My Lords, it is a pleasure to open this debate on the Savings Gateway Accounts Bill. This Bill will create a national savings gateway scheme, giving 8 million people the chance to open accounts in which each pound that they save will be matched by 50p of government money. I am pleased to have the chance to set out the purpose of the Bill and I look forward to the contributions of noble Lords both today and at future stages. I know that the Bill will benefit from the careful and expert scrutiny that it will be given in this House.
I start by explaining the aims of the saving gateway scheme, which the Bill will introduce from 2010, and how we have reached this point, because this is a measure that has been carefully developed over a number of years. We have two objectives for the saving gateway scheme: to encourage a savings habit among working-age people on lower incomes and to promote financial inclusion.
I am sure that noble Lords on all sides of this House will agree on the importance of saving. Savings can provide people with independence during their lives, security if things go wrong and comfort in later years. They make it easier to deal with unexpected events, to plan ahead and to prepare for the future. A lack of savings, by contrast, makes it more difficult to invest in education or training. Unexpected expenses, such as an unplanned domestic expenditure or an illness, are much harder to deal with, as there is less of a buffer to fall back on.
Government incentives to save are already in place, including tax relief on pension contributions and tax-free savings accounts, or ISAs, which are now held by 18 million adults. However, both these incentives rely on tax relief to provide the incentive to save, but that offers little benefit to people on lower incomes, who pay little or no income tax. We know that people on lower incomes also have lower levels of savings than the rest of the population. According to the most recent Family Resources Survey, 43 per cent of households with a total weekly income of less than £100 have no savings at all, a percentage that falls as incomes rise.
We therefore conclude that there is a strong case for an additional incentive for people on lower incomes to save, which is what the saving gateway scheme aims to provide by offering 50p from the Government for each pound saved. We believe that this can promote a saving habit, which will continue even after the saving gateway comes to an end. The saving gateway also aims to further financial inclusion by bringing people into contact with mainstream financial services, some of them for the first time.
We are, I am sure, all aware of the costs that financial exclusion can bring, often to the most vulnerable members of our society, whether through something as simple as paying commission to cash a cheque or through being forced to turn to doorstep lenders or even illegal loan sharks because affordable credit is not available. We are working hard to tackle financial exclusion, supported by the Financial Inclusion Fund. The saving gateway will form part of that work by encouraging people to engage with the banks, building societies and credit unions that will offer saving gateway accounts.
Again, there is a case for a particular focus on people on lower incomes. According to research by the Financial Inclusion Taskforce, whose chairman, Mr Brian Pomeroy, gave evidence to the committee on this Bill in the other place, low-income households are more than twice as likely to be unbanked as other households. Many may also be saving through unregulated products, the dangers of which were shown by the collapse of Farepak in 2006. Our objectives for the saving gateway have been welcomed by organisations that help to tackle financial exclusion, by representatives of people on lower incomes, by organisations focused on saving and by the financial services industry.
Over recent years, we have looked closely at how the saving gateway can best achieve these commendable objectives. Since we first consulted on this idea in 2001, we have conducted two pilots of the saving gateway. Between the two, more than 22,000 people took part and over £15 million was saved. Those who participated were overwhelmingly positive about the effect of the saving gateway.
We are currently conducting further evaluation of the second pilot. The initial results show that 91 per cent of participants would be very likely to open a saving gateway account again if they had the chance and that 93 per cent would recommend it to a friend. This evaluation also shows that, before the pilot started, around 40 per cent of participants were putting money into a savings account at least once a month. During the pilot, the proportion rose to around 80 per cent of participants. Unsurprisingly, that number fell slightly once the pilot ended and the incentive of a government contribution was removed, but even 18 months later around 60 per cent were still saving once a month and around a further 20 per cent had saved in the previous three months.
We have also learnt a number of important lessons from the pilots, which have informed the design of the national saving gateway scheme. As I said, we believe that there is a strong case for an additional incentive for people on lower incomes to save. They have fewer savings than the rest of the population, they benefit less from incentives that rely on tax relief and they are also more likely to experience financial exclusion. We believe that the saving gateway should be focused on people of working age, rather than pensioners. There are significant incentives for people to save for their retirement before they reach it, including tax reliefs to incentivise pension savings, which were worth around £30 billion in 2007-08. We will also be introducing personal accounts to promote low-cost, tax-enhanced savings for retirement.
On average, pensioners have higher levels of savings than the rest of the population. Only 17 per cent of households with more than one adult over pension age have no savings, compared to 24 per cent for all households and, as I mentioned, 43 per cent of households with incomes of up to £100 a week. The Government already provide significant support to pensioners in other ways, such as winter fuel payments, free prescriptions, free eye tests and free off-peak nationwide local bus travel for the over-60s, free TV licences for the over-75s, free central heating for pension credit recipients and free loft and cavity insulation for those aged over 70.
We are also increasing the full basic state pension to £95.25 a week from April 2009 and raising the standard minimum income guarantee in pension credit by more than indexation in April, which means that no single pensioner need live on less than £130 a week in 2009-10 and no pensioner couple on less than £198.45. These measures mean that pensioners have money to fall back on, even if they have low levels of savings. I know that my noble friend Lady Hollis has views on this subject and I very much look forward to hearing them. I doubt that I have assuaged her concerns, but hope that I may be able to do so in the course of our consideration of this Bill.
Our target group is working-age people on lower incomes. We believe that the simplest and most efficient way of reaching them is through passporting eligibility for the saving gateway from qualifying benefits and tax credits, which is what the Bill sets out. This means that people will not be required to complete a means test to prove that they are eligible for the saving gateway and they will not need to contact the Government. Instead, they can automatically be sent a notice of eligibility by HMRC, which will be operating the scheme. The qualifying benefits and tax credits are listed in Clause 3 of the Bill and have been carefully selected to target working-age people on lower incomes.
Noble Lords may be aware that there was some discussion in the other place about the fact that carer’s allowance does not feature in that list. We have listened carefully to the views expressed. As the Economic Secretary said in the other place, we are minded to extend eligibility for the saving gateway to recipients of carer’s allowance, in order to target claimants of working age. We hope to do this in Committee. We believe that this amendment will make an additional 300,000 carers eligible for the saving gateway.
