Motion to Approve
That the draft regulations laid before the House on 29 June be approved.
Relevant document: 1st Report from the Joint Committee on Statutory Instruments.
My Lords, the Motion I am moving today invites the House to approve the Child Trust Funds (Amendment No. 3) Regulations, which represent the first step in legislating the changes to child trust funds announced on 24 May to reduce and then stop government payments. Before I explain exactly what these regulations do it may be helpful if I remind noble Lords briefly of why we are making these changes.
As your Lordships will know, Britain has an unprecedented budget deficit. At present, the British state is borrowing £1 for every £4 that it spends, increasing the national debt by £3 billion per week. We believe that tackling that deficit must be this Government’s most urgent task. To make a start on the process of deficit reduction, within two weeks of the Government being formed we announced £6.2 billion of Exchequer savings in this financial year. We have of course since taken further action through last month’s Budget, which sets out a credible plan to get the public finances back under control. The savings announced in May included £320 million from the child trust fund by reducing government payments from August 2010 and stopping them altogether from January 2011. Those changes will also save us more than £500 million in every future year, thus helping to reduce the structural deficit.
I know that some noble Lords and others have concerns about these changes, including those set out in the amendment in the name of the noble Lord, Lord Davies of Oldham. I want to respond to the points that that raises, but first let me explain what the regulations do. They deliver the first part of the savings that I have mentioned by reducing government payments in three ways. First, Regulation 3 reduces the starting payments. At present all children in a child benefit award have £250 paid into their child trust fund account by the Government when the account is opened. Children in lower-income families later receive a further £250. These regulations will reduce both those payments to £50. This will affect all children for whom child benefit is first paid after 2 August and, therefore, all children born after that date. However, children born before 2 August will be unaffected as long as child benefit is paid for them by 2 August.
The date is 2 August, rather than 1 August, because it is a Monday and child benefit awards always start on a Monday. As child benefit can be backdated for up to three months, a claim will need to be made by 1 November in order for child benefit to be paid by 2 August and, therefore, for the child to be eligible for the current level of government payments. That will give parents a three-month window in which to make a claim. I should also mention that a child who would otherwise be eligible for the current level of payment but for the fact that they are subject to immigration control will be eligible if that immigration control is lifted by 1 November. This again provides a three-month window.
One group of children is treated slightly differently; namely, looked-after children in the care of a local authority. These children are eligible for a child trust fund even if they are not in a child benefit claim. They currently receive £500 when their account is opened, which will be reduced to £100 by these regulations. In both cases this is the same total amount as children in lower income families. Again, children born before 2 August may be eligible for the current level of payment and we have allowed a three-month window to become eligible through this route, as with the child benefit route.
These regulations ensure that a child born on 31 July, for example, for whom no child benefit claim is made but who is then taken into care at any time up to 1 November would also be eligible for the existing higher payments. Providing this three-month window accounts for much of the apparent complexity of Regulation 3, but I hope that I have explained it clearly.
I said earlier that these regulations reduce government payments in three ways. The other two are rather more straightforward than the changes to the starting payments. Regulation 4 simply ends the payment of £250 made to all children at the age of seven, as well as the additional £250 given to children in lower income families at that point. These payments will stop for all children turning seven from 1 August 2010 onwards. Regulation 5 ends the annual payments made into the child trust funds of disabled people. The payments due this year will be made, but they will stop from 2011-12.
As I have said, these changes are the first step in the Government’s changes to child trust funds, and we also intend to bring forward primary legislation to stop government payments altogether, which cannot be done through these regulations. I realise that some will be disappointed by these changes, so I want to respond now to the points made in the amendment tabled by the noble Lord, Lord Davies of Oldham. The first is that the Government are ending a successful savings scheme. In many ways, it was far too early to judge the success of the child trust fund, but in any case the main point here is that the Government are ending a savings scheme that is unfortunately not affordable given the budget deficit that we have inherited.
The second point is about how this will affect those on lower incomes and with disabilities—whether this is fair and whether it will increase inequality. At the root of that is the fact that children from lower income families receive higher government payments than other children. However, it is also the case that children in better off families are more likely to receive contributions from their friends and family and that those contributions are also likely to be higher. Together, this means that the child trust funds of children in better off families are expected on average to be worth more at the age of 18 than those of children in lower income families. It is therefore far from clear that the child trust fund would have reduced inequality. As for disabled children, we have already said that we will recycle the funding that would have been used to make the additional payments to disabled children and use it to provide additional respite breaks.
Finally, the amendment argues that these changes will not foster a savings culture in the next generation. We have been clear that we want to encourage saving across the population, including saving by parents for children which can in turn help children to develop the savings habit. We are therefore considering carefully the best way of doing that within the constraints of the public finances. Indeed, my honourable friend the Financial Secretary will be discussing this with stakeholders later this week. That meeting will include representatives of child trust fund providers, and I know that this is another group which is disappointed by the changes we are making. I realise that some are concerned about the profitability of offering accounts that start with £50 from the Government rather than £250. We are working closely with providers to explore ways of reducing their costs, and that will also be discussed at this week’s meeting.
