporated into a Bill. It would help the reputation of this House if the Government were prepared to behave in that manner.

One fundamental aim of the e-commerce directive was to identify clearly which practices fall within and outside safe harbour defences. Part of the legislation— article 16, to be specific—encourages member states and the Commission to draw up a code of conduct at community or national level. However, no such code of conduct has ever been drawn up due to resistance by the search engines. They should not be allowed to avoid parts of legislation at the expense of UK creative industries just because they find it inconvenient. The new clause would end the wasting of Ministers’ time in chairing meetings that go nowhere, the repetitive process of rights holders producing proposals and the practice of search engines consistently refusing to comply to combat piracy, thus ensuring that the digital economy continues to benefit both the UK creative industries and the British public.

New clause 33 is the last amendment in the group. Last month, the Government released their annual intellectual property crime report. Some of the trends are quite startling: they reported 33% more illegal TV programming downloads in March to May 2015 than in the same period in 2013—a rise from 12 million to 16 million. The report highlights as a major concern the proliferation of internet protocol TV, or IPTV as it is known, which offers viewers increasingly easy access to pirated digital content. Technological changes have led to exponential growth in this new form of piracy. Android-based IPTV boxes are being loaded with software linking thousands of streams of infringing entertainment, movie and sport content. The boxes are sold on mainstream marketplaces such as Amazon and eBay, and through Facebook.

The Copyright, Designs and Patents Act 1988 has yet to be updated to reflect the new technology. It offers no effective remedies to copyright owners, who at present can rely only on laws that are not particularly tailored to copyright infringement. The new clause would help prosecute those who pre-load and distribute such devices and make it easier to work with online marketplaces to remove listings by wholesalers of such products.

I rise to speak to new clause 3. It is a pleasure to follow the hon. Gentleman, who knows an immense deal about this area, having been a huge recipient of earnings from rights over the past few years. I am not entirely sure whether all that income was derived from him buying presents for his family, but it is great to see that we genuinely do have talented musicians in this place.

The new clause would create a power that allowed the Secretary of State to consider introducing a code of practice between search engines and rights holders on copyright infringement, which we have heard about. This power could be used only in the absence of a voluntary code between the two parties; it would not automatically create new legislation. Instead, as has been said, it acts as a backstop power if all other attempts to get an agreement between the producers of creative content and those who facilitate access to infringing material fail.

According to the latest estimates from the Department for Culture, Media and Sport, the UK creative industries amount to £87.4 billion in gross value added, and have an export value of £19.8 billion. These are incredibly large sums. Industries such as the music sector contribute immensely to those figures. Last year, five of the top 10 biggest selling artists in the world were British. One in six albums sold globally is from a UK artist. Those are staggering figures, and they demonstrate the appetite for UK music content here and abroad. According to “Measuring Music”, a report developed by UK Music, the industry body, the sector grew by 17% over the past four years and is worth £4.1 billion to the UK economy; it generates exports of £2.2 billion.

Although the UK creative industries are much in demand, copyright infringement remains a significant challenge. It not only has negative economic consequences for our businesses and industries by driving consumers to illegal markets, but seriously undermines the respect for, and value placed on, the creativity and effort that go into producing content—music and films in particular. According to the latest Kantar Media copyright infringement tracker, commissioned by the Intellectual Property Office, 78 million music tracks were accessed illegally between March and May 2016. The same research indicated that 20% of internet users participated in some form of illegal music activity online during that short period. These are very worrying figures, and they remind us that despite the growth in access to legal streaming sites, such as Spotify for music and Netflix for films, piracy remains a significant problem that needs to be tackled.

If we are to ensure a prospering commercial market for UK music that benefits rights holders and creators, it is essential that the main method of discovering music and artists directs consumers to legitimate sources. Search engines are one of the key means by which consumers discover music and artists. However, the prevalence of search results linking to infringing content, particularly on the first few pages of a generated search result, as we heard from the hon. Member for Cardiff West, indicates that more needs to be done. Furthermore, search engines incorporate auto-complete functions that can provide access to terms associated with the discovery of illegal content even before an internet user has finished typing their search terms.