I turn to how the accounts will work, once they have been opened with an account provider. These accounts will last for two years. Each month, savers will be able to deposit up to £25. The monthly limit will promote regular saving. For each pound saved, the Government will contribute 50p at the end of the two years. In total, this means that account holders will be able to save up to £600 in their accounts and receive up to £300 from the Government, all of which will be tax-free. How the government contribution will work is set out in Clause 8 of the Bill, which provides that the maturity payment, as it is called in the Bill, will be calculated on the basis of the highest balance that has been reached during the account. At the end of the account’s life, the saver will have the choice of what happens to the money that they have saved and the maturity payment that they have earned. There will always be a default savings account for the money to roll into if the saver does not make an active decision. The account holder will also have the choice of different saving products, or of spending some or all of the money.
As I said, the results of the pilots suggest that many people will continue to save, having established the saving habit that the saving gateway is aimed to promote. I am sure that there will be widespread support in the House for that aim and for the aim of promoting financial inclusion and I hope that there will be widespread support for the Bill. It will introduce a national saving gateway scheme that will offer 8 million people a real incentive to save, targeted on working people on lower incomes who need it most. That will help to initiate a saving habit. I commend the Bill to the House.
My Lords, before speaking on the Bill, I draw attention to my interests as listed in the Register of Members' Interests, and in particular my capacity as a director of a life assurance company.
For my part, I welcome the explanation that the Minister has given of the Bill and its objectives. We must recognise that it is something of a mouse of a Bill compared to the scale of the challenges that we face, but it is welcome nevertheless as a small but significant recognition of the importance of developing a culture and habit of saving and thrift in the UK. That is clearly important for two reasons. First, it is good for the economy; and, secondly, and perhaps more importantly, it is good for the individuals. I shall touch on those points briefly.
First, it is good for the economy because a high savings economy is more productive and wealth-creating. It is important that we are clear about that because there have been moments when the messages from the Government have appeared to be somewhat ambiguous or contradictory. We should be very clear that, at the end of the day, the output of the UK economy in the long run is determined by the size of the labour force and its productivity; it is not determined by any particular level of consumer spending or government spending. The more savings we have, the more productive the economy becomes and the higher is future output. A low savings economy, whether brought about because of government borrowing or consumer borrowing beyond prudent levels, in the end leads to a trade deficit and a build-up of debt that has to be paid for by future generations. So we should unequivocally be in favour of a high savings economy. The question, of course, is how to manage the transition from where we are to that point, but that is the direction in which we should all seek to travel.
Secondly, savings and thrift are important for individuals in encouraging independence and self-reliance. I accept, as has the Minister, that there are many people on low incomes, especially those targeted by the Bill, for whom paying their way week by week is a struggle. They have little if any cash put by to protect them against occasional emergencies. However, we should not imagine that just because people have low incomes, they cannot save. In part, it is an attitude of mind and an attitude of responsibility—of people living within means and taking some responsibility for their future welfare. Indeed, the pilots have demonstrated that many people on low incomes—not all, but many—can, if given incentives, find the opportunity to put some money aside to provide security for their own well-being.
I was reminded of that a few years ago when an uncle of mine died at the age of 95. Among his papers, we found a life assurance policy that had been taken out by his mother when he was born in 1901 at a rate of a penny a week to a Hampshire mutual society. His mother was the wife of a rural labourer who became a war widow during the First World War, but for 40 years a penny a week was paid to that life assurance company to ensure that when her son died there was money to pay for his funeral.
That type of attitude was not unique to her. It was part of the thinking and culture of her generation and class. I fear that in many sections of society, we have lost that sense of responsibility and thrift in the headlong rush to live on borrowing and credit—the mortgages of the future. Like the Minister, I am very much in favour of something which tries to recreate some of that culture and habit.
The question is: if this Bill can help—and some pilot results suggest that it can—what can we do to make it even more effective? Let me pick on two problems that often occur to people targeted by this Bill. One is the fear that if they save and build up reserves and then, as often happens, fall into default on some of their loans or credit-card bills and are put under a court order, their savings are immediately taken as part of the settlement. That creates a view, “Why bother saving up money which will simply be taken away every so often when I hit that problem? If I had spent it, it would not have been there to be lost”. The problem is that if they do not save, it is more likely that they will not have the cushion to protect them when the unexpected comes along and they cannot keep up their payments.
Another serious issue is that when they fall into that situation, get behind on rent and become homeless, getting back into housing requires a deposit. Many cannot, even with the amount of money envisaged in this scheme, save up enough to be able to take out the deposit to get back into housing.
Will the Government consider a couple of modifications to this Bill? The first is to provide that savings in these gateway schemes are excluded from normal debtor claims and court settlements. In other words, will they ring-fence them, so that money put aside in these savings schemes will still be there at the end of a court settlement? It will not then be lost, but will be there to continue to provide a cushion.
The second possibility is to create a link to the Social Fund, so that those who have built up some savings, and demonstrated that they have a savings habit, would have preferential access to a top-up loan or grant, which would enable them to afford a deposit to get back into housing. For many, that is the real source of continual poverty. Once they are evicted and lose their housing, they can never get the money together to get back into rented accommodation.
Those two changes would significantly enhance the perceived attractiveness of putting savings aside in these schemes. They would address real issues on people’s minds and would increase the incentive to participate. I will leave it to the noble Baroness, Lady Hollis, to raise the issue of pensioners. However, in passing, I add it as a third area which the Government might amend. It is odd to suggest that people cease needing this just because they pass over the pension age. While many pensioners may have capital, many do not. They would benefit from the incentive to build up enough of a cushion to deal with the odd, unexpected bill. However, even with those additions, we have to accept that this Bill will remain a mouse—maybe a slightly stronger one. If we are to address the lack of savings in this country, we need to go further. I suspect that is beyond the scope of this Bill.
There are a couple of things that I have spoken about in the House before, which I would like briefly to mention at this stage. One major step forward would be to remove taxation from all income derived from savings. It seems anomalous that, having encouraged people to save out of taxed income, we tax them again on the income that they produce from those savings. It is no incentive to save and no way to encourage people to be independent. My suggestion would simplify a whole range of schemes that are wholly designed to get around the taxation of savings, and would be a major step forward.