I am sure that the noble Lord, Lord Davies of Oldham, will want to explain the amendment in his name in his own words, but I hope that I have explained the Government’s views on the points that it raises and the reasons for the changes we are making to child trust funds, as well as what these regulations do. As I said, we believe that unfortunately it would be simply unaffordable to continue to spend more than half a billion pounds on child trust funds every year. Stopping government payments will allow us to save that money, and by moving quickly to reduce payments from August, we can also maximise the savings made in this financial year as we make a start on tackling Britain’s unprecedented deficit. As I have explained, these regulations will allow us to do that by reducing government payments at birth and ending them at age seven. I hope that noble Lords will support them.
My Lords, I think that many of us feel that it is no business of the Government to tax parents and give money to their children. If parents want to do that, they can do it themselves. I am disappointed that this scheme cannot be ended immediately. If I understood correctly what my noble friend said, he seemed to say that that could not be done by regulation, but needed primary legislation. Can he confirm that and tell us whether this will be done in the next Finance Bill?
I can confirm for my noble friend that it is not possible to end completely child trust funds by way of regulations, which is why we are doing this in two stages. The primary legislation will be coming forward in the near future in order to complete the process. I beg to move.
Amendment to the Motion
At end to insert “but this House regrets that the regulations will end a successful savings scheme; will not protect those on the lowest incomes and those with disabilities; will widen inequality and fail the test of fairness; and will not foster a savings culture in the next generation”.
My Lords, it is always encouraging to hear the Government’s defence before the amendment has been moved. I congratulate the noble Lord on taking advantage of his position and commenting on the amendment when introducing the regulations. I recognise his need to do so. Even before we had articulated and identified the main sense of the amendment, I found his response to it rather flimsy, not least because it was clear that the Conservative Party did not go into the general election with a proposition to abolish the fund. The Conservatives spoke in their usual vague terms about the necessity for some curtailing of this constructive scheme, but they did not address the issue of bringing forward primary legislation to abolish it.
The Liberals were in favour of abolishing the scheme but, knowing the consequences for the children of the less well-off in society, they had it in mind that the Budget would protect, or even enhance, the position of children in that situation. We shall debate the coalition Budget next week, but the Liberal Democrats will be hard pressed then to defend their part in it. That is why they ought to think twice about the impending decision to scrap the whole of this scheme through primary legislation in due course.
We have heard from both parties in the coalition that savings are a priority. Earlier this year, the present Chancellor said that we need to restore our savings culture and that,
“we will build a saving society”.
This scheme has one significant advantage—it is universal in its appeal and covers each and every child, with special provisions for those families with the least propensity to save. It was because of that that it was warmly welcomed when it was introduced.
What is now being proposed is quite clear. We may, in due course, hear of some vague ameliorative measures for the poor and disabled, but what will happen as a result of these regulations is a straightforward deterioration in their position. This is an attack on the poor and disabled. I appreciate that the noble Lord made the best fist that he could of it when indicating an element of gradualness, but this will happen all too quickly and with dramatic effect.
The scheme is successful in emphasising a savings culture and long-term investment. If we were talking about sacrificing short-term investments—I imagine that there will be plenty of examples and illustrations from the government Benches over the forthcoming months and longer about the constraints necessary on investments in the short term—that would be one matter, but this is investment for the long term. It ensures that, when young people reach the age of 18 and their needs are particularly acute, they have a basis that can help them to organise their lives.
We should not underestimate the significance of the point that young people will have reached at that time. When people reach the age of 18 to 21, family expenditure increases apace. The average amount owed by 18 year-olds is just over £5,000; the average family spend on young people in this range is more than £13,000. That is before we have any idea—although how can we feel encouraged?—of what the implications of higher education finance might be for that substantial section of young people who expect to stay in full-time education beyond the age of 18. A black hole is opening up for that generation of young adults, who could have looked forward to long-term, modest savings, who could have looked forward to being part of a savings culture and who could have looked forward for the first time to having a stake in the economy and in the country, something that I would have thought had some appeal to Conservatives down the ages. This was an opportunity not just to talk in broad terms about the advantages of increasing financial literacy and improving equality of financial education among our young people but also to give a clear illustration of resources that were being developed on their behalf and would give some point to that financial education and assist in it.
None of this underestimates the fact that aspects of public expenditure need to be reined in. We made quite clear as a party before the election—and we made no bones about the issue in the debate on the Budget—the necessity for constraints on public expenditure. However, at stake today is a scheme that is long term in its investment potential and has particular advantages to the least well-off in our society. It is one that aids all the objectives that we share with regard to creating greater opportunities for young people and ensuring that they feel part of society, yet the Government are out, first, to strip the scheme of many of its benefits and, then, in the very near future, to abolish it. That is why the Opposition have put down their amendment. I beg to move.
My Lords, I declare an interest. I contribute to the child trust funds for both my granddaughters, Ciara and Ella. In a sense, I should declare an interest in that I am the only one in the Chamber at the moment who was involved in the creation of the child trust fund when it was originally voiced by one of the think tanks, IPPR. Some funds were transferred from the Children’s Mutual, of which I had the privilege of being the chairman at that time, so I was in at the beginning. I state now, as I stated then, that I had reservations about the supplementary contributions at seven and 11.
The scheme has worked, in the sense that 6 million children have benefited from it so far. About a third of the trust funds have been topped up by various family members and that figure is slowly increasing. Some would say that a third of young people saving anything significant is not a huge success, but it is certainly a very good start. It is certainly better than anything that had happened in any previous scheme from any other Government, so when I first heard the news I had to think hard about this whole situation.