For example, I am sure that you, Mr Streeter, are aware of the artist James Arthur, who was at No. 1 with “Say You Won’t Let Go” until he was knocked off the top spot, as I am sure you are aware, by Little Mix, which caused great excitement in the Adams household. When searching on Google, all I need to do is type in “James Arthur say y”, and I am given an option of clicking “James Arthur ‘Say You Won't Let Go’ download”. This takes me to a series of search results, and the only legitimate link allowing me to access that track legally is at the bottom of the page. It is not acceptable that search engines allow such ease of access to infringing content.

Some searches involve wading through several pages of results before getting to the first legal site. That is clearly wrong. The effectiveness of Google making changes to its algorithms—an infringement solution that that particular search engine advocates—remains to be seen. In reply to a written parliamentary question that I tabled on 2 September, the Government admitted on 26 September that it is “not possible to say exactly how” an algorithm change “equates to changes in infringement”. In response to a separate question, they said that it was “not…possible to analyse the…effectiveness” of measures to decrease auto-complete suggestions that provide access to stream ripping and other illegal converter technologies via search results.

In the 12 months up to September 2015, the British Phonographic Industry—the representative body for the recorded music industry, which does much vital work in the pursuit of anti-piracy measures—submitted almost 66.5 million infringing URLs to search engines for removal from search results. The ability of search engines to link to legitimate websites should be straightforward. For example, pro-music.org identifies legal online services. The site identifies that the UK has over 50 legitimate music websites—28 download, 19 subscription and 14 supported through ad services.

Creating a legitimate marketplace increases industry’s capacity for growth and supports overall economic wellbeing. Consumers also stand to benefit from higher-quality search results, clear signposting to legal content, and reduced exposure to malware, viruses, and other types of deceptive advertising. Studies demonstrate that these risks to internet security are sadly prevalent on infringing sites.

Dealing with copyright infringement requires co-operation; the problem can be addressed through positive initiatives. We have seen success in website blocking and, as we have heard from the hon. Member for Cardiff West, from the “Get it Right from a Genuine Site” campaign. UK Music developed an app, aimed at young people, called Music Inc. in partnership with Aardman Animation and the IPO. It raises awareness by simulating the mechanics of the music industry and showing the impact of copyright infringement on business decision making. The app has attracted over 600,000 users since its launch. We have also seen positive results from activities by advertisers and payment providers, and from the work of the police intellectual property crime unit to take advertising and payment services away from illegal sites.

Recognising the challenges, the Government have facilitated a round-table process so that rights holders, industry bodies such as the BPI, and representatives from search engines can discuss the problems of copyright infringement. This process has yet to result in agreement on how infringing content should be tackled. Rights holders are trying to negotiate a voluntary code of practice. We must take this opportunity to ensure that that happens. A code of practice for search engines would result in the reduced prominence of known infringing websites in search results, through demotion and delisting. Search engines already use such practices with regard to a range of illegal activities. The demotion of illegitimate websites would be attractive, in that verified artist websites would benefit in the same way that licensed retail stores do. This is because they will be promoted in the rankings at the expense of infringing sites.

Is my hon. Friend aware that rankings are vital? For some search terms, up to 90% of clicks can come from the top three results. Certainly more than 90% of people do not look past page 1, so being at the top is vital to clicks and activity.

My hon. Friend speaks with great knowledge on the subject. That is absolutely vital. Consumers searching are not necessarily aware of which sites are legal and which sites are not, so being in the top few search results is crucial. Much more needs to be done to ensure that genuine sites are recognised when people use search engines.

A code of practice should recognise that its scope includes legitimate artists’ websites where appropriate. The Bill presents an opportunity for the Government to fulfil their manifesto commitment to reduce copyright infringement and ensure that search engines do not link to the worst offending sites. At this stage, there is no specific provision in the Bill to achieve that. Although it is not my intention to push the new clause to a vote, I am keen to hear the Minister’s response, and his ideas about how to ensure that its intentions are delivered.

It may help the Committee to know that we will not reach votes on new clauses today; that will come at the end of our proceedings, in case anyone is getting terribly excited.

I am sure that the Minister will be glad to hear that I will not be quite as thorough, because everything has been covered already. He was looking somewhat exasperated. I do not know what he was googling; “How to make this Bill go quicker”, perhaps.