The second point that I want to put to the House is about recognising the importance of passing down modest levels of accumulated savings from one generation to the next, and in particular allowing people who have built up a pension pot, and who believe that they can get by by drawing income from that capital rather than converting it into an annuity, to preserve their pension pot and not to have to convert it into an annuity, and to pass that savings pot down to the next generation to go into its pension pot without being lost to an annuity conversion or being subject to high levels of taxation. We must accept that, in the current situation, it will take several generations to build up the levels of capital in this country that will give people the independence that we want them to have.
I know that it is asking a lot of the Minister to leap to those suggestions in this Bill, but I ask him to consider the other suggestions. Meanwhile, I welcome the Bill.
My Lords, this is a modest seeming Bill that embodies important, progressive principles. It dispels the commonly held illusion that poorer people do not save, do not want to save and cannot save, and it confirms what the Institute for Fiscal Studies and others have shown: that matching payments of this kind can provide people on poor incomes with an effective incentive to save. It can make a real difference to their lives, notably in dealing with the problems of indebtedness. As my noble friend has observed, previously higher-paid people have had benefits through the tax system: for example, up to 40 per cent tax relief on ISAs.
The Bill is an attempt to deal with lower-paid people, and is therefore an attempt to deal with an implicit class bias in our current savings and taxation system. At a time when ordinary people feel powerless in the face of unaccountable and irresponsible capitalists in our society, it takes a perhaps modest step towards empowerment, and the Treasury and its officials should be congratulated on it. It is not a rash experiment, as we have heard; it has been thoroughly tested in two major Treasury schemes in which, I believe, 22,000 people took part. The schemes proved the popularity and effectiveness of regular savings among less well-off working people of working age, and showed that new savers can be generated and the pattern of saving behaviour altered.
The Bill offers, as we have heard, a clear and simple structure for saving, with the Government matching savings by 50p per £1. Perhaps £1 per £1 would be an even more attractive scheme for people in the gateway scheme. It covers up to 8 million people: a wide range of poorer people on various allowances, benefits and tax credits. A simple system of passporting makes it straightforward to proceed from entitlement to benefits to eligibility for the gateway scheme, and the fact that there is no means test is of enormous merit, given all the indignity that has been associated with means-testing.
The Bill is very helpful to women, among others. Women with scant means who are trying to manage household budgets will find it helpful, and it will reinforce one of the points made in a debate last week in your Lordships’ House on the impact of our current economic problems on women. In that connection, I was pleased to hear that carers will be included in this scheme. We have been pressed, strongly and rightly, to include carers, who are commonly on lower incomes. It is difficult to see why people receiving a particular allowance should be included and people receiving a carer’s allowance should not. The role of carers was recently highlighted in the Carers (Equal Opportunities) Bill passed in the Commons by my honourable friend and former pupil, Hywel Francis, the MP for Aberavon. I am glad that that principle is now to be extended.
The Bill has many good features. It will run for a reasonable period and is due to start in 2010, which may be a better year than 2009 to launch such a scheme. There is to be a variety of providers, and important among them will be the Post Office with its wide accessibility for ordinary citizens. I should like to think that a savings gateway account would be an ideal scheme for the proposed post office bank that has been discussed in connection with the Postal Services Bill. Advice will be available from the Government and bodies like credit unions, and as we have heard, no restrictions will be put on the use of the savings accumulated. That is unlike the schemes of a somewhat similar nature in the United States where purposes like housing are specified.
As we have heard, the Bill should be welcomed on all sides of the House. It enjoyed cross-party support in the House of Commons as a measure for financial involvement, financial education and financial inclusion. For people of a conservative outlook, you would think that a saving gateway would be a welcome form of escape from the dependency culture in which so many working-class people have been imprisoned over the generations. It should encourage a greater mood of self-reliance and enable categories of people not hitherto involved in saving to become familiar with the principles of financial management. That is particularly valuable in the middle of this economic turmoil, when the basic principles of financial management personally, let alone nationally, have clearly not penetrated into many people.
For those of us on the left, the idea of a saving gateway scheme should be welcomed as a way of extending social equality and opportunity. It will do something modest but none the less important in principle towards weakening the entrenched class divide in this country. It offers help to those who need it the most. Tackling financial exclusion is a way of tackling social exclusion more generally. I believe therefore that important social as well as financial principles are embodied in the Bill and I warmly support it.
My Lords, I am delighted to speak briefly in support of this Bill and I thank my noble friend for introducing it. However, I should say immediately that this would not have been my position when it was brought forward originally. This is a cash savings account for individuals on low incomes with excellent incentives and the promise of kick-starting the saving habit among people on lower incomes by the provision of matched funding. Encouraging people who do not normally do so to engage with financial services will promote financial inclusion and will undoubtedly help those on low incomes to manage their finances, plan for the future and guard against the financial insecurity that plagues our society at present. That is all very much to be applauded, but in its original form, the Bill intended that while other income replacement benefits were to be part of the scheme, carer’s allowance was specifically to be excluded. The Treasury Minister in another place said at Second Reading:
“We have thought carefully about making carer’s allowance itself a qualifying benefit. However, although all recipients of carer’s allowance will have low earnings, many may be in higher earning households; in fact, carer’s allowance recipients are less likely to be in poverty than the average adult. Extending the scheme to all carers regardless of their level of savings or other financial circumstances would therefore mean that it was poorly targeted.—[Official Report, Commons, 13/1/09; col. 171.]
While that statement may be technically correct, it has none the less caused great concern as the figures from the Work and Pensions Committee later showed. It said:
“While the evidence suggests that Carer’s Allowance makes a modest contribution to reducing poverty among carers, further exploration of this data is needed to examine how far the differences shown are related to uneven take-up of this benefit; ineligibility for CA when the cared for person is not a recipient of relevant benefits themselves; and issues relating to age”.
It is misleading to compare carer’s allowance recipients with the general population. They should be compared with people who share other characteristics; for example, gender and age. They may be clustered just above the formal poverty line but they tend to have lower incomes than the general population. Many of them have retired early and have a small occupational pension which takes them just above the threshold for means-tested benefits, but they are by no means well off. Carer’s allowance recipients are in the bottom two quintiles of income distribution compared to 37 per cent of all adults. This clearly shows that the Minister’s claim that carers may be in high-earning households was not quite accurate.
Carers also spend many years on a low income and claiming benefit. More than two-thirds of carer’s allowance recipients claimed the benefit for more than two years and 40 per cent receive it for more than five years. This makes it extremely hard to accrue savings. We should remember that caring is a long-term business.