I suppose that as an economist I am conscious of the economic situation that my noble friend on the Front Bench has been saddled with. I am not the least bit surprised that he has looked at every conceivable large sum sitting on the books—and £500 million is a large sum in anybody’s counting house. My noble friend will correct me if I am wrong, but I think that the figure is £525 million, of which £5 million is the cost of administration and £520 million is the figure for the amount given out in benefit.
I recognise that any Government facing the situation that our Government face at this time would need to claw back a significant sum from any scheme, whether for children or anyone else. However, I want to make a plea. I welcome the news that my noble friend announced from the Dispatch Box that there is to be a meeting with the providers later this week or early next week. That is a hopeful sign and could be beneficial.
Whether or not this particular scheme goes forward, the kernel of the scheme is the unique number that is issued by the Government to every child in the country. I have calculated the cost of issuing those unique numbers to be about £2 million. Whether or not the scheme continues and whether or not there is to be a mark 2 version—there was an inference on that from my noble friend on the Front Bench—without that unique number it is not possible to take it forward. My plea to him is to recognise that that is the kernel of the scheme. I am sorry to take issue with my noble friend, who has just joined us, but I think that what he said was wrong. The unique number is absolutely crucial. If that goes, the scheme is dead and I would personally regret that.
My Lords, in rising to support the amendment moved by the noble Lord, Lord Davies, I make one simple point. I accept that the country faces grave financial difficulties and that there will be a need for public spending cuts. I accept that the child trust fund scheme may need revision. However, what the Government are proposing is extremely drastic. Of all cuts, it is not the right cut to make. I will explain why.
The child trust fund attempts to build capital that people, especially the most vulnerable and poorest in our society, can spend when they reach adulthood. There is far greater inequality of wealth than of income and there is a particularly great inequality of what an economist would call liquid wealth. Inequalities of wealth have narrowed in recent years largely as a result of the expansion of home ownership, which has spread over large sections of the population. However, there is a massive inequality in how much cash in savings people have for meeting essential needs.
This morning, I looked at the figures that the Institute for Fiscal Studies—a noted body—quotes in its latest research on the subject. The latest figures, which were for 2005, show that the median family in Britain has cash savings that it can access of the massive sum of £1,100. For the family at the 75th point of the distribution, the figure is £16,000 and, for the family at the 90th point of the distribution, it is £60,000. However, families at the bottom, below the median, have virtually no cash or liquid savings of any kind.
The child trust fund was a bold and radical attempt to give children from poor families in particular, through targeting extra resources on those families, some stake, so that, when those children came to maturity, they would have some funds that they could access. This Government are proposing to take that away, which is why I support the amendment moved by the noble Lord, Lord Davies.
I support my noble friend. Clearly, we have urgent savings to make, and £500 million is no trifling sum—and there is really no alternative. If I have a problem with what we are discussing today, it is along the lines of the direction of travel, as my noble friend Lord Naseby said. I shall come back to that in a minute.
Before I get to the substance of my remarks, I declare an interest. I am chairman of a firm that provides compliance training and administrative support to independent financial advisers. Therefore, I have an involvement in the savings industry. The firm is regulated by the Financial Services Authority and I am an authorised person.
The economic devastation wreaked on our country as a whole and left behind by the previous Labour Government is well documented, and I do not propose to plough this familiar ground. Perhaps the only astonishing thing—a theme that ran through the comments of the noble Lord, Lord Davies—is that somehow the Labour Party continues to deny its involvement and responsibility. Its approach is along the lines of, “It was nothing to do with us, guv—it was all down to those Americans and their subprime mortgages”. While the subprime mortgage market may have been the spark, our economy was tinder dry, and that is down to the previous Labour Government.
If that aspect has been well documented, less well documented are the parallel ravages of the previous Labour Government on the savings and financial well- being of private individuals. In 12 short years, the Labour Government effectively brought to an end every single final salary private sector pension scheme. It is true that this would have been a difficult time for private sector pension schemes. Increasing longevity would have caused difficulties to their operation. The increased lifespan is devoutly to be looked for and welcomed on an individual basis, but it represents a nightmare for a pension fund trustee. So there would have been problems—but the Labour Government delivered three hammer blows. First, there was the tax on pension funds; the Chancellor clearly believed that it was a goose that would continue to lay golden eggs. Secondly, there was the introduction of a pensions regulator with varying and often capricious powers. We saw the impact on management companies of the different valuations that could be applied to pension fund deficits, with the regulator nearly always taking the most extreme deficit. Last but not least, the previous Government created a perfect storm for pension funds, with low interest rates, which meant that the discount rate applied to the liability was low and therefore liabilities were high, and there was a collapse in asset values, which meant that the assets held for their discharge were reduced. There was an increasingly large deficit, so any sensible board of directors closed the scheme to new entrants, then ceased further accruals, then moved from 60ths to 80ths—and so on. This was a major plank for our savings culture, which was removed in 12 short years by the Labour Government, unless you were in a public sector scheme, where inflation-proofed pensions remained the norm. But that is for another day.
No less important was the attitude of the Government towards spending, which created a change in social attitudes to debt and to saving. If the Chancellor of the Exchequer—later the Prime Minister—claims that he has abolished boom and bust, it is not surprising that change follows. Credit card debt soared while long-term savings plans were cashed in, in a way that was almost certainly bound to earn the person who had taken them out a less than adequate return.
