§ 12.18 p.m.
§ Lord McIntosh of Haringey
My Lords, I beg to move that this Bill be now read a second time.
My briefing notes state:I am delighted to be bringing this Bill before the House",and I really am. It is not very often that one has a complete innovation in social policy brought forward by a political party in its manifesto, consulted on over a number of years, receiving in principle virtually universal support, even in the detail, and have the opportunity to bring it forward. So I am delighted to be bringing this Bill before the House. The child trust fund represents a new and imaginative way of encouraging children and their parents to save for the future and the Bill enables us to make that a reality for the many children who will benefit.
There are four objectives to the child trust fund: to help people to understand the benefits of saving and investing; to encourage parents and children to develop the savings habit; to ensure that all children have a financial asset at the start of their adult life; and to build on financial education and help people to make better financial choices throughout their lives.
That is an ambitious project. Too often, welfare policy looks solely at income distribution and focuses exclusively on meeting immediate needs. It is now time to take a longer view and consider the factors that make a difference to young people's opportunities.
The child trust fund is a universal savings policy that will benefit all children but will target greater resources at those children who need it most. With the child trust fund we could, for the first time, make a real difference to people who have never had the security of a financial asset.
The child trust fund was proposed in our manifesto in 2001. It has been developed on the basis of extensive formal and informal consultation with potential providers, trade bodies, consumer organisations and other voluntary organisations. There have been two formal consultations.
352 Saving and Assets for All, published in April 2001, set out our belief that saving and asset ownership is an essential element in our welfare strategy. The paper outlined policy options for the saving gateway and the child trust fund. The responses received influenced a further paper in November 2001—Delivering Saving and Assets—in which the Government consulted on more detailed proposals for delivering the child trust fund: through the open market or licensed providers.
In the 2003 Budget, the Chancellor announced that child trust fund accounts would be introduced in 2005 for all children born from September 2002. In October last year, we published detailed proposals on how the child trust fund will work. The Bill had its Second Reading in the other place in December—I will return to discuss its passage there later.
We want to encourage all families to save for their children. Surveys show that only one third of the population saves regularly. There is not a tradition of people saving money for their children over the long term. They save for a rainy day or for a particular purchase but there is little evidence of people saving to build up a financial asset for their children when they reach 18.
We are especially concerned about families on low incomes. The American experience with individual development accounts shows that incentives do encourage people on lower incomes to save money. Our own pilots of the saving gateway—although it is early days to draw conclusions—indicate that people on very low incomes can make regular savings.
We believe that the child trust fund will kick start savings among families for two reasons: first as a response to the initial government payments—and further payments at age seven—and secondly as a result of financial education.
The Bill places a duty on the Inland Revenue to make child trust fund payments to eligible children. It sets out how CTF accounts are to be set up and run and includes powers to make regulations covering some of the more detailed issues. The draft regulations were published on 2 February and copies are available in the Library. Those include most of the detail of the investments that will be allowed and the requirements of providers. I will discuss some of the detail later.
This morning, the Select Committee on Delegated Powers and Regulatory Reform published a report on the Bill, for which I am grateful. I understand, on first reading, that it has made a number of suggestions for substituting affirmative for negative resolutions in the Bill. At this stage, I see no difficulty in our complying with its proposals.
I turn to eligibility. In developing the child trust fund our aim has been to keep the processes as simple as possible for all concerned—families, providers and children. All children born since 1 September 2002 who live in the United Kingdom and for whom child benefit is claimed will be eligible for the child trust fund. Entitlement to a child trust fund account—I hope that I can I call it the CTF; using its full name is getting boring—will be linked to an award of child 353 benefit, which nearly every parent in the country claims. That removes the need for a separate claim form and process for the CTF and will keep things simple for parents.
Child benefit cannot he claimed for children in local authority care and the Inland Revenue is working with representatives of local authorities and central government to ensure that those children do not miss out. When the award for child benefit is made, the parent or guardian will be sent a CTF voucher and an information pack. The information pack will include details of all providers, a step-by-step guide to opening an account and a clear and objective explanation of the stakeholder CTF account, which all providers are required to offer. Parents—or someone else with parental responsibility—can then take the voucher to the provider of their choice to open an account.
Financial institutions that want to offer CTF accounts will need to be approved by the Inland Revenue. The details are set out in regulations but that is a straightforward process and one with which financial providers are already familiar, as it is based on the approval process for individual savings accounts. Providers will be able to offer a variety of different accounts to suit the different preferences of parents. The CTF will be a "wrapper" in a similar way to the ISA—that is, it can be wrapped around a variety of products such as cash or unit trust and life insurance products. That will give parents choice and allow providers to offer a full range of accounts to suit a diverse market.
The CTF is a long-term savings and investment policy. Historically, investments in equities have been shown to provide a better return than cash deposits. Over the past 18 years, for instance, £100 invested in the stock market would have yielded £321, whereas the same £100 deposited in a building society account would have produced £171. We want all children to have the opportunity to benefit from the generally higher returns on equities over the longer term. That is why offering the stakeholder CTF account will be a prerequisite for all financial providers that want to offer CTF accounts.
The stakeholder account will follow the principles outlined by Ron Sandler in his July 2002 report, Medium and long-term retail savings in the UK. He proposed that stakeholder investment products should be simple, low cost, accessible and risk controlled. Stakeholder accounts will be equity-based. To balance risk and return, providers who offer stakeholder accounts will be required to diversify investments so that investors are not unduly exposed to a narrow range of equities. They will also be required to apply "lifestyling" to the accounts, moving investments to less risky assets as the account nears maturity. Again, further details are set out in the regulations.
Once the CTF account has been opened, the financial provider will claim the amount of the initial government payment—£250—from the Inland Revenue. Children in families on child tax credit whose income is below the income threshold—currently, £13,230—will have an additional payment 354 of £250 paid directly into their accounts as soon as the tax credit claim for the year in question has been finalised.
Children born between September 2002 and April 2005 will receive higher amounts to recognise the fact that they could not open accounts earlier. A further payment will be made when the child reaches seven, and, again, a second payment will be made to those children in families on low incomes. By the age of seven children are beginning to understand money and that payment will remind them and parents of the account.
Inevitably, there will be some people who do not get round to opening accounts for their children, but we do not want those children to miss out. If an account has not been opened 12 months after the voucher has been issued, the Inland Revenue will open an account and tell the parent or guardian that that has been done and how they can take over managing the account. The accounts that the Revenue opens will always be the risk-controlled child trust fund stakeholder accounts, as they are designed for long-term investment. Of course, they will be with an approved provider. The Inland Revenue will not be responsible for managing the account once it is opened.
Parents will be free to move the account to a different provider or type of account if they wish. We hope that the number of accounts that the Inland Revenue needs to open will he small and will diminish over time. The Inland Revenue will also open stakeholder accounts for looked-after children for whom a child benefit award has not been made. As those children are in care when the account is opened, they will not be able to qualify for the additional government payment by living in a family receiving full child tax credit. Given the disadvantages experienced by those children, the Government have decided that they will automatically receive an amount equal to the initial and the additional government payments.
But the child trust fund is not only about government payments. We hope that government payments will kick-start a saving habit and that parents and other family members also make their own savings.
We would like to see a change in attitude to saving for the long term and have decided that child trust fund accounts should have certain advantages to encourage that. Between them, parents, grandparents, friends and relatives will be able to add up to £1,200 to the accounts each year, and all income and growth will be free of tax.
As a further incentive, the income tax settlements legislation will not apply to child trust fund accounts. With child trust fund accounts running for 18 years, the settlements legislation could have caught large numbers of people in the later years of the account.