Poverty statistics take into account only income, not household expenditure, and clearly carers have higher costs for things such as heating and transport. Like other families, carers are feeling the pinch in these difficult economic times but for them this is no change; they have always found that caring leads them to financial difficulties. They face higher costs associated with caring, such as heating, water and transport costs, and at the same time do not get much support from local authority services. Many families do not receive publicly funded care and are forced to arrange their own care, which can be expensive and of poor quality. That places a very heavy burden on their budgets.
Research carried out by Carers UK—I declare an interest as its vice-president—published in December last year found that many carers are living in poverty. From a survey of 1,700 carers, 75 per cent reported that they struggled to pay essential bills; 52 per cent were cutting back on food; and 54 per cent were in debt, of whom nearly a third owed more than £10,000 and were resorting to bank overdrafts and credit cards.
So, for all these reasons, it was inconsistent to exclude carer’s allowance but include other income replacement benefits. Carer’s allowance should be treated the same as other benefits. In addition, excluding carer’s allowance sent a negative message to carers, who saw themselves excluded from a government policy that was extending to other benefit recipients. At a time when the Government are making carers a high priority—indeed, they have a very proud record as far as carers are concerned—this was inconsistent. Following publication of the National Carers Strategy last June, the Government committed themselves to ensuring that by 2018 no carer should be forced into financial hardship by their caring role.
I am absolutely delighted that the Government have seen sense and responded to persuasive arguments. I pay tribute to my honourable friend Steve Ladyman, the former carers Minister in another place, who has worked very hard to have carers included in the Bill. The Minister has now said that it is right that the Government should be open to listening to arguments and that when they find good and persuasive ones they should change their mind. I am glad that they have done so. I wish the Bill a speedy passage through your Lordships’ House.
My Lords, we have a low savings ratio in this country compared to, say, Germany—one of the points interestingly made by the noble Lord, Lord Blackwell—because our savings are largely embedded in houses and pensions, neither of which counts towards the savings ratio, which is essentially get-at-able, rainy-day, liquid savings. That low ratio may not matter very much when we have full employment, the opportunity for overtime and an approximate matching of income and expenditure, but increasingly, as the recession deepens and financial insecurity grows, people need rainy-day savings.
We in this country have not done very well in allowing people to access their illiquid savings—to get early access to the tax-free lump sum of their pension during their working life, for example, if they face repossession—or to draw down capital from their home through safe equity-release schemes in retirement to cope with growing need, particularly the wish to stay at home rather than go into long-term care. We make it very difficult for people to borrow from themselves, to move between capital and income and to move, as the noble Lord, Lord Blackwell, said, between pre-retirement and post-retirement assets. We have hung on to financial products that are increasingly not fit for purpose, designed for one gender and a different generation.
The saving gateway is therefore to be welcomed, especially as it will include help for carers, which is excellent news, as my noble friend Lady Pitkeathley indicated. Since 1997 we have transformed income welfare; tax credits and pension credits, underpinned by the minimum wage and greatly improved state pensions, together have tackled poverty. But the disparities in wealth are still twice as great as those in income. Following in the footsteps of the child trust fund, we are increasingly engaged not only in income welfare but in asset welfare, and rightly so.
In the saving gateway, as my noble friend explained to us, the Government will be adding 50p to every £1 saved over two years, to a maximum of £25 a month or £900 in total. The early gateway pilots, as he said, showed that people who had not hitherto saved did so, and that, even when the 50p-matching incentive stopped, they none the less continued to save. They regained control over their lives. They worried less when the washing machine broke down; they could plan a little more, weather stress a little better, spread their bumpy outgoings and avoid high-cost borrowing or getting into debt. As one participant said of the saving gateway:
“It made me feel more secure and I didn’t feel so panicky. Before, I would panic if I thought something was going wrong”.
The scheme is limited to people of working age on low incomes, passported on to it by their benefit claims—income support, JSA, tax credits and now the carer’s allowance. Incidentally, they are passported, not means-tested, which is good to note. Why, as the noble Lord, Lord Blackwell, said, is the scheme confined to people of working age? Why are pensioners denied access to it? My noble friend was typically generous in addressing that issue, and I am grateful—at least, I think I am—for his pre-emptive strike. Essentially, his case was that pensioners are thought to have less need and greater resources, and therefore they can cope. I challenge that. On any needs and resources analysis, I argue, pensioners have the greater claim.
My understanding is that pensioners were excluded because the Government followed the recommendations of the IPPR report by Sodha and Lister, researchers I expect to respect. The need of pensioners, however, is dismissed in their report of nearly 70 pages in under seven lines. Excluding pensioners, they say,
“is sensible, as it makes most financial sense for pensioners to be consuming resources they have saved during their working lifetimes”.
They add that only better-off pensioners would take it up, and that instead their pension credit should be increased. I do not know whether their remarks are underpinned by research about pensioners’ savings, expenditure, coping strategies, vulnerability, needs or indeed their likelihood to panic if the washing machine breaks down. There is certainly no evidence of any of that in their report, merely the statement offered that those of working age should acquire the savings habit while those of pension age should acquire the spending habit. I see why they might say that—they do not want pensioners going without in order to leave something to their family—but the notion that denying them the saving gateway would thereby encourage pensioners to change their behaviour and spend is, in my view, flawed and possibly pernicious.
The IPPR believes that pensioners need income, hence the recommendation on pension credit rather than capital. It is wrong—they need both. Of course the IPPR’s proposal to increase pension credit is nice but, the £1 billion or £3 billion price tag aside, it rather misses the point. Pension credit supports income. The 70 year-old needs modest savings just as much as the 40 year-old. Pensioners on pension credit do not usually have—in the words of the IPPR’s report—“spare” resources to consume, which is why they are eligible for pension credit in the first place. They are usually poorer, older women. They do not have occupational pensions, they certainly will be too old for the personal accounts that my noble friend cited, and they may well be pensioners for 25 years or more. In comparison, the typical lone parent on income support is on that benefit, on average, for less than three years.