The consequence was the collapse of the savings ratio. When the Labour Government came to power in 1997 the ratio was 10 per cent of disposable income; by 2007 it was 2 per cent. So when the noble Lord, Lord Davies, puts down a Prayer about fostering a savings culture, he will understand why, in the light of that record, I have a sense of slightly hollow laughter. The noble Lord talks about a black hole opening up for 18 year-olds. It is opening up not because of the removal of the child trust fund but because of 10 years of incompetent economic stewardship by his Government.
Where I agree with the noble Lord is that we cannot allow this situation to continue—if we do so, our fellow citizens are going to face a difficult old age. What to do? Saving, in my view, is about creating the right habits and explaining that, because of the magic of compound interest, putting small sums aside regularly over time can create large sums over 20, 30 or 40 years. We see this in mortgage repayments. A payment each month pays off the interest but also some of the principal, so that at the end of the term the mortgage has been paid and the house belongs to the mortgage holder. Of course people are aware of the direct debit and of when interest rates rise, but that becomes part of the landscape. We need to seek to achieve this on a much wider basis.
In two places the Labour Government did some sensible things. The first was that they launched and maintained the ISA programme, a sensible way of increasing annual savings by individuals. The second was the concept of a child trust fund. The unique reference number referred to by my noble friend Lord Naseby stimulated parents to do something for the financial future of their child. Evidence from industry, as my noble friend said, suggests encouraging trends in the way that parents and families started to contribute as a result of this stimulus, and there was an increase in the number of children having regular long-term savings plans.
As I said, I agree that the country cannot afford to make a contribution to each child’s trust fund. Is it right, however, to wind down the structure that has given rise to this increasingly successful savings policy? Surely £5 million a year for administration is a low cost in comparison to the potential social benefits. If in future we continue to send to the parents of every child their unique reference number, it can do no harm. It may well stimulate some parents, who otherwise would have done nothing, to start saving for their children. One day Conservative policies will have revived the financial health of the nation, and maybe at that point it will seem to be a useful way of encouraging savings and initial payments will be resumed. It would be a pity if at that time we had to recreate the administrative back-up that we may shortly be going to demolish.
I hope that my noble friend will think carefully about this final step before statutory proposals are brought forward in the autumn. I entirely support the need to make immediate savings but we must not, in the old phrase, spoil the ship for a ha’p’orth of tar. Creating a savings culture is critical to our country’s future prosperity, and child trust funds could provide a useful element of that.
My Lords, over the coming months and years a series of public expenditure cuts will no doubt come forward that will make people on these Benches feel extremely uncomfortable,. This, however, is not one of them. We opposed the introduction of child trust funds at the start, before there was a financial crisis, for a number of reasons that in my view have not been seriously undermined by the experience of the child trust fund programme.
First, we were very sceptical of the programme because we felt that it was poor value for money. We felt that the principal beneficiaries of it would be middle-class parents and middle-class families who saved every last penny they could tax free, and that the poor—because they were poor—would not be able to add to the programme. As the noble Lord, Lord Liddle, said, poor children will undoubtedly end up with a nest egg aged 18, but middle-class children will end up with a big nest egg aged 18 because their parents will have taken advantage of very significant tax breaks. This view has been borne out by the take-up of child trust funds in constituencies. In the poorest constituencies, 40 per cent of parents have not even exercised their option on where the trust fund should go, far less put any money in it. Therefore, our view was that the scheme was not such a wonderful measure in reducing wealth inequalities—far from it, as the wealthy were the principal beneficiaries.
Secondly, it always seemed to us implausible that this scheme would somehow inculcate a savings culture among young people as young people were not saving. The Government were saving on their behalf and in a minority of cases their parents were also saving on their behalf. Why would that inculcate a savings culture in a 10, 12 or 15 year-old? Many children will simply be unaware of the scheme as they are not putting anything into it; they are passive beneficiaries of it. Therefore, I do not believe that it inculcates a savings culture, nor do I see how, in itself, it helps improve financial literacy.
The third issue we have with this flows from that. I am a great supporter of thrift. When I was a boy, my parents practised it and encouraged me to practise it. However, the thing about thrift is that you save up and forgo something now so that when you get the benefit of it at a later date, you value it because you know that it has cost you something in terms of consumption forgone. The problem with this scheme is that there is no link between the contribution and the benefit which you achieve aged 18. Noble Lords have said that 18 year-olds will use a nest egg they are given for all kinds of worthy purposes and that it will be used to help their education. On an earlier occasion, a noble Lord from the Labour Front Bench suggested that 18 year-olds might use this nest egg to put down a deposit on a house. I do not know whether my experience of 18 year-olds is totally different from that of other noble Lords who have spoken but, frankly, I do not believe that the mentality of most 18 year-olds—poor or affluent—is to take a nest egg to which they have not contributed and use it for long-term savings and benefits. To me, that goes against the grain of human nature and nothing that I have seen in my experience of 18 year-olds suggests that human nature has suddenly changed.