I promised to return to the passage of the Bill in the Commons, where a number of interesting issues were debated. I shall discuss first the effect of the child trust fund on means-tested benefits claimed by the child or the family. First, I can give the assurance that funds 355 within CTF accounts will not be taken into account in any claims for family benefits or tax credits while the account is growing. The Government are keeping the treatment of capital in income-related benefits under review, so that a sensible balance is struck between providing targeted state support and not unfairly penalising those who have acted responsibly by saving. There are three points at which the CTF and benefits interact: when a child reaches 18 and the CTF account matures; the impact on pension credit when grandparents contribute to CTF accounts; and where a child dies and parents receive funds from the CTF as part of the child's estate.
I shall deal first with the treatment of CTF at maturity. Understandably, there is concern that saving in a CTF may affect entitlement to benefits such as income support and jobseeker's allowance when a child reaches the age of 18. At that time, the CTF account ceases to be a CTF and the funds are available for the young adult to spend or to reinvest. The Government have responded to those concerns. At Second Reading in the Commons the Financial Secretary announced that, as a first step, from 6 April 2006, the threshold above which savings reduce eligibility to income support, jobseeker's allowance, housing benefit and council tax benefit will be increased from £3,000 to £6,000. Although it is not possible to guarantee the rules for benefits in 2020, when the first CTF accounts mature, that doubling of the threshold will reduce the number of people affected.
The second issue is pension credit and capital deprivation rules. Capital deprivation rules for income-related benefits such as pension credit are designed as anti-abuse measures. Officials in the Department for Work and Pensions have discretion to determine whether payments such as those into a CTF account will be treated as deprivation of capital. It is unlikely that modest contributions would be caught under that rule.
In the sad event of the death of a child, the funds from the CTF will form part of their estate and will be treated as capital in the hands of the person inheriting the estate. That could affect any benefits claimed by that person; but, again, the increase in the capital threshold will reduce the number of people affected.
There have been debates on disabled children in Standing Committee and on Report in the other place. Let me clarify the position: the child trust fund is a long-term savings policy, and the funds in the account can be accessed only when the child is 18. The honourable Member for Witney suggested that it might be useful for the parents of severely disabled children to be able to access the money for the good of the child before 18, and that the annual limit of £1,200 for non-government contributions should be raised so that more money could be paid into the CTF accounts of those children.
The Financial Secretary committed on Report to consider the proposal in consultation with disability groups. She pointed to factors to be taken into account. The first was whether the CTF is the right vehicle to help disabled children, given the tax-free allowance of £4,615 for all individuals—but which children are not likely to 356 breach—and the availability of accounts with immediate access. The second is whether such a change would not distort the objectives of the CTF and result in disabled children being disadvantaged at 18; thirdly, whether the administration required would be proportionate; and. fourthly, whether there is a consensus of support for such change among disability groups.
Debates in Standing Committee were constructive. The Financial Secretary was able to respond positively on Report to another suggestion; that is, that parents of terminally ill children will have access to the funds in the CTF account before 18. That change will mean that parents can withdraw the funds and use them for the benefit of their child. That is sensible, but there is still work to be done on the details.
Before outlining an amendment that I intend to table, I wish to inform the House about two amendments made by the Government in the other place. I explained that parents could open a CTF only with a voucher issued by the Inland Revenue. A number of providers and Members of the other place have argued that it is unnecessarily bureaucratic for providers to be obliged to obtain the voucher from parents before accounts are opened. We think that handing over the voucher containing the child's details will both play a key part in the efficiency of the CTF and deter fraud. None the less, we can see that flexibility to make any changes to that system by regulation would be useful. We have amended the Bill to put that requirement in regulations. If experience demonstrates that the paper voucher is not necessary, we can make changes much more easily.
§ Baroness Hayman
My Lords, I am grateful to my noble friend for giving way. On the interaction with social security benefits, although the raising of the threshold is obviously welcome, will the Government undertake to look again at the principle of the issue? It is problematic to think of an 18 year-old who is unable to find a job and is on jobseeker's allowance being penalised, not just because of the money that the state has put in, but because for years grandparents, uncles and aunts have contributed to the CTF instead of giving birthday presents, and so on. We ought to look at that problem.
The issue of payment on death is equally important. Mainly those will be hugely tragic cases, where perhaps parents have given up work to care for a child who is dying and want to use the CTF to form a memorial, but instead find that it reduces their benefits while they are trying to remake their lives.
§ Lord McIntosh of Haringey
My Lords, the noble Baroness's second point was about what happens in the case of the death of a child under the age of 18. I thought that I had answered that, and that the Government's changes dealt with the point that the noble Baroness makes.
The interaction at maturity between the child trust fund and benefits was discussed constructively in the Commons, and I think that it can be discussed in the same way here. I am sure that there will be amendments, that everybody will have their say, and that I will be able to give a more detailed answer to specific proposals. I 357 agree that an issue of principle is involved, but there are also considerable practicalities to be considered. We will have to look at specific proposals to be able to respond to them.
The second amendment concerns the age at which children can manage their CTF accounts. The Bill as originally drafted followed general law, which does not allow under-18s in England, Wales and Northern Ireland to make binding contracts to buy or sell shares, whereas in Scotland they can do so at 16. Following a debate in Committee, the Government tabled amendments on Report to allow 16 year-olds to manage CTF accounts, including accounts with investment in equities. That does not affect general law about other investments, or the age at which children can access the funds in their CTF accounts—it remains 18—but it means that 16 year-olds will be able to make decisions about their CTF accounts.
I shall now discuss an issue that affects children being looked after by local authorities, and my proposal to table a government amendment to improve the Bill in Committee. In most cases, parents retain parental responsibility for their children while they are in the care of a local authority, and will be able to manage their child's CTF account. But there will be cases, such as those of orphans with no legal guardian, or where contact with the parents has been terminated, where no one is able to take on the role of responsible person for the looked-after child's CTF account. The Official Solicitor has agreed to do this and I intend to table an amendment to the Bill allowing that to happen.
Before closing I should like to say something about the charge cap and the minimum contribution. The Government's decision to set the cap at 1.5 per cent recognised that the CTF had certain key characteristics that were not typical of other products in the stakeholder suite, including stakeholder pensions. In particular, child trust fund accounts will be smaller than stakeholder pensions and will have a lower minimum contribution level than other stakeholder products.
The charge cap of 1.5 per cent is in the best interests of consumers, as it encourages a wide selection of providers to offer CTF accounts. A large number of providers will encourage competition and the best value for consumers.
The evidence on which the Government based their decision included research commissioned from Deloitte. Deloitte's report comprehensively analysed the trade-offs of different charge caps for providers and consumers. That report will be published later this year at the same time as its report on the other stakeholder products.
The minimum contribution for the stakeholder child trust fund account has been set at £10 to ensure that it is accessible to all savers, including those who are unable to contribute regularly. Providers may accept even lower contributions if they wish. It is expected that competition among providers could drive the minimum amounts accepted below this.
The child trust fund is a bold and ambitious policy. We hope it will fundamentally change attitudes to savings, improve financial capability and extend opportunities across income barriers by providing all children with an asset when they reach 18.
358 We all have an interest in creating a society that understands the benefits of saving. The child trust fund will help us to do that. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)
§ 12.41 p.m.
§ Lord MacGregor of Pulham Market
My Lords, I wholly support the objectives of the CTF as outlined by the noble Lord and in the various documents we saw earlier. I support them because they are fundamental Conservative objectives which the Tory party has subscribed to during the period I have been a member of it. In particular, I am wholly in favour of the objective of greater financial education, especially among young people. There is no doubt that in all kinds of ways this is deeply desirable.
When I was—for an all too short period—Secretary of State for Education, I was particularly anxious to see what I could do to encourage that in schools. We should recognise that this objective will be more fully achieved by what can be done in schools—and we have to recognise that it is a long-term objective—rather than by the CTF. I am also—and have been throughout my political lifetime—in favour of more encouragement of wider ownership both of homes and of shares and of savings for the future and encouraging the savings habit. I am in total agreement on all of that.