The notion that pensioners should consume, run down and run out of any tiny savings they may have, and expose themselves to the buffeting of every minor financial calamity over 25 years, seems to be the height of folly. We are asking pensioners to gamble on their own longevity. Will your washing machine die before you do? Will you be in residential care before you need to repair your roof? Their needs over time—and the length of time is key—will grow. Far from consuming, they, too, need to save if they do not have a cushion behind them. As for their resources and their ability to meet those needs, half a million pensioners have no savings at all. One and a half million have less than £3,000. How will they manage? They will not necessarily go into debt; instead they will go into denial—of heating or of food. Many simply have no margin at all to deal with the unexpected.
Pensioners at 70 need to smooth out bumpy expenditure just as they did when they were 40. They have the same need to feel in control of their finances, the same hunger for a bit of security, and the same neediness and vulnerability if that is denied. In other words, the 70 year-old, as much as the 40-year old, needs not only income, but capital as well.
We do not require claimants of IS or JSA to have consumed all their savings before they can get benefit and be passported on to the saving gateway. Their first £6,000 of capital is disregarded, and thereafter a notional tariff applies, just as in pension credit—and rightly so. It is a false economy of the state to strip out, 1930s-style, any modest savings. Why then is it acceptable for someone on JSA to have £6,000 of capital yet be eligible for the saving gateway, but for a pensioner with only £600 of capital to be excluded? Just because the first person is 40 and the second person is 70 will not quite do, with an equality Bill coming our way.
I beg my noble friend to bring forward an amendment to bring poorer pensioners—those on pension credit—into the saving gateway. We have tackled wonderfully well the issue of the poverty of pensioner income. We now need to think again about the poverty of pensioner savings. Then the saving gateway would really make a difference.
My Lords, the aims of this Bill are undoubtedly admirable and we support them and it. The Minister explained that there are two principal aims. The first is to encourage those on the most modest incomes to save sums regularly, so that they develop the savings habit and in doing so have the funds to hand to deal with emergencies or to fund essential capital expenditure. The second is to promote financial inclusion and to bring people into contact with the financial institutions, often for the first time.
So far, so good. However, I have several doubts about whether the Bill will achieve these aims, not least, as the noble Lord, Lord Blackwell, almost put it, because of its mouse-like qualities. First, and uniquely among government savings initiatives, the Bill provides for only a limited period during which eligible people will be able to get government support for their savings. We believe that this is two years, although the Bill says nothing firm about a time limit. But a time limit there definitely is.
This is unlike all the current principal savings incentives offered by the Government. For example, it is completely unlike the ISAs, where, in effect, there is an unlimited period in which to make savings. One can see by the amount of advertising done by the financial institutions towards the end of the financial year that they know that many people simply will not put aside cash or other forms of saving unless they are reminded of it and unless the tax incentives, year on year, are brought fully into view.
Secondly, the tax benefits for making pensions provisions last for an individual’s entire lifetime of making contributions, which can be up to four decades and beyond. Even under the child trust fund scheme, a second payment is made after seven years and parents can make top-up payments tax-free for the 18-year life of the fund. So why do the Government feel it necessary to subsidise tax incentives for those who are rather better off over the long term but to support the very poor for only two years?
The noble Lord, Lord Morgan, talked about the inherent class bias in the current savings regime. The Bill does not go as far as it might in redressing that bias, particularly now that carers are brought within its remit, which we welcome. As the noble Baroness, Lady Pitkeathley, said, many people are carers for significantly longer than two years and, in my view, they require a longer period during which to have an incentive to continue saving.
I mentioned that we assume that the period of the incentive will be two years. The Minister said so, but we would not know that from reading the Bill. On this and on every substantive issue, the Bill is completely silent. It has 32 clauses and 29 separate delegated powers. We protested about this when it was debated in the Commons and I am protesting about it again. It is a very inadequate way of dealing with legislation to have all the substance in secondary legislation, which, as we know, will be unamendable.
The second reason why I am doubtful whether the Bill will achieve its aims is that I am concerned that not enough effort will be made or incentives given to encourage a high percentage of potential beneficiaries to set up a savings gateway account. The evidence from the pilots was indeed encouraging but, when this becomes a national programme, eligible individuals will, as I understand it, simply receive a notice of eligibility, of no value in itself, which they then have to take to a participating institution—I will come to that in a minute—to open an account. How many will actually do so? I suspect that it will be a significantly smaller proportion than took part in the pilot.
My reason for thinking so is in no small measure underpinned by what happened with the child trust funds. All parents were sent, in effect, a cheque for several hundred pounds; all they had to do was deposit it with one of the many institutions that were offering child trust funds. But we know that in the poorer constituencies barely 50 per cent of parents took that bankable asset to the bank and opened an account. In the poorer sections of those communities, the percentage who did not was significantly higher, and the Government had to do it for them. My concern is that the same principle will apply in this case and that, for many people, simply getting a letter from HMRC—unless it is couched in different language from most letters from HMRC, many may struggle to understand it—is not in itself incentive enough for them to set up an account at a bank.
That brings me to my third and arguably most significant concern. All this is predicated on there being banks and other institutions near at hand into which people can deposit their new-found savings. When evidence was taken in another place, the institutions were extremely discouraging about the likelihood of their participating. The BBA has followed that up in a briefing that noble Lords will have received. It says that it is concerned about the complexity of the whole scheme and adds:
“Our second major concern has been the commercial viability for potential providers. Banks are likely to be interested in acting as providers only if the SG design is fundamentally simple, set-up costs were low and if therefore a business case could be made … No bank has yet committed to acting as a provider”.
We know that the banks undertook to introduce basic banking accounts only with great reluctance and one could argue that the costs of opening those accounts were less and the amount of money in them might well be greater. Can the Minister say anything about the likelihood, in his view, of any of the principal banks participating in this scheme? If they are not minded to do so at the moment, does he have any intention of asking the nationalised banks to join in?
The Government then said that the Post Office would offer these accounts. However, when Alan Cook, managing director of Post Office Ltd, was asked in another place what percentage of the market share he would need to make Post Office participation economically viable, he replied:
“That is a tricky question to answer, because it is not yet clear to me how it can be economically viable—full stop”.
Is it the Government’s view that, if the Post Office cannot make this scheme economically viable—and it cannot, as Alan Cook made clear—it should, none the less, go ahead? Alan Cook also said:
“I would not … want to trivialise the cost issue … I would need to find a partner to provide the administrative capability and would pay that partner to do the work”.
Can the Minister inform the House whether such a partner has been found, and on what basis that partner might do the work for the Post Office?