The strongest argument for child trust funds is that it must be in the interests of society for parents to save funds so that their children can be helped when they have more requirements. At the moment, parents can save £5,100 tax free in an ISA, which can then be transferred to their children at age 18, or whenever, to benefit them. If the money is transferred in that way, I suspect that the relationship between the parents who have saved the money and their children will mean that it is more likely to be used for a positive purpose. The tax free ISA limit of £5,100 is far beyond the savings capability of a family on a median income. It offers plenty of scope for parents who have a desire to save for their children to do so already. There may be an argument for marketing ISAs which may eventually be used to provide a nest egg for children, but the benefit in terms of taxation is already there in ISAs, and the child trust fund, almost by definition, can be of additional benefit only to parents who have enough money to put not only into an ISA but into a child trust fund. That is not the cohort of parents who the proponents of child trust funds—
If the noble Lord’s argument was valid, why do 12 per cent of families contribute to ISAs, whereas contributions to child trust funds cover 30 per cent of families?
My Lords, that is why I was saying that I thought that within the ISA wrapper, a marketing campaign directed at parents who wanted to save for their children could be extremely effective.
We opposed the child trust fund from the start. We oppose it now and we hope that the Government waste no time in bringing forward the primary legislation to finish it off.
My Lords, I speak in favour of the amendment moved by my noble friend Lord Davies and in opposition to the content of the regulations.
Wherever we end up on this issue this afternoon, and if the statutory instrument is to proceed, I support the proposition of the noble Lords, Lord Naseby and Lord Hodgson, that we should do what we can to preserve the infrastructure of the arrangements, so that they do not die and can be revived at some stage.
I shall also digress a little into pensions, as did the noble Lord, Lord Hodgson. I was not sure whether we would discuss them this afternoon, but I contest the proposition that the noble Lord made about the record of the previous Labour Government. Yes, we did introduce the Pensions Regulator and, indeed, the Pension Protection Fund. Without those very important planks of pension provision, many more people today would have lost their pensions and be without decent provision in retirement. I have a specific question for the Minister. The noble Lord, Lord Hodgson, raised the issue of what he called a tax charge on pensions. It was not a tax charge on pensions, but a change in the imputation system which reduced corporation tax and therefore denied the repayable tax credit. If the noble Lord’s party sees that as an attack on pensions, can the Minister say whether that will be reversed and whether it is the policy of the coalition Government to revert to an imputation system of tax, or whether they will continue with, in his noble friend’s words, a tax raid on pensions?
As we have heard, these regulations are the first instalment of the coalition Government’s proposals to scrap child trust funds altogether. The Government have other form on this. Child trust funds are one of the initiatives that a Labour Government developed to promote asset-based welfare, in recognition of the importance of asset holding in determining approaches to employment, education and well-being. The other initiative was the savings gateway. It consists of a time-limited two-year savings account for those in receipt of certain means-tested benefits and credits—those on low incomes. Up to certain limits, the Government were to match savings pound for pound. That was clearly a way of incentivising saving by those for whom a tax break is not particularly relevant. Sadly, we are now told that this programme will not now be introduced this month, as it is also not affordable. This removes at a stroke one of the pillars of asset-based welfare, for a saving of £115 million in 2014-15—savings, by definition, paid for by the poor. They are some of the same families and individuals who will pay the highest price for the winding up of child trust funds, and they are some of the same families who will miss out because of the coalition Government’s scrapping of the tax credit elements for infants, the termination of the health in pregnancy grant, the limitation of the Sure Start maternity grant for the first child, and the freezing of child benefit.
These regulations end all government contributions for children at age seven. This is a loss of £250 for most children, but a loss of £500 for seven year-olds in low-income families. There is also a reduction in the special contribution of £500 for looked-after children. The poorest and most vulnerable are having to bear the greatest burden. There is yet worse. At present, children entitled to any rate of DLA are entitled to an annual government contribution of £100, or £200 if the highest rate of the care component is received. From April next year, this is to be snatched away as well. Government contributions to accounts when first opened are to be reduced by £200 for most children and £400 for the poorest.
My noble friend Lord Davies made the point that although the Conservatives’ manifesto made clear that they would seek to remove the universal element of the child trust fund, they had a commitment to preserve the remainder:
“We will … cut government contributions to Child Trust Funds for all but the poorest third of families and families with disabled children”.
So how do we justify the current situation? What was it that the Lib Dem wing of the coalition said that persuaded the Tories? I am bound to say that I hope it was more than what the noble Lord, Lord Newby, just enunciated. What was the quid pro quo, and how much of the half a billion pounds of saving comes from withdrawing support from the poorest families? Perhaps the Minister could specifically let us know.
We have heard about the Children's Mutual, which is a provider of accounts. It claimed that the child trust fund is the most successful savings policy to date. Does the Minister share that assessment? Does he at least accept that over 5 million children now have child trust fund accounts—I think the noble Lord, Lord Naseby, said 6 million—and, with the Government’s safety net, there is now virtually 100 per cent take-up of the facility. Some 1.4 million parents, families and friends are contributing to the accounts and, had the scheme continued, from 2020, each year nearly £3 billion would have been available to young people as they reached adulthood. Seventy per cent of the government investment goes to households with average or below-average incomes, and 50 per cent to the 1.5 million families with incomes under £16,000. Since the introduction of child trust funds, the number of children having regular long-term savings made for them has nearly doubled. While the annual cost is not insignificant, tax relief for ISAs costs double the tax relief for child trust funds, and even after proposed changes to tax relief on pensions, it is many multiples of the cost of child trust funds with take-up being 30 per cent and 40 per cent respectively, subject to auto-enrolment.