The Government have more recently subscribed to the belief of encouraging individual savings, but they have signally failed in their endeavours so far. In the six years to 1997 the savings ratio was never lower than 9.1 per cent; in the six years since, it has never been higher than 5.7 per cent. So one has to say that whatever the Government have been trying to do, they have absolutely failed in their objectives and have been less successful than the previous administration.
I also see the importance of giving encouragement to savings. During the mid-1990s I saw several surveys which indicated that the vast majority of the population recognised that they needed to save more, particularly for pensions given that the state pension was going to be insufficient for their needs. There was a huge recognition of the need to subscribe more. But when one actually looked at the responses of those who were doing something other than being in occupational pension schemes—and we know what has happened to them—one found that they simply were not taking the necessary actions to meet the objectives that they saw as desirable.
That was the position then. I think that it is worse now when one looks at what young people in particular are now saying. Very many believe in spending on the day and are actually not subscribing—possibly apart from buying their own house—to the need to save for the future. So there is a big, big job to be done.
I therefore support the objectives. But, the key question is: is this scheme the right way to achieve them? The Chancellor has a mania for micro-management, for micro-social engineering, for tinkering at huge cost and with complexity and bureaucracy. I have to ask the 359 question: is this scheme one of those? So at the moment I am agnostic. I am prepared to be persuaded and that will depend on the Government's response to various questions which address three issues. The three issues are these: is it cost-effective? Is it practical? And, will it achieve the objectives? I recognise that the third issue is one that inevitably involves judgment, but the question must be asked.
The first two issues can be answered more directly. I have a number of questions to put to the Minister in connection with it. I make these points and make no apology for bringing them forward because I notice that the Select Committee in another place on child trust funds concluded in December last year that,the Government is committing itself and its successors to significant expenditure under this initiative, potentially over £4 billion over the next 18 years. It must therefore get the details of the scheme and its implementation right".The Government, as the Minister has indicated, have been working on this scheme for about three years, so I hope that they will be in a position to answer all my questions. Interestingly, some of them were raised by the Liberal Democrats in the other place, and led that party to vote against this proposal both at Second and Third Reading. Indeed, the final comment of Mr Laws was that the Government's first priority should not be to,launch a Bill whose policy is supposed to be evidence based, but where evidence that the policy will work is in such short supply".—[Official Report, Commons 3/2/04; col. 729.]These are the questions that we should be asking.
Before I turn to the particular questions, I should declare an interest in that I am a non-executive director of a financial services provider, although I have not actually discussed these details at all with anyone in that particular company. They are my own personal concerns based partly on my experience in the City but perhaps even more on my experience in government. I recognise—and I acknowledge this straightaway—as the Minister clearly outlined, the Government have done a great deal to meet many of the objections and difficulties of the scheme, but a number of concerns still exist.
The first question is in relation to the overall cost of the scheme. We all recognise that it will be very expensive—about £4 billion over 18 years. Does that £4 billion relate only to the £250/£500 payments—and presumably some estimate of the payments that are going to be made at age seven, but we do not know how much at the moment—or does it also take into account the administrative costs of dealing with the proposal? I suspect that the scheme will be very expensive for the Government to administer and for the Inland Revenue in particular. So my first question is in order to establish what the total cost will be: what is the Government's estimate of the administrative costs of running this scheme as far as the taxpayer is concerned?
The second issue I want to raise is the use to which the money will be put. The Financial Secretary indicated in the other place that, leaving aside whatever additional money might come at age seven because we do not know 360 what that will be, the £250 would produce a figure of £475 at age 18 and the £500—for the lower income groups—would produce £911. If, as may well be the case, the top up—and I want to come to that later—by many families will be minimal, how can the Government be sure that that sum of money—the £475 and the £911—will either go into further saving schemes at the age of 18 or will be spent on good causes?
I recognise the difficulty of prescribing particular causes. That matter was much debated earlier and of course was much part of the consultation. Indeed, it is interesting to note that in the consultation period the Savings and Assets for All paper of 2001 indicated:This could be supported by restricting the uses to which young adults can put the funds in their matured Child Trust Fund".Reference was made in the paper to the individual development accounts in the United States, to which the Minister has referred. The interesting point about that is that the individual development accounts in the United States confined the uses of the funds at the age of 18 to lifelong learning, business or housing. It can be done. The question that we need to explore is whether the Government are right to reject that answer. The responses that they received, quoted in Delivering Savings and Assets of November 2001, were evenly balanced between those in favour and those against restrictions on the final use of the assets.
My concern is that large numbers of young people who are given £475 at the age of 18 may well find that it will not be much help to them in a deposit for a house, or perhaps—as has been indicated that the Financial Secretary wishes—to start a business of their own. Is it not much more likely that that money will be used on an 18th birthday party spree? If that is the case, what have we achieved with this vast amount of taxpayers' money? We have not actually developed the savings habit for substantial numbers, and that money has simply gone in the wrong direction. Are we right to say that there should not he some restrictions on the use to which the money should be put at the age of 18, as in the United States?
The Minister rightly indicated that there were tax advantages for parents, grandparents, family friends, and others to top up the child trust fund to a limit of £1,200 per year. I recognise the objective of encouraging many more people to contribute to the fund, but I want to explore what particular advantage there would be in putting money into the CTF compared to other savings media. The advantage is the tax relief. However, in response to the issue of whether children born before September 2002 should be allowed to come into the scheme without the £250 but getting the tax advantages, the Treasury stated that the cost would be negligible. That suggests that the advantages to parents and others of topping up this fund would also be negligible. I would like to hear more from the Minister about that calculation.
The fourth point is the likely take-up by providers. I am glad that it has been recognised that a 1 per cent cap is not sufficient. I recognise that the Children's Mutual and other banks and building societies will be providers. The Children's Mutual has played a big part in the development of this scheme. I have talked to the 361 Children's Mutual, and it is keen to see this scheme succeed, as am I. I wonder how many providers there will be. I recognise the merit of the voucher scheme. It is an ingenious way in which to market the scheme to parents and younger children who are eligible. It is an ingenious way of getting them involved, but nevertheless there are issues that seem to work against there being a large number of providers. They relate to the 1.5 per cent cap.
The Minister indicated some reasons why this scheme needed to have a higher cap; small sums, a large number of people taking part, and so on. He minimised the difficulties, because there could well be large numbers of small sums coming from a lot of different individuals to the one fund. That will all have to be managed by the provider. There is the possibility of the owners of the funds being able to change providers, with the cost involved in that. There will be annual statements, and there will he all sorts of things, because there are many transactions involved. Given that the 1.5 per cent produces a return to the provider of £3.75 per year, I wonder whether all of that will be covered in the available time. We need to explore whether there is sufficient incentive.
On top of that, there is the need to market the scheme. The voucher helps, but there will need to be marketing by the providers too, particularly if we are to encourage people to top up. There are questions about whether that cap is too low. The stakeholder pension experience suggests the same. We are now finding—for individual stakeholder pensions as distinct from group pension schemes—that a large number of people are moving out of being providers. That is a real worry.
Everything must be done to simplify the scheme. There are two areas of concern, which the Children's Mutual has raised with the Government. The first is the question of whether vouchers are required to be provided on paper. I heard what the Minister said, and that looks like a useful concession, but I rather doubt whether it is enough. Perhaps we can explore that in Committee. The bigger worry is that the regulations say that every provider must permit, as a means of payment to the account, payment by cash, credit card, debit card, cheque, direct debit, standing order or direct credit. If we are to make the scheme work within the cap, there has to be a concentration on electronic means of payment. I suspect that having to provide the whole range—they do not have a choice—will put a lot of providers off. We should consider all those issues.