If there are problems with the banks and the Post Office, what about the building societies? When questioned in another place, Adrian Coles of the Building Societies Association said:
“I am certain that some societies are sympathetic … and will want to offer it, but others, in the current environment of low profitability, low margins, difficulties in the mortgage market and very low interest rates, may decide to stay out of the market”.
He is saying that, frankly, many building societies will not carry out the scheme. As we know, unless the Nationwide does it, there is no building society with a national branch network either. We are then left—I do not say this pejoratively—with the credit unions, which are the fourth group of institutions that might be expected to offer this service. When questioned in another place, Mark Lyonette said:
“Even we are looking, to some extent, for hidden subsidies, although not Government cash … We may be looking for social landlords to do some of that collection business for us”.—[Official Report, Commons, Saving Gateway Accounts Bill Committee, 27/1/09; cols. 26-28.]
It is absolutely clear that the credit unions are finding it difficult, even with their very low cost base, to commit themselves to the scheme at this stage. My principal concern—I would welcome the Minister’s view on this—is that neither the banks, the Post Office, the building societies nor the credit unions are yet signed up to the scheme. Without a significant number of them offering the scheme, frankly, whatever else its virtues or demerits might be, the thing will not fly, as Alan Cook said.
Will the Minister bring us up to date with the provision of financial advice to people on low incomes? It is all very well offering people this opportunity, but I suspect that one of the reasons why the pilots worked was that there was a bigger support system around people to encourage them to participate. I hope that the Minister will tell us where matters now stand with the Thoresen pilots and when he expects that a national scheme of financial advice will be available to those on low incomes as well as to everyone else.
Even if we put all that to one side, we have to accept that the scheme has some rough edges. Some people will not qualify who should qualify; poor pensioners are clearly in that bracket. Others will qualify who would not naturally be among the first flush of people who wish to qualify. I already know several early-20-somethings—unemployed graduates with very affluent parents—on jobseeker’s allowance who are totting up how much they might make out of participation in this scheme. I do not think that that is anything other than a second-order issue, but it demonstrates the complexities of achieving a watertight Bill. I hope that the Bill is a success but, for the reasons that I have given, I have real doubt whether it will meet the Government’s ambitions for it.
My Lords, this is probably the least offensive Bill—certainly the least offensive I have had to deal with in my time on the Front Bench—to emerge from the Labour Party’s policy factory since 1997. We shall raise some detailed issues during the Bill’s passage and we shall seek to improve it, but we shall not oppose it.
The most curious aspect of the Bill is why it has taken the Government nearly eight years, since the publication of their document Savings and Assets for All, to reach this stage. The other scheme floated in that document was the child trust fund, which was legislated for in 2004 and which has been in operation for some time. The child trust fund concept was not piloted and I think the jury is still out on whether it is a success on the various criteria set for it. That is a debate for another day.
The savings gateway concept has been piloted, not once but twice, and it is hard to argue with that as a process. However, the evaluation of the larger, second pilot scheme was not very encouraging. It did not give a massive amount of confidence that a savings gateway will result in an overall increase in savings. Indeed, the evaluation found that there was no evidence of an increase in net wealth as a result of the pilot and only limited evidence that other expenditure had been reduced to accommodate the saving that was made. That suggests that the saving was coming from other sources, possibly informal savings.
Furthermore, among savers at the higher income end of those included in the pilot, there was statistically significant evidence of switching from other formal savings sources, rather than of additional saving. That is entirely rational behaviour as the top-up which the Government will pay is too good an offer to miss for those who qualify for the scheme. The noble Lord, Lord Newby, pointed out that people will seek to exploit that. The Government are quite good at that; it is exactly the same behaviour that occurred when the Government set up the stakeholder pension arrangements.
The evaluation of the pilots produced evidence that there was an intention that the majority of savings accumulated under the scheme and the top-up would be wholly or partly retained as savings at the end of the scheme. The report came out in May 2007. I am not sure whether there is further evidence of what happened to the balances that were accumulated at that time but, if the Minister has any further evidence of what has happened since then, I am sure the House will be grateful for it. Did the intention of holding on to the savings turn into reality or were the savings withdrawn?
I ask these questions because the savings gateway scheme is a modest one. It is targeted at a narrow group and lasts for only two years. It is much less comprehensive than the lifetime saving account which my party has proposed in the past. As explained, it is intended to kick-start a saving habit rather than be a part of a long-term structure of support for savings. As with all such schemes, we need to be sure that the public expenditure involved, which is over £100 million a year in the first three years falling to around £60 million in steady state, genuinely leads to higher saving as opposed to short-term switching followed by withdrawal once the government bonus has been paid. As I have said, I do not think that the pilots have produced any evidence on that, thus far.
I am sure that the Minister will not have definitive facts on all of these issues today, but I hope he will agree that a scheme such as the savings gateway has to be justified in the long term by hard evidence about the impact on savings behaviour. I put the Minister on notice that we shall want to explore that further in Committee.
We will lend our support to the Bill, not because we have particular faith in the solution that it puts forward, but because as a matter of principle we support savings. My noble friend Lord Blackwell spoke eloquently on that. The same cannot be said of the Government if we judge them by facts, rather than their words, because the plain fact is that the savings ratio was 9.6 per cent in 1997 and at the last count was 1.8 per cent. It was actually negative earlier last year. This is yet further proof that the Government have turned the UK from a nation of savers into a nation of borrowers.
One of the many urgent tasks facing the next Government is to reverse that trend and to help the citizens of our country again to embrace saving rather than debt. We have already set out our proposals to make savings income-exempt for basic-rate taxpayers, which should go some way towards helping those who have the virtue of saving but whose incomes have been hit by falling returns. I hope that the Government will follow our lead in next month’s budget. My noble friend Lord Blackwell would go even further than I have suggested, but of course our nation’s finances are perhaps not strong enough at this stage to go as far as my noble friend would suggest.
One of the things that we will want to look at in Committee is whether it is sufficient for this Bill to be targeted solely at the recipients of benefits. We understand that the passporting proposals are simple to operate, but I am not sure that they are necessarily simple to understand. Why should being poor but without benefits deprive people of access to the scheme? We know that many people resist the idea of applying for benefits and some groups, such as low-paid single people—whether or not they have affluent parents—have limited access to benefits. Surely, saving by these people is just as important as for those on benefits.