If the savings gateway and child trust funds are to go, what alternative policy approaches does the Minister recommend to encourage children and young people into recognising the value of saving? How does he propose to do that? Doubtless, he will pray in aid the importance of financial capability education. In this regard, we note that the Red Book identifies the launch of the new national financial advice service next spring. The coalition Government’s document states that it is to be,
“funded in full from a new social responsibility levy on the financial services sector”.
When he replies to the debate, will the Minister update us on this service, which is clearly well advanced if it is to be launched next spring? What form will the levy take? How much is intended to be raised? What is included within the definition of the financial services sector? If the levy is not to be in place by next spring, how is the service to be funded?
The coalition Government do not need to axe child trust funds. Leaving aside issues around the timing and depths of the cuts the Government intend to make, which we have made clear we consider to be too soon, too far and dangerous, there is a fundamental matter of priorities. What thinking goes into a Budget judgment that determines that a banking levy should raise less than a quarter of the cuts in welfare measures? What analysis drives the conclusion that savings should be given a boost by ending the obligation to annuitise at age 75, which is relevant only to those with very substantial pension pots, but that all children should not be given a helping hand to get into a savings culture and build assets for when they become adults? If the Government want to encourage people to save more and borrow less, why abolish this important programme that helps young people to save? If they are intent on rolling back universality in the welfare system, why extend this to poor families and families of disabled children?
These regulations are unworthy. I will conclude with a quotation from the alliance that is seeking to push back the measures. It states:
“We recognise that in a time of severe cuts financial contributions from the state to any savings schemes are hard, yet there is still an urgent need to encourage families to save for their children's futures. The Child Trust Fund is the most successful government saving scheme ever. It has made great strides towards increasing the asset base in Britain, helping families save for the costs they will face as their children make the transition into young adulthood. At present, nothing has been proposed to be put in its place. That is why we formed the Save Child Savings Alliance. The key element of the Child Trust Fund must be retained, even if Government decides that the Treasury cannot afford contributions at present”.
My Lords, I rise briefly to support the Minister in bringing forward these regulations. I declare my interest as director of a life and savings institution in the UK, but stress that I speak in a purely personal capacity. Like my noble friend Lord Newby, I have opposed these funds on principle. At the level at which they are funded, they are an example of gimmick politics—where the Government take money off taxpayers and then give it back in ways that are meant to make the population feel grateful for their largesse, having taken off significant amounts in administration costs.
The reason why the poorest in this country do not have significant savings is that they cannot afford to save. The best way to help those people is to reduce their taxes and target benefits on them. That is why I favour anything that reduces public expenditure and enables us to take more people out of tax, as the last Budget started to do at the lowest end of the income level. Of course it is important to encourage savings, but an important characteristic of that is to have the simplest possible regime, not one that is adorned with lots of Christmas tree ornaments. We have very effective ways of encouraging savings through the ISA and pensions regimes. The Government should focus every effort on making those schemes as universally attractive and accessible as possible. This scheme does little to add real wealth to the poorest people in this country. It is an adornment that we can do without.
My Lords, I will make one simple point. This country is deeply unequal. Inequality has extended and expanded during both Conservative and Labour Administrations. It expresses itself in many ways, including in the differing abilities of people to save and in whether saving as a concept means anything to them. There are plenty of possibilities for saving. We heard a paean of praise for them from the Liberal Democrat Benches. They are for middle-class and wealthier people, through ISAs, which enable wealthier people to lay aside money and provide additional benefits to them as well. For poorer people the possibilities for saving were already weak, and this Government's inegalitarian policy is clearly designed to make things worse.
The abolition of the saving gateway, to which my noble friend referred, is obviously a part of this issue. It was a very carefully tested and costed scheme, and it worked extremely well in other countries as well as in this one. It was not a display of mad largesse by a left-wing Government in this country—there are plenty of examples of it elsewhere. However, the saving gateway scheme has simply been abolished, which means that poorer people who would not normally fall into the categories of those who are able to save, as set out by the noble Lord, Lord Newby, will now not have the possibility of doing so. The child trust fund is a part of that. These are people who have to be assisted by the state. As we have heard, they cannot save very much, if anything, and it is the function of government to provide assistance for such people. The scheme was very successful with a good take-up, as we heard from the noble Lord opposite, who spoke impressively with great knowledge and feeling on the subject, but now working-class and poorer people will be denied the ability to take serious decisions at key moments in their lives. The savings structure that we have is manifestly unfair, and it reflects the social inequalities and unfairnesses in this country.
My final point is that, contrary to what has been said, child trust funds, along with the saving gateway provision, improved people’s ability to understand finance. There was a real point in financial literacy. People with no financial literacy at all because they had no funds and were simply victims of a harsh capitalist system now found themselves with the means to understand these matters. Therefore, this extremely mean-spirited proposal increases inequality, denies economic and social empowerment to many people, and, I am afraid, is all too typical of what we have had over the past few weeks.
My Lords, I am grateful to all noble Lords who have contributed to the debate. Of course, the Minister will have the joy of the last word and the necessity of replying to the specifics of my amendment. However, I assume that he is going to contribute to the debate before we conclude and I extend him the courtesy of doing just that. If he wishes to rise now, I shall of course defer to him.