There is the issue of whether children who were born before September 2002 should be eligible not for the government contribution but for the tax relief. That issue has been debated in the other place. It will be difficult for parents to explain to their children that a child who was born in July 2002 will not be eligible even for the tax benefits under the scheme, whereas a child born a year later will be. That issue needs to be explored, particularly if the cost is negligible.
There are two issues relating to regulation, and they concern particularly the Financial Services Authority. It is important to stress them. The first issue is that, if 362 providers are to be ready to be set up, they must know what the regulatory aspects that will be laid down by the FSA are as quickly as possible. I am still bothered about the dangers of what might be regarded in any other form of saving as retrospective mis-selling. I shall explain the mis-selling point.
I understand why the Government say, rightly, that the schemes should be available for equities. The Minister explained exactly why. He also said that it would be a risk-controlled environment. The Government also intend that, in the later years of the child, in order to help with the risk, one would move slowly from equities into interest-hearing forms of saving. However, equities move up and down, and it is not good enough simply to say that, over the past 18 or 20 years, they have provided so much. What happens if, under the rules of the scheme, a child of 15 moves from equities to interest-bearing accounts at a point similar to, say, the end of 1999? There would be a big loss on the money in the scheme. If the child is obliged to move at that point into interest-bearing accounts only, there must be doubt about whether, for a £250 payment, there will be £475 available. If that is the case, will there be an accusation of mis-selling, as there would in other areas such as endowment policies? I have not heard the Government's answer to that, and I do not know how they intend to make the system work without risking that kind of accusation.
We must consider such issues carefully. As I said, I support the objectives, but I need to be convinced that the scheme will deliver them in a way that is cost-effective for the Government and the providers.
§ 12.58 p.m.
§ Baroness Goudie
My Lords, I declare an interest as a founding trustee of PiggyBank Kids, a charity that organises and delivers a range of projects to support and strengthen charities working to improve opportunities for children and young people across the United Kingdom. I welcome the Child Trust Funds Bill. I see it as a further commitment by the Government to tackle poverty and improve the life of those on low income.
We all know that many families can offer their children a financial buffer to protect them and assure their future. Improving people's income will not in itself allow the children of poorer families the opportunity to fulfil their full potential. The Government must build up their wealth, in order to give children on the brink of adulthood a fund that will assist them to take opportunities and fulfil the ambitions that all young people have, irrespective of their financial and social background. That is exactly what this Bill will do. Its aims are to ensure that, in future, all children have a financial asset at the start of their adult lives. It will encourage parents and children to understand the benefits of saving which also enables family and friends a tax-efficient way to contribute up to £1,200 each year to the account. It will build on financial education and help people make better financial choices throughout their lives.
363 In the Pre-Budget Report, the Chancellor, Gordon Brown, announced an additional £1 billion per year investment in Britain's children to meet the Government's commitment to reduce child poverty by a quarter. In order to advance that goal, it is important that not only some, but all this country's children are given the best possible start in life. No child should be left behind. That commitment to an active strategy, founded on the principle of security, opportunity and responsibility, is underpinned by the proposals in this Bill.
The Bill will increase opportunities to help young people manage the transition into independent adulthood and improve their financial literacy and responsibility. For the first time all children, no matter what their circumstances, will in future receive a financial resource on which to build, helping in the fulfilment of their ambitions.
§ 1.1 p.m.
§ Lord Northbourne
My Lords, access to a small capital fund for all young people as they move into independent living and the world of work certainly appears to be an attractive idea. I support the underlying objective of the Bill. Unfortunately, I do not think in all honesty that the fund as proposed in the Bill is necessarily going to achieve that objective. I want to draw attention to two important defects.
First, government funding alone is inadequate to produce the desired results. Without any extra top-up from the family, it has been estimated that at the higher rate of input of £500 by the Government, applicable to poorer families, the fund would accumulate £91 I in terms of current buying power over the 18-year term. Such a sum would not seriously contribute to the cost of setting up independence for an 18 year-old. Indeed, as the noble Lord, Lord MacGregor, pointed out, it is much more likely that the money will be blown on a party or in some similar fashion.
If we consider the fund as a vehicle for family savings, which is clearly what the Government intend, I believe that it is not an appropriate means for poor families. Such families live on a financial knife-edge. Their finances are punctuated by crises. Even quite small adverse events such as an illness, the children suddenly having a spurt of growth and needing new clothes, a burnt-out cooker or even a fine from the courts, can play havoc with the family's weekly budget. If they have to turn to street borrowing, that is usually secured on the benefit book. The interest can cost up to 10 per cent of the loan per week.
At such times of crisis, it is crucial that if the family has any savings, it should be able to access those funds so as to avoid mounting up crippling debts. If a poor family has a windfall, they should save the money in a flexible scheme, one that can be accessed in an emergency. Top-up money put into the child trust fund would not be available in this way. For that reason, I do not think that I would ever recommend it to a family with limited means.
364 My second point is the more important. I believe that the scheme as drafted patronises parents and I shall try to explain why that matters. There are two ways in which the state can offer to help the nation's children. The first is to accept that parents will always have a unique role in the care and education of their children and then to work as much as possible with and through those parents. The second way is to intervene directly in the life of the child, possibly brushing aside the involvement of parents, regarding them merely as an unnecessary complication.
This Government wisely adopted the former strategy when they set up the Sure Start programme, which has been an outstanding success. But some of their subsequent initiatives have fallen into the second category. I cite as an example their childcare policy. It has focused on getting parents out to work, even single parents with young children, and the state then moving in with subsidised professional childcare. Parents or grandparents who want to stay at home and look after their own children have consistently been denied subsidies in any way comparable with those available for state-sponsored childcare.
The trouble with this "Nanny knows best" form of intervention is that it is bound to demotivate parents. I fear that this Bill may be another declaration that "Nanny knows best". If so, it will be another nail in the coffin of responsible parenthood. The Bill seems to say to parents, "We believe that your child could benefit from a capital sum to help him or her get started in independent living, but we don't trust you enough to consult you about how and at what age that sum should be made available to your particular child, or how he or she can be helped to spend it in his or her long-term interest". That is implied, even though parents know far better than the state possibly can their own children's individual needs.
We should consider whether that message is liable to encourage or discourage parents to take their parenting job seriously, and to believe that the huge contribution they are making to society is valued. It is a financial and logistical impossibility for the state to bring up all the nation's children, so would it not be sensible to take parents a little more seriously?
I wonder how many noble Lords, when they were children, had the experience of a parent or teacher who, when they were trying hard to do something useful or good, would impatiently snatch the job away and do it themselves. Noble Lords will recall how demotivating was that experience. They will have thought, "What is the use of trying?". I believe that struggling parents sometimes feel the same.
Finally, and specifically in relation to the Bill, I accept that if the Government are investing taxpayers' money, it is right that there should be some form of trust. But surely the trust should acknowledge that all children are different and that parents usually know more about their children than the state ever could. Trustees should be required to consult parents in order to ensure that, as far as possible, the money is made available to the young person at a stage in their life when it is likely to be of most help. By no means is that 365 always at the age of 18. Further, parents should be involved as much as possible in obtaining help and advice for their children so that they can reach responsible judgments about how to spend their money in their own long-term interest.
I know many young men from all kinds of backgrounds who, at the age of 18, are still so immature and insecure that they would be unlikely to make wise decisions without help. They would spend the money on a binge, on clothes or on winning popularity. Then, at the age of 20 or 21, they would bitterly regret that they had done so.
I am considering whether it will be possible to introduce amendments in Committee and I shall certainly he interested to hear from any noble Lord who would like to talk to me about that.
§ 1.9 p.m.