We will be supporting the extension of the scheme to carers, as announced by the Minister. It did not surprise me that the noble Baroness, Lady Pitkeathley, turned out today to argue that case, which, in her usual way, she did so well. However, whether the extension to carers should be dependent on the receipt of a carer’s allowance is another matter. Many carers do not claim the allowance or do not know that they are entitled to it. We are not convinced that linking savings policy to benefit entitlement is the correct approach and we shall want to look at that in Committee. In that light, it would be right to look again at pensioners, as the noble Baroness, Lady Hollis, suggested; but I suggest to her that the receipt of pension credit should not be the important consideration because many pensioners do not wish to apply for it.
As well as stimulating savings, the stated objective of the savings gateway proposals, as the Minister explained, includes the promotion of financial inclusion by encouraging people to engage with mainstream financial services. This is another bit of motherhood with which all parties can readily agree, but again the question will be whether the savings gateway in fact achieves its aim. The evaluation of the second pilot study indicated that, while many of the participants described themselves as non-savers, in fact almost all already had formal financial accounts and more than 40 per cent had financial assets of more than £2,000. Few took up the offer of financial training, saying that they already knew enough about how to manage their finances.
There is nothing in the Bill and little in the Government’s proposals to date to deliver anything significant in the way of financial inclusion alongside the savings gateway. I echo the request of the noble Lord, Lord Newby, about the Thoresen proposals, because something is needed to support the savings gateway. I am sure that we will return to this issue in Committee.
The noble Lord, Lord Newby, set out some of the evidence that was given to the Public Bill Committee in another place by the British Bankers’ Association, the building societies and the Post Office—I will not repeat the detail. It is very clear that there is no one group that is convinced that it is worth it to them to get involved in this scheme. The key issue is whether any of them can make it work.
The noble Lord, Lord Newby, suggested that the Government might “ask” the nationalised banks to take this up—I think that is the word he used—but I hope the Government will not be twisting the arms of the nationalised banks to get involved in this scheme and in effect force them to cross-subsidise because the market would not get involved in this scheme. That would be a very unstable foundation on which to build new savings behaviour.
The economics of the savings gateway proposal revolve around a number of issues which I am sure we will return to in Committee. They include the information required to be maintained and provided both to account holders and to HMRC. The ability to transfer accounts between providers, which we understand the Government favour, has a major impact on costs, according to the British Bankers’ Association, and is one of the key issues to make it unattractive to the banks. So too would the requirement to pay interest, although we note that the Government have decided not to mandate the payment of interest in their draft regulations, but of course in doing so they have diminished the attractiveness of the scheme, particularly in view of bodies such as the citizens advice bureaux. I think we will need to return to all these issues in Committee.
The Bill will be a difficult one to scrutinise since it amounts to not much more than one long regulation-making power, as the noble Lord, Lord Newby, has pointed out. The Minister may rest assured that that will not deter us from the task of scrutiny at which your Lordships’ House excels.
In sum, we have a number of concerns about whether this Bill will have the effect that the Government desire. At the macro level, it seems unlikely to make any significant contribution to restoring savings, but if it contributes to a habit of saving and financial security at the micro level, then it probably is worth a try.
My Lords, I very much enjoyed hearing the contributions of noble Lords, and I am much encouraged by the unanimity of welcome expressed from all sides about the central thrust and intention, and also informed by the valuable contribution from Members of both sides of the House to issues around both design and implementation.
The noble Lord, Lord Blackwell, commenced our debate with some valuable insights around the importance of promoting savings to developing a strong economy. I have known the noble Lord for many years—we were colleagues at work together—I have greatly respected his understanding of these issues and find myself broadly in support of his observations about the need to develop a stronger savings culture. We spoke a little about this last night in the debate following the Chancellor of the Exchequer’s Statement on the G20 meeting of Finance Ministers and central bank governors over the weekend. However, my noble friend Lady Hollis also reminded us of the need to be careful when making comparisons about savings ratios to take into account different preferences in terms of assets, and that a low reported savings ratio does need to take into consideration, in a proper evaluation, interest such as property ownership. Generally speaking, countries with higher savings ratios would tend to have higher use of rented accommodation. We have a very high owner occupation, by contrast, and we also have high pension savings. However, the central thrust of the noble Lord’s point in that respect was well made.
The noble Lord, Lord Blackwell, suggested that funds saved in a savings gateway account should be excluded from debtor claims where an individual has fallen into default. As we set out in the draft regulations, a savings gateway provider will not be able to set-off a debt on one account by taking money that a person has saved in the gateway account. The noble Lord suggested going further, protecting these funds from claims by third-party creditors where an individual is in default. The interests of creditors need to be balanced against savers’ interests. We should not rush into subserviating the interest of the saver over the interest of the creditor without thinking about it very carefully. However, I commit to the noble Lord to give this matter further consideration before Committee.
The noble Lord, Lord Blackwell, also raised a question about whether the savings gateway accounts should not have an impact on Social Fund entitlement: those who save should have preferential access to the Social Fund. In the last month of 2008 the Government published an informal consultation document on the Social Fund, and they published the responses to this consultation last month. In the light of the significant interest in this consultation, the Government are planning more detailed public debate reform of the Social Fund during 2009, providing further opportunities for interested parties to express their views. In taking this forward the Government will continue to consider the impact of the savings gateway on the Social Fund.
The noble Lord, Lord Blackwell, also suggested—although he did not necessarily expect me to reply to it—that people who have pensions cannot pass on those pensions but are obliged to annuitise them, and that that was invidious. I remind him that the purpose of pension savings is to provide an income in retirement. It is for this reason that tax relief worth an estimated £19 billion net in 2007-08 was given. Allowing tax relief savings to be used for other purposes would not be a fair use of taxpayers’ money. For those who have different needs a number of alternative savings options are available, including ISAs.
The noble Lord, Lord Blackwell, asked a much broader question about why the Government need to tax savings at all, although the noble Baroness, Lady Noakes, reminded us that the Opposition are currently minded to exempt—at least, I believe, from basic income tax—income from savings. Nearly everyone is entitled to a personal allowance which allows a certain amount of income to be earned tax free, although I believe that the noble Lord, Lord Newby, was right to identify that this has an element of social-class or economic-category bias in the sense that we are offering further incentives, inducements and rewards to those who are already better off than many in the community by virtue of the fact that they are paying tax. Above the existing facility that is available to earn a part of one’s savings income tax free, there are other products such as individual savings accounts, child trust funds, employee share schemes, SAYE and share incentive plans. Indeed, there is a multiplicity of plans and arrangements that encourage people to save.