My Lords, I am grateful to those who have taken part in today’s debate. A number of noble Lords have spoken eloquently about the advantages of the child trust fund, and I agree with much of what they said, although others have pointed out that, even setting aside the issue of affordability, the child trust fund is not a perfect vehicle. However, as I said earlier, given the unprecedented budget deficit that we face, the question is whether government payments into the fund remain affordable, and I am afraid that the Government believe they simply are not.
I turn to a number of the specific points that were raised. I start with a point made on both sides of the House by a number of your Lordships, including my noble friends Lord Naseby and Lord Hodgson of Astley Abbotts, and the noble Lord, Lord McKenzie of Luton, concerning whether the wrapper or unique number would continue to allow people to save through the child trust fund mechanism. Many other speakers suggested that the wrapper should remain available to parents, even once government contributions had stopped, or that some other, new form of tax-free savings account for children should be put in place. To reiterate what I said earlier, the Government are considering this question carefully and I am sure that it is one of the major issues that will be discussed later this week by my honourable friend the Financial Secretary when he meets representatives of the industry. I thought that the contributions of my noble friends who expressed their understanding of why the CTF had to go were particularly telling.
I shall pick up some of the other points. I suppose that it is good knockabout stuff to try and pick out what people said in manifestos and to compare that with the coalition agreement, and we will live with that game for some time to come. In response to the noble Lords, Lord Davies of Oldham and Lord McKenzie of Luton, I say that it is indeed the case that both the Conservative and Liberal Democrat manifestos set out an intention to reduce spending on the child trust fund, as did the coalition agreement and the programme for government. We have since then looked at the options and the Government believe that it is right to stop the government contributions entirely as that will make the greatest contribution towards deficit reduction.
We then had a number of contributions—including from the noble Lords, Lord Davies of Oldham and Lord McKenzie, and from my noble friends Lord Hodgson of Astley Abbotts and Lord Blackwell—about who had done what on savings over the past few years. I noted that the noble Lord, Lord Davies, talked of this as an onslaught on savings while, on the other hand, my noble friends talked about the hammer blows inflicted on savings by the previous Labour Government. I do not think that this is the time to go into who has done what to whom.
Some of my noble friends have pointed out that what the previous Government did to support ISAs was important, and that if it was affordable, the child trust fund initiative had an important role to play. I think that we would all agree that the recent level of savings has been too low. It is the current Government’s intention to foster a culture of personal responsibility and better financial planning to improve individuals’ independence over their lifetime, particularly in planning for retirement. We will measure the policies on savings against the coalition’s three principles of freedom, fairness and responsibility, while making sure that such measures are affordable and effective. Attention has already been drawn to the fact that the Budget announced a number of measures which will take the first steps—I stress, first steps—in meeting these aims, such as the annual financial health check and an end to the effective requirement to annuitise pension savings at 75. That is an important reform that has not been mentioned this afternoon.
There was then a particular stress—again from the noble Lords, Lord Davies and Lord McKenzie, and from the noble Lord, Lord Morgan—on whether we were hitting low-income families and how this was fair. They did not draw attention to the reforms that we are making to the tax credit system. We are tackling the deficit in a way that is fair and ensuring that tax credits, which are an important part of this construct, are targeted at those who need them most. I remind noble Lords that the Government will freeze child benefit to help fund very significant increases in child tax credit and will invest around £3 billion in the child element over the next two years. Although we are making significant savings to reduce the deficit, we can be sure that this will not lead to a negative measurable increase in child poverty over the next couple of years.
On the issue of no measurable increase in child poverty over the next few years, can the noble Lord remind us which year is the basis for making that assessment? I think that updated statistics came through between the Budget pronouncements and where we are today. Will he confirm that, so that we can have absolute clarity?
I thank the noble Lord for his question. I think that it will relate to periods looking forward, on a rolling basis. However, I will let him know the base for this particular two-year period. I think that the point here is that the coalition Government will make every effort to protect the poorest in our society, including children, by a combination of measures, of which the cessation of the child trust fund is only one.
Other points were made by the noble Lords, Lord Liddle and Lord Davies of Oldham, about protecting those on the lowest incomes and those with disabilities, and about the distributional effect of the child trust fund. However, as my noble friend Lord Newby pointed out, the evidence to date suggests that the child trust funds of children in better-off families are expected to be worth, on average, considerably more than those of children in lower income families when they reach the age of 18. The distributional impact is therefore not clear, and it may well be that on some of the estimates a child in a better-off family would have a fund amounting to some £4,700 whereas a child in a lower-income family would have one that totals only £3,600.
We recognise the additional needs that face children with disabilities, and the Government will publish a Green Paper in the autumn to look at a wide range of issues for children with special educational needs and disabilities. To reconfirm the point I made earlier, from next year we will recycle the funding that would have been used to make the additional payments within the CTF to disabled children, and use those funds to provide additional respite breaks. I should also note that my noble friend Lord Newby pointed out alternative ways of delivering an increasing savings habit which we all want to see.
The noble Lord, Lord Davies of Oldham, made the particular point that many young people are in debt at 18 and need the CTF. In that context, I again stress that we have announced plans for a free annual financial health check that will give everyone a chance to review their finances and get the help they need to take action to improve them. That will be launched nationally in spring 2011.