§ Lord Naseby
My Lords, I welcome the Bill. I declare an interest as chairman of the Tunbridge Wells Equitable Friendly Society, founded in 1881, and trading since January 2003 as the Children's Mutual. Over the past 20 to 25 years, the Children's Mutual has specialised in children's savings. We believe it is important that families are encouraged to save for their children.
As to the point made by the noble Lord, Lord Northbourne, we have carried out a fair amount of research in relation to the attitude of families towards saving for children. The vast majority of families differentiate between saving for their children and any other form of saving. Poorer families, in particular, see the money set aside for their children—either by the parents, grandparents or other relations—as sacrosanct. That money is kept purely for the children. Whatever crisis may arise, they do not see it as a fund to be used for other family matters. That evidence has been consistent over a number of years. I give that as an example of why I believe that the final point made by the noble Lord, Lord Northbourne, is not correct.
I became interested in this project after listening to an interview given by the then head of IPPR. It may have been in the Labour Party's aspirations but certainly it was not publicised as a venture it would be taking forward. I was sufficiently interested to invite him to tea in your Lordships' House. Having listened to him, I suggested that, in principle, the Children's Mutual, of which I was then chairman—I am still—would be prepared to contribute a modest sum to help take the work forward. We did not want to interfere in the work but the money was there for the IPPR to take it forward.
That was one of the best investments we have ever made as a society because out of it has come this Bill. Like my noble friend Lord MacGregor, I believe that it supports Tory principles. That is why I have been passionate about it ever since. Your Lordships will know—certainly the noble Lord, Lord McIntosh knows—that we own the registered trade mark of the "Baby Bond".
Since the Government have taken up the idea the society has been in the forefront of encouragement. We have shown this by opening our doors to Treasury 366 officials and anyone else who wanted to see the mechanics of how a provider deals with the real issues of running such a scheme. We have attended every seminar there has been on the issue and we have responded to every consultation document. It is in that vein that I make my contribution today and will continue to do so at Committee stage.
We are troubled by two particular issues at the moment and there are two further issues on which we should all reflect at Committee stage. I shall first comment on the sales regime; then the method of payment; then the pre-September 2002 children; and then the voucher system.
First, as to the sales regime, Ministers may not realise it but this is where a good deal of the providers' costs will be. I have knowledge of the 1.5 per cent cap determined by the Government but I have absolutely no idea what the sales and associated disclosure regime will be. I respectfully suggest that normally under joined-up government one would have the data on these two issues and, arising from that, a sensible cap would be settled. But the way it has happened is not quite so sensible.
My society and every other provider now have only seven months to build the IT structure necessary to apply for a licence by 1 October. For instance, should I be building the CTF stakeholder alongside the non-stakeholder CTF? Will I be able to promote the non-stakeholder CTF by itself? Those are two straightforward questions, but there are many more. I shall be very happy to share the others with the Minister when we reach Committee stage.
I am also worried that the CTF may be tied tip with the other Sandler products for which there is no implementation date at the moment. When the Minister replies to the debate, will he assure the House that the CTF is to be treated quite separately?
The second issue concerns the method of payment. The existing draft regulations stipulate that, as a provider, we would have to offer six methods of payment—including cash and credit card. This will be the first government-sponsored saving scheme of any UK government where the provider, by law, has to offer all six methods of payment or else cannot take part. I strongly recommend to the Government that they should leave it to the providers to decide how many of the six options they will offer. In my judgment, there is no great need for every provider to offer all six.
Some providers have many branches. Many building societies have them on the high street. Others—for example, friendly societies—usually have one or two offices. For them, cash is not a convenient method of subscribing to the CTF. If necessary, they will take cash, but it is not a terribly cost-efficient way to operate.
More importantly, there is the issue of payment by credit card. I do not know whether the Minister realises that you cannot take out national savings by credit card but that you can by direct debit card, cheque, cash and through the Post Office. I suspect that the reason national savings does not accept credit 367 cards is twofold: first, you are encouraging a debt to achieve a saving, which is not terribly logical; and, secondly, there is a cost to the provider of somewhere between 3 per cent and 5 per cent, depending on which credit card you accept. When the cap is 1.5 per cent, it is a little like Mr Micawber to have a charge of between 3 per cent and 5 per cent. I do not believe credit cards should be a runner. Certainly they should be removed from the mandatory element. I, personally, would remove them altogether.
The third issue concerns the voucher system. I heard what the Minister said about the regulations and that if the system does not work too well amendments can be made, but we need to reflect a little on why the Inland Revenue steadfastly refuses to allow parents to use the Internet or the telephone. By definition, it is young couples who have newborn children. Among those young couples, both parents may be working. The profile of people using the Internet indicates that many of them are young couples or the elderly. Obviously in this case it is the young couples who are important. Where they both work long hours, they should be able to come home, get on the net, make a decision and buy something. But they will not be able to do that with the voucher system as it is at the moment. This area should be looked at.
The experience of my own society with the current Baby Bond is that when we get an application on line and send out a piece of paper for signature, we lose about half the people who originally applied on line because they cannot be fagged to go through the second stage. The whole thrust of government policy across so many areas is that the people of this nation should become more and more IT literate, and yet here the opportunity to do something ab initio is at the moment being denied.
The issue of children born before September 2002—this point has been referred to already—will be extraordinarily difficult and a major disincentive. Let us take the example of someone with a child born before September 2002 and another child born a year later after that date. The children will grow up a year apart but one will have the benefit of £1,200 a year in a tax-free environment and the other will have only the £270 tax-exempt policies available through the friendly society movement. That will cause a great deal of heart-searching in families, and is a major disincentive. I make a plea to the Government that either they set up a regime—without the £250 or £500, obviously—of tax exemption for children under 16 up to the £1,200 limit, or they should raise the friendly society limit to £1,200. Both options must be considered very seriously.
In conclusion, the child trust fund has come a very long way, and I congratulate the ministerial team who have taken it thus far. We at the Children's Mutual want to see it become a major success, with a very high take-up. The facts are that just one in five families save for their children. So there is a lot to do and it will not be automatic—it will require marketing.
I hope the Government will reflect on my observations and suggestions. I have highlighted the difficulties of the method of payment, particularly 368 regarding credit cards. I have highlighted the fact that the FSA urgently needs to publish its guidance on the sales regime. It has had it long enough for some form of draft proposal to be available. Quite frankly, I see no reason why it should not be published next week.
Having said that, I thank all those who have worked so long and hard to make this a reality. I think it is very exciting for the future.
§ 1.21 p.m.
§ Lord Newby
My Lords, we on these Benches share the Government's view that long-term savings should be encouraged. However, we believe that this Bill is misconceived and is in danger of being little better than an extremely expensive gimmick.
I would like to explain why we believe that the Bill is unlikely to achieve its aims, why and where we believe the money could better be spent, and then outline a number of specific amendments that we will be seeking to make at a later stage.
The Government have set out four aims which underpin the Bill and I shall look at each of them in turn. The first is to help people understand the benefits of saving and investing. The vast majority people covered by the Bill will not be doing the saving or investing—the Government will do it for them. Certainly, children will have no say until they are 16, at the earliest, on how the money will be invested for them. They will simply be given a lump sum—a windfall—at the age of 18. The key principle of saving—namely, forgoing consumption today for enhanced consumption tomorrow—will simply not be taught via CTFs, because children are not making a trade-off. They are simply getting a no-strings-attached 18th birthday present.
Secondly, the Bill is to encourage parents and children to develop the savings habit and engage with financial institutions. Of course we agree that we want to encourage adults to save, but the key questions are what we want them to save for and how. By the Government's own admission—and I think it is a fairly common-sense approach—there is a hierarchy of savings objectives. The first is to pay off any debts; the second is to establish a pool of assets for a rainy day—no pun intended. The third is to look at long-term savings, of which the first and most important vehicle is a pension. Then there are CTFs.