The noble Lord, Lord Morgan, shamed me with the proficiency with which he extolled the merits of the saving gateway. He did so with much more conviction than I was able to do. I will pass on to the team who have worked on developing this Bill and carrying out the pilot schemes his congratulations on a first-class piece of work. It was also a delight to hear the contribution from my noble friend Lady Pitkeathley, who has a proud record of supporting carers. I am pleased that she took encouragement from my remarks about recipients of a carer’s allowance being able to participate in the saving gateway.
I failed miserably to pre-empt the contribution from my noble friend Lady Hollis of Heigham. We greatly value her informed and measured contribution to so many debates around issues relating to gender, savings and age; we take everything that she says very seriously. Her observation, based on one of those involved in the pilot, that the saving gateway account had given that person control over his or her life was a wonderful way of summarising one part of what we are trying to achieve. It aligns with the observation made by the noble Lord, Lord Blackwell, about the importance of thrift.
I repeat my remarks about the important benefits that are already available to pensioners through the tax system and other benefit arrangements. Pensioners are not necessarily excluded from the saving gateway and some may be eligible through tax credits. However, the saving gateway is targeted primarily at working-age people on lower incomes. As the noble Lord, Lord Newby, said, there are some rough edges. That is the price that one pays for producing a scheme that is simple and easy to administer. It is a matter of getting it very largely right, rather than completely right, in terms of participation.
There are, as I said, significant supports to encourage people to save for their retirement. In particular, there are generous tax reliefs to incentivise pension savings, which were worth around £30 billion in 2007-08. As I also said, we will introduce personal accounts, which are intended to provide a highly attractive, low-cost option to those in the private sector on low to moderate incomes who currently have no occupational pension arrangement. That will extend, from recollection, to 5 million or 6 million people.
We will continue to support programmes for those in receipt of pensions and I will carefully consider the contribution from my noble friend, although I would not wish to raise her hopes. Her observation about the shortcomings of the IPPR report on pensioners was apposite. She drew my attention to the IPPR report a few days ago and I set aside quite a lot of time to read the relevant section, although I found that I needed very little time, because it was very short and somewhat inadequate. At the very least in Committee, we will ensure that we have a more complete debate on the issues that my noble friend raised.
The noble Lord, Lord Newby, raised a point that I had anticipated about the balance between the wording in the Bill and its dependence on secondary legislation; he asked whether the Bill was essentially a carrying document rather than a document of substance. Many of the important features of the saving gateway, including the list of qualifying benefits and credits and the method of calculating maturity payments, are set out in the Bill. However, many of the details of the scheme’s operations are relatively technical and are better suited to secondary legislation. It is also important that there is some flexibility for the scheme to be amended, developed and improved in the future in the light of experience to ensure that it continues to meet its objectives without the need for further primary legislation. We will of course look closely at the report of the Delegated Powers and Regulatory Reform Committee on the Bill and will consider these issues again carefully ahead of the Committee stage.
The noble Lord, Lord Newby, raised questions about providers—a point also covered by the noble Baroness, Lady Noakes. The noble Lord asked whether we were creating something that no one would be willing to offer in the commercial market. I have in front of me quotations from Mr Alan Cook of the Post Office which take me to a rather different conclusion. I think that banks, building societies and credit unions all now recognise the increased value of a loyal depositor base from retail deposits, rather than reliance on wholesale deposits. The opportunity is here for banks and building societies, including the Post Office and credit unions, to develop a new customer base, because we are seeking to promote a new savings habit among a group of people who either do not have a savings habit at the moment or—this is very important—have savings but not within the regulated formal banking system. Taking people into the regulated financial system will, in itself, be a huge benefit arising from this important legislation.
I am sure that the noble Baroness, Lady Noakes, would expect me to point out that there are no nationalised banks. There are banks in which the Government have a large shareholding and there are banks in temporary public ownership, but there are no nationalised banks.
The noble Lord, Lord Newby, also raised questions about Thoresen and issues concerning advice. I will ensure that, when we come to this matter in Committee, I am informed and can advise the House or I will write to those who have participated in this debate, updating them on where the Thoresen projects are at the moment. I am afraid that this matter does not currently fall within my sphere of recollection but I will definitely ensure that we are well informed ahead of Committee.
Finally, the noble Baroness, Lady Noakes, welcomed the Bill with what, for her, was an unusual and distinct enthusiasm, which will warm the hearts of new Labour and the left. There is a belief that after many years we are finally beginning to get things right and this may well be the start of a trend. She asked why it has taken us so long to bring about the scheme. The answer is that we have been carrying out pilots. If we had not, we would probably be criticised for that as well. Pilots will produce hard evidence. The noble Baroness said that she wishes to see more detail of that hard evidence. When we next come to the Bill, we will make every effort to satisfy that requirement.
Questions were asked about the use of savings balances, but I am not sure in my own mind that that is necessarily relevant to the legislation. The purpose is to establish a habit and a pattern of saving without being prescriptive on the use of that saving. If someone used the saving to finance a special need or to meet an emergency, that would seem to be entirely consistent with the expectations of those who advocate thrift. The important question is: having run down the balance through force of necessity, will people, when circumstances permit, re-engage with the financial institution with which they have established a relationship and a comfort level? Will walking into a bank or building society no longer be an inhibiting or intimidating experience but one with which they are comfortable?
The noble Baroness also asked whether the targeting was appropriate and, in particular, whether it should be defined in the way that the eligible community is. On that, the real value and virtue of this approach is its simplicity. We are creating a product that is simple, easy to administer and easy to understand, without the need for a means test or complicated form-filling. No doubt, as we go through the detail of the Bill in Committee, noble Lords will have an opportunity to test those attractions versus the counterarguments about the appropriateness of the defined target group, or the “rough edges” issue, as the noble Lord, Lord Newby, described it.
I think that I have covered nearly all the points that were raised on Second Reading. If I failed to do so, I will of course write to any Member who raised a point that I overlooked. I commend the Bill to the House.
Bill read a second time and committed to a Grand Committee.