The noble Lord, Lord McKenzie of Luton, asked whether the Government would reverse the abolition of the dividend tax credit changes that so dramatically hit pension funds under the previous Government. I regret to say that there are a lot of tax and other measures introduced under the previous Government that it might be highly desirable to reverse but which, regrettably, cannot all be dealt with. The coalition’s programme for government said that we would like to reverse this change, and we will revisit it when the public finances improve.
My noble friend Lord Newby felt that the CTF would benefit the middle classes and not the poor, thereby benefiting the wealthy more. I have already touched on that point, and should now like to confirm the statistics. Only 13 per cent of families on lower incomes are making contributions each year, compared with 30 per cent of other families. Indeed, as one might expect, the contributions are likely to be lower for lower-income families. I can therefore confirm my noble friend’s point.
The noble Lord, Lord McKenzie of Luton, asked a specific question on the financial health check and the social responsibility levy. I confirm that that levy is intended to fund the national financial advice service, which will include the annual financial health check to which I referred. However, we are ready to listen to views from everyone on how the Government should support debt advice.
The noble Lord, Lord McKenzie of Luton, also raised some points about changes to tax credits and child benefit. I believe that I have already answered them. I stress again that I will get the baseline for him, but we are looking at that in the round with the intention of ensuring that the poorest children are protected.
The last question, asked by the noble Lord and the noble Lord, Lord Morgan, was about the scrapping of the saving gateway. I have to come back to where we started. I fear that the saving gateway is in the same basket. With the unprecedented Budget deficit, we have to make some very tough choices. The saving gateway would have cost more than £300 million over the next five years, and it is unaffordable. We were also concerned that there was a lack of engagement from providers and that not everyone in the target market would have had easy access to a provider, so the Government have decided that the saving gateway will not be introduced.
Again, I am grateful to those who have spoken in today's debate. The regulations form an important first step in implementing the Government’s announcement that we will reduce and then stop government payments into child trust funds. By saving £320 million this year and more than £500 million each year in future, we will make an important contribution to the reduction of Britain's unprecedented Budget deficit. I come back to where I started. Reduction of the deficit has to be our most urgent task, which is why we have taken the approach that we have of reducing government spending on the child trust fund as quickly as possible. It is a challenging task, which is why we decided that government payments should stop altogether to make the greatest contribution. I have stressed, and reiterate, that we are listening to noble Lords who have suggested that there may be some continuation of the wrapper and the unique reference number.
I realise that this provision is disappointing for some noble Lords and for others outside this House, but I believe that it is necessary and I hope that, having had a full discussion, the noble Lord, Lord Davies of Oldham, will feel able to withdraw his amendment.
I shall speak to my amendment in a moment, possibly with some significant conclusion, but, first, I thank all noble Lords who have contributed to a very constructive debate. One obvious divide in the debate is that my noble friends Lord Morgan, Lord Liddle and Lord McKenzie emphasised the distribution of wealth, which is what the scheme is about. The scheme is not about child benefits and support for poor families in the short term; it is about producing a modicum of wealth for young people at the age of 18, when it is recognised that they need it. What is important about that is not that there will not be disparities between the middle class and the poor, and between the very wealthy and the middle class—of course there will. Of course those with greater resources will contribute more, but the significance of this scheme is that it brought, and brings, the crucial issue of a savings culture to the less well-off. It provides for young people who come from poor homes at least a toehold on resources and brings them within the framework of the nation as far as wealth is concerned.
The Minister, with his contributions on what the Government will do to ameliorate the impact on poor people through tax changes and changes to benefit, convinces no one. First, we all know in this House that if we think that there is to be a major redistribution of wealth from the better-off to the less well-off in our society under the coalition's politics, we will be grievously mistaken. We are not going to be conned with those generalisations, nor will we accept that this is about a direction of travel. It is not. This is about a full stop. The noble Lord, Lord Hodgson, made a constructive point and in a moment I will give him due credit for that.
I do not accept that the Government’s proposals are anything other than an interim for a matter of months; that is, to cut and then to stop something most constructive. The noble Lord, Lord Blackwell, indicated that the funds are a gimmick, but they are not at all. They were to engage and to be an incentive to those whose propensity to save is very low. The noble Lord, Lord Newby, thought that the substitute could be ISAs. My heavens, if ISAs had been the substitute, we would not have the distortion that we have at present in those who benefit from incentives to save. He knows very well that, whereas this scheme engages 30 per cent of the population, ISAs engage about 13 per cent from those who are better off and can afford to save.
I am grateful to the noble Lord, Lord Hodgson, and the noble Lord, Lord Naseby, who speaks with great insight. They emphasised the importance of the Government thinking again about the infrastructure of this scheme. On our Benches we would probably use the word “principles”. I know that such a word is almost alien to those who form a coalition of diverse views and call themselves a Government but, if the Minister were to discuss some issues of principle which can be saved and safeguarded with those who have been concerned about this scheme and have contributed so much, in order that we could build on the successes achieved so far, out of this debate and the ashes of the Government’s proposal would come one small glimmer of hope for the Opposition. There is not sufficient of a glimmer of hope to dissuade me from believing that I should test the opinion of the House.
19 July 2010
Division on Lord Davies of Oldham’s amendment.
Amendment disagreed.View Details