In reality, a CTF is the fourth savings priority, which the Financial Secretary accepted in another place, and, as I say, we agree with that. So before parents even look at CTFs, they should have developed the savings habit and engaged with the financial institutions on these other areas. Given that, as the Minister said, a third of people save for the long term and two thirds do not, the higher issues in that hierarchy must be addressed by those people first. So I think there is a problem there.
That is why the Institute for Fiscal Studies, which looked at the Bill, came to the conclusion:It is far from clear that many families would be well advised to contribute additional funds to their Child Trust Fund Account. It is difficult to find a convincing explanation for why the Government has chosen to support young people using this policy".We agree.
369 As for children, I think it is frankly futile to try and persuade them at a young age to get into the habit of long-term saving. In my experience, and I suspect most parents would agree, children are, by their nature, consumers, not investors. In all but the most affluent families, and probably even there, they believe they have legitimate immediate short-term demands to which their unreasonable parents do not give in. I do not believe that the Bill will change that mentality one jot.
The third purpose of the Bill is to ensure that all children have an asset at the start of their adult life. That is undoubtedly the case. But, as a number of noble Lords have made clear, the money can be spent on anything. It is a windfall, and windfalls, by their nature, are often not valued as highly as things for which one has saved.
A number of noble Lords talked about the possibility of introducing an amendment which would constrain the uses to which these funds could be put. In reality, that would be extremely difficult to do, but we on these Benches would be interested in exploring that possibility. I am not saying this in a pejorative way, but I do not believe that many 18 year-olds will, when there are so many demands on their life, think of using this little pot of money for something that the Government and all those who support the Bill would wish it spent on.
For CTFs which have not had significant parental and family contributions, the amount will be almost "neither nowt nor summat", as they say in Yorkshire. What might a young person do with a pot of money that will be less than £1,000? What would a young person really want to do that would make a big difference to his or her life? We might encourage young people to learn to drive, for instance, because it affects their ability to get a number of jobs. They might want to buy a car and would need to be insured. As one of my children has just gone through this painful procedure, you might, if you are really lucky, be able to take enough driving lessons to get through your test on the child trust fund; you might, as we were able to do, purchase a car for a very few hundred pounds. But car insurance is staggeringly expensive, and significantly greater than the sum of money that will be in the child trust fund as a result of government and parental contributions.
Another possible use of the child trust fund which, I suspect, will be very common, is to offset the cost of university. This is a classic case of the Government robbing Peter to pay Paul. The money will go in a circular fashion from one bit of government to another. To set up this whole edifice to make it easier to pay the Government's impost which has recently been introduced is not a sustainable argument. It will be extremely interesting, if the Bill goes through in its current form, to see what the money is spent on and whether it is well spent. It may be impossible to do that. Certainly, it will be 18 years before we have any evidence.
Another problem with the Government's perceptions about how the money will benefit young people is that many of the most disadvantaged poorer young people— 370 those for whom £500 or £1,000 will represent a significant sum—will leave school at 16, rather than 18. The point in their lives at which they will be faced with the sternest financial constraints may well he between 16 and 18. As the Bill currently stands, they will be in the frustrating position of having a pot of money with their name on it to which they will not have access. Therefore, many of the most vulnerable and disadvantaged children, who should and will be beneficiaries of this Bill, will not get the benefit when they most need it.
The final argument advanced by the Government in favour of this Bill is that it will build on financial education to help people make better financial choices. What financial education? There is nothing in the Bill about financial education and many children go through school at the moment with no financial education of any significance. I commend to the Government the recent call from Neville Richardson, the chief executive of the Britannia Building Society, that personal finance education should become a mandatory part of the national curriculum. I agree, and wonder whether the Government will respond positively.
The Government believe that better financial choices will flow from this measure, but I would like them to explain how a windfall helps one to exercise choice. It is a complete non sequitur. We reject the Government's assertions that CTFs will effect a major change in the savings habits of the nation. They probably will encourage some better-off parents and grandparents to channel funds into their children's CTFs. However, even if they follow the Government's advice, in terms of the hierarchy of savings, this will only be spare cash after they have saved enough for their own short and long-term financial needs
Could the money be better spent? Even with these shortcomings, if this is the best way of using free money, perhaps we should go with it. However, we believe that the money could be spent better. A minimum of £4 billion will be expended by the Government before a single child gets a single penny benefit some 18 years from now. That £4 billion could be put to better use. There are a number of ways of doing that. We commend to the Government one of the policies that they introduced which has undoubtedly been a resounding success—the Sure Start programme.
We would expand the provisions of Sure Start so that the Sure Start centres offered a wider range of help to children and parents than they do at the moment. They are undoubtedly a success in the inner cities, but they do not exist in many towns and there are none in rural areas, where many if not all of the problems found in inner cities also exist. The Government have a policy which is successful and really does give every child the best possible start in life, in so far as governments can, which is begging for more cash. It is a model that could be replicated throughout the country and we strongly recommend that the Government redirect CTF funds into Sure Start.
There will be plenty of time to debate specific issues in Committee. I was extremely grateful for the detailed way in which the Minister explained amendments that have either been made in the later stages of 371 proceedings in the Commons or tabled here. However, I wish to flag some areas that we will examine. We want to look again at the inability of 16 year-old school leavers not having access to CTFs, and at the minimum contribution level. Although £10 may not be a huge amount to your Lordships, £5 is a sum that more people would find possible to put into a CTF.
We will also further pursue the logic of providing equity-based accounts for children in care. The noble Lord, Lord MacGregor, mentioned fluctuations in the stock market. We would also like to look at the remaining concerns, both of the Building Societies Association and many of the detailed issues raised by the noble Lord, Lord Naseby. We will also examine concerns raised by the NSPCC about 18 year-olds who are vulnerable to predatory adults or those who may not be in the best position to receive such a payment—young people with a drugs habit who are about to leave care homes, for example.
We on these Benches are happy to work with the Government on encouraging long-term saving and, indeed, to try to improve this Bill. However, we are not convinced that this Bill is the best way to encourage saving or to give children, especially poorer children, the best possible start in life.
§ 1.35 p.m.
§ Baroness Noakes
My Lords, I thank the Minister for introducing the Bill so enthusiastically in his customary comprehensive and lucid way. I welcome his acceptance, at least in principle, of the recommendations of the Delegated Powers and Regulatory Reform Committee. I wish to say at the outset that it is a pleasure to consider a Bill for which the draft regulations have already been made available. So often when we consider a Bill, the guts of the policy are in regulations which seem barely to have been considered. My noble friends in another place lamented the fact that the regulations were published on only the last day of their proceedings, but we can rejoice that they are available to us.
We have had a small but high-quality and interesting debate on this Bill. I would particularly like to refer to my noble friends Lord Naseby and Lord MacGregor, who made important practical points about how this Bill could be implemented. I hope that the Minister will reply to them today. If he does not, I can assure him that those points will be a focus for us in Committee.
We see child trust funds as having the laudable aims outlined by the Minister earlier—to provide financial education, encourage the habit of saving and give children financial assets with which to start their adult lives. These Benches agree with those aims. Indeed, as my noble friends Lord MacGregor and Lord Naseby pointed out, such aims have their roots in Conservative philosophies that go back much further and deeper than any to be found in new Labour's policies. The Bill's proposals are startlingly at odds with much that we have had from the current Government, especially the Chancellor.
The Chancellor has a particular responsibility for destroying public faith in saving for old age, especially through his annual £5 billion smash and grab raid on 372 pension funds. Since 1997, the savings ratio has halved and now stands at 4.75 per cent. The Chancellor taxes those who own their own homes—we have the administrative nightmare of stamp duty reserve tax, the most modest of houses can trigger inheritance tax and now he is threatening a retrospective tax on pre-owned assets. He has supported the massive increase in borrowing by young people that the Government's higher education policies entail—to which the noble Lord, Lord Newby, alluded. He is meanly lowering the value of annual contributions to ISAs as well as ending their ACT entitlement. Indeed, it is difficult to come up with many of the Government's or the Chancellor's policies that favour savings or assets.
Members of your Lordships' House who wish to find out what lies behind the new government policy would do well to read the proceedings of a seminar held jointly by the Institute for Public Policy and Research—new Labour's favourite think tank—and No. 10. It was called Opportunity and Assets: the role of the Child Trust Fund. It contains such insights as describing this policy as being the,third way within the third way",and other new Labour content-free mantras. It is regrettable that new Labour language has even crept into the draft regulations where that non-word "lifestyling" has now become part of the official lexicon.
New Labour and third way thinking is not, of course, what we expect from the Chancellor but the notes of the proceedings of the seminar contain a most valuable insight into the real dynamic behind this policy. Kevin Rudd, a left-wing Australian politician, talked about what he called a potential problem with child trust funds. He is reported as saying that,the long term nature of the Child Trust Fund could mean that it does not fit well with the electoral cycle".That is a big problem. But our ever-inventive Chancellor has turned that particular problem into an electoral vote winner. First, he announced his proposals just before the previous election. But what better way to appeal to the voting intentions of the parents of about 2 million children who will initially be eligible than to send them a voucher, worth £250 or £500, compliments of the Chancellor, just before the next general election?
Most commentators think that the smart money is on May or June 2005 as the date of the next general election. When will the vouchers hit the electorate? Yes, just a month or so before that. That is why the major concern that these Benches have about this Bill is the timing of its implementation. It would simply not be right to allow the implementation of this policy close to the next general election.
We shall press amendments designed to defer implementation of the scheme so that it cannot be construed as buying votes. If the Government win the next election and if the Chancellor still wants to implement the scheme—there is at least one big "if' there—we would not stand in their way. However, the scheme must not be allowed to be an electoral influencer.
373 I shall not pretend that child trust funds as set out in this Bill would be a policy of choice for these Benches. As I said earlier, our beliefs in the virtues of savings go way beyond this policy. We are deeply sceptical about whether this scheme, which involves taxpayers paying money into accounts which accumulate until a child reaches the age of 18, will have any effect at all on savings behaviour. We are quite sure that the account will be well used by those who have already acquired the habit of saving and sincerely believe in it. The ability to top up child trust fund accounts by up to £1,200 a year with a tax shelter will be appreciated by those who already save or have significant financial assets. The tax breaks are welcome but they are probably only of significance to those children who already have other sources of income.
One issue is whether any new savings will be generated. The evidence given by the Government to the Treasury Select Committee in another place showed only slender evidence for this proposition. The Committee was told that the Treasury had not modelled the likely outcomes or set any targets whatever.
Another set of issues is whether asset holding will persist once entitlement at age 18 is established. A number of noble Lords referred to that. Again, only very sketchy evidence was produced. This is the kind of evidence-free policy-making which is, unhappily, typical of this Government.
I was interested to hear the reservations of the noble Lord, Lord Northbourne, about the scheme, and, indeed, that it may in some cases be counter-productive. We are sceptical about many aspects of the scheme. As I said, we are not convinced that saving behaviour will be altered. It is very likely that large numbers of young people will simply fritter away the funds as soon as they get their hands on them. Financial education may constitute not much more than how to cash in an investment at its maturity.
This is a huge experiment with large sums of taxpayers' money. We may find at the end of the 18 years, having invested taxpayers' money of well over £4 billion, plus the administrative costs that my noble friend Lord MacGregor asked the Government to explain further, that the savers simply carry on saving and the spenders carry on spending, not to mention a whole host of abuses that could well emerge during the course of the experiment. The Government think that it is worth the gamble but it is not where we would place our bets.
We on these Benches will not oppose the Bill. In another place my honourable friends voted for the Third Reading of the Bill but that represents our deep commitment to re-energising the habit of savings rather than our satisfaction with this particular scheme. Instead we shall concentrate our attention on the details of the Bill.
During its passage in another place the Bill won some helpful concessions from the Government, to which the Minister referred. I should like to praise in particular the efforts of my honourable friend Mr George Osborne. However, as the Minister is 374 aware, some matters were left unsettled and we shall want to return to them in your Lordships' House. The Minister will not be surprised to hear that we shall want to look again at the position of disabled and terminally ill children. We shall, indeed, wish to look again at the issue of capital disregards. We shall in particular want to ensure that child trust funds are available to all children, without the Government's contribution for those born before 2002, but with the ability for parents and others to contribute the £1,200 annually. We have a particular concern about the most vulnerable of children—those in care. I look forward in particular to seeing the amendment that the Minister said would be tabled for consideration in Committee. I hope that that goes some way to allay the problems that were illuminated in another place. The scheme must also be kept under close review by Parliament in view of the long time between its introduction and proof of its ultimate efficacy.
However, the most important issue is the one that I raised earlier. We must not let this child trust fund scheme become intertwined with the politics of a general election. With that strong caveat, we commit to working hard to see that this Bill is improved before it leaves your Lordships' House.
§ 1.47 p.m.
§ Lord McIntosh of Haringey
My Lords, I am genuinely grateful for the tone of the debate and for the expertise which has enthused many of the contributions to it. I can sum it up by saying that everyone except the Liberals want the objectives of the child trust fund but that there are genuine and sincerely felt queries about the way in which it may be expected to work. I do not object to that. We are, after all, proposing something which, although I understand from the noble Baroness, Lady Noakes, has been part of Conservative philosophy for many, many years, has never actually come out in terms of Conservative policy and has never actually been brought into force by a Conservative government.
Of course, I commit myself in Committee and at Report to respond to the specific criticisms and queries that have been made. Many of those important points are better responded to in the form of a response to actual amendments or proposals for alternative action. However, that does not mean that I shall not this afternoon try to respond to as many of the significant points as I can.
The difficulty that I have with some of the criticisms is that when you propose something for the first time and when you propose a radical new change that has not been done before, there are two kinds of response. The first one is the genuine, proper Conservative response that nothing should be done for the first time. That, after all, has been the principle of the Conservative Party since it was first founded. That is all right; that is its philosophy and we are used to it. But the second response is that somehow when you are doing something for the first time, you should have evidence about every single aspect of it when that does not exist. I have been a survey researcher all my life. Much of the time I had to do what we in our jargon called projective research; in other words, we tried to 375 estimate the effect of things that did not exist. Some of them we got hopelessly wrong. I remember saying that there would never be any market for large-scale spirally welded steel tubes in the 1960s, which was before we discovered gas and oil in the North Sea. One can get these things wrong, but every now and again one has to take a leap and say, "This is the right thing to do, let's go ahead and do it. Let's give ourselves the flexibility to make changes in response to particular problems that arise, but don't let us be deterred by the fact that there is no experience, here or anywhere else, of the detailed operation".
In response to the noble Lord, Lord MacGregor, I certainly do not think that this is an example of what he called the Chancellor's micro-management. It is much more an example of the Chancellor's willingness to be visionary and to do new things, which has been characteristic of his tenure of the office of Chancellor for nearly seven years. The noble Lord is right to say that it is necessary to be as sure as we can that the proposal is cost effective, practical and will achieve its objectives. Of course, all those things are true, but I hope that I can show that our evidence suggests that those who are best informed and most likely to have informed opinions believe that this is an experiment very much along the right lines.
I anticipate a debate in Committee on additional contributions for looked-after children, to which the noble Baroness, Lady Noakes, referred. However, as the matter was not referred to in detail, I do not have anything specific to reply to, and I shall respond in Committee.
There was some discussion of the issue of the start date, and whether we should make provision for older children. The noble Lords, Lord MacGregor and Lord Naseby, referred to that point, and the noble Lord, Lord Naseby, made a helpful suggestion about raising the limits for friendly societies. That is certainly worth looking at, although whether it could be done in this legislation is quite another matter. Of course, it is awkward for families with children born both before and after 1 September 2002, but we have to make a start somewhere. The fact is that there are tax-effective savings vehicles for all children; there are stakeholder pensions for children, for example. The noble Lord, Lord Naseby, knows better than most, from his role as chairman of Children's Mutual, that there are many children's accounts on which no tax charge would arise. However, the Financial Secretary said at Report that she would monitor whether there was a gap in the market and would consider how it should be filled. I do not see how she could say fairer than that.
Again, only the noble Baroness, Lady Noakes, referred to the issue of disabled children, early access and a higher limit. Since no positive suggestions were made for alternatives, I shall deal with that matter in Committee.
A great deal of debate took place on the possibility of restrictions on the use of the funds at 18. I have to say at the outset that I was puzzled by the contribution made by the noble Lord, Lord Northbourne. I know that he is devoted to the cause of families, and I have 376 always admired him for that, but I was puzzled that he described the provisions as patronising parents. He said that we should consult parents more about the age at which the maturity of the child trust fund should he set and on the use that should be allowed for it at the age of 18. I should have thought that the alternative is patronising young adults, which is something that we should avoid.
The noble Lord, Lord MacGregor, referred, although only in the form of a question, to the individual development accounts in the United States as being limited to life-long learning, to business or to housing. He put that only as a question, and did not recommend it as a proper alternative. The noble Lord, Lord Newby, said that children are spenders, not savers. Of course they are—but we are referring to the decision to be taken on the expenditure of the child trust fund, or the continuation of further investment, at the age of 18, when people are young adults. At that age, they have been able to be married for two years, for example.
We should be wary of patronising young adults by putting restrictions, which have not been very well defined, on the way in which the funds should be used. It was asserted that the money might go on a party or on drugs. As the noble Lord, Lord Naseby, will bear out, the Children's Mutual showed that 47 per cent of young adults would spend the money on education and 20 per cent would invest it in another account.
At the age of 18 young adults can join the Army, can vote, and have been able to be married for two years, as I have said. Surely, they are more likely to be responsible about money that has been saved by their families—and, yes, that has come in a windfall from the Government, but what is wrong with that?—than other people are, making decisions for them. Having made the concession about 16 year-olds being able to manage their account, we would be very unwise to accept amendments that would restrict the use of the funds at the age of 18. It would he counter to the evidence, of which I shall say more in due course.
The noble Baroness, Lady Noakes, made a predictable point about the timing of these funds and the timing of an election. When does one put forward a proposal of this kind except in a manifesto? That is what we did, in 2001. How does one implement it, having put it forward in a manifesto and having won the election? One does so by proper consultation, which is what we did. Having completed the consultation, one announces it and announces the dates so that people know where they stand, and then one implements it through primary legislation. Having carried the primary legislation, one must have a certain amount of time in which to allow providers to be set up and all the other provisions to he made. Yes, in this case the provisions come out for 2005. I do not know whether there is going to be an election in 2005 but, in any case, there would not be any generic marketing of child trust funds during any pre-election period. It is simply the way in which governments work—we say we are going to do something in a manifesto, and then we do it. If it comes out before the next election, that does not seem to me at all unreasonable.
377 In an intervention, the noble Baroness, Lady Hayman, made a point, that I take very seriously, about the interaction of the child trust fund on maturity with benefits. I should like to discuss that with her between now and the Committee stage. Indeed, I offer any noble Lord an opportunity to talk with me, and I shall take steps to ensure that there is an all-party meeting to discuss the provisions of the Bill between now and Committee stage. Clearly, the issue is one that we have considered carefully and on which we have come to conclusions, but we are willing to listen to arguments.
We have always made it clear that there is no impact on the parents' finances while the child trust fund account is growing. It has always been our intention that the fund can be rolled into tax-free accounts on maturity. The income from tax-free savings does not affect the entitlement to tax credits. As we announced when the Bill was going through the Commons, we have doubled the threshold, which is certainly not insignificant. We said then that we would keep the treatment of capital under review as the accounts progress, and that we shall certainly do.
There was a good deal of debate on the burdens on providers, some of which took me by surprise because this is a wonderful new opportunity for them. With the honourable exception of Children's Mutual, most financial service providers do not significantly provide for the kinds of funds that will be available from Government and families through the Child Trust Fund. It is looking a gift horse in the mouth to complain about the opportunities and financial returns for providers.
The noble Lord, Lord MacGregor, asked me how many providers there are likely to be. A very large number of people have told us that they are going to be providers. We have testimonials, which I will not read out, from the Association of British Insurers, the Investment Managers Association and the Association of Investment Trust Companies. They all applaud the child trust fund.
I know that there are questions about vouchers. The noble Lord, Lord MacGregor, thought that they were a good thing. The noble Lord, Lord Naseby, was sceptical. He wanted the use of the Internet and the phone and we shall consider that. Given the fact that the Financial Services Authority is continually making changes, all I can say is that we have been consulting it on the regulatory regime as much as is humanly possible.
The noble Lord, Lord MacGregor, made a point about the forthcoming simplified sales regime. We believe that this is a different proposal from that which the FSA is investigating and we do not think that there is any likelihood of any conflict.
I take the point of the noble Lord, Lord Naseby, about methods of payment. I listened to what he said about difficulties with cash or credit cards. Regulations on these matters are at present in draft form. If these matters are raised in Committee we shall consider them and any amendments that would be appropriate for the draft regulations. However, I am not sure that we would be sympathetic to any restriction that will inhibit those who 378 are not normally savers from accessing new forms of saving. After all, our whole intention is to increase the amount of saving for children.
There was a series of criticisms about the lack of research evidence. I have already commented that research evidence on the detail of something that has never been done before is particularly difficult to find. But there is research evidence. To answer questions such as that raised by the noble Baroness, Lady Noakes, about the effect on savings behaviour, there has been research on the development of a savings habit. McKay and Kempson have shown that a windfall receipt of as little as £57 encourages teenagers to start saving. The evidence from the early findings from the Savings Gateway shows that people on incomes of below £11,000 are saving. The Homeowners Friendly Society found that 62 per cent of parents in socio-economic groups D and E intend to contribute to a child trust fund.
On financial assets at 18, the National Child Development Survey showed that assets of even £300 to £600 could significantly affect children's futures. I have already quoted the valuable research from the Children's Mutual that shows that 47 per of children would be likely to use the money for education and 27 per cent would invest it further. The National Consumer Council, which is not removed from these issues, believes that the child trust fund is an excellent opportunity to communicate financial issues to a generation of parents.
I do not know how it fits in here, but the noble Lord, Lord MacGregor, asked me about the administration costs. The start-up cost is about £90 million and the administration costs are about £10 million a year. The £4 billion is an endowment. I think that sets it in context.
I find it very difficult to respond to the noble Lord, Lord Newby. He is antagonistic without really proposing any alternative.
§ Lord Newby
My Lords, I am very sorry, but the noble Lord cannot have been listening. Apart from an alternative use of the funds, I suggested that the Government might devote considerable resources to financial education.
§ Lord McIntosh of Haringey
My Lords, I was going to wind up with the issue of financial education because, on that issue, I certainly agree with him. But financial education is not in conflict with the proposals in the Child Trust Funds Bill. It is complementary to them. I entirely agree with him. The noble Lord, Lord MacGregor, made the same point about financial education. In point of fact, our schools are developing new ways of teaching financial education—they are doing so through the personal social health education programmes—and they have been teaching it through the citizens programmes since 2002. In addition, the Financial Services Authority has been providing teaching and learning materials on financial matters and financial responsibility to our schools in a very praiseworthy way. I have answered as many points on that issue as I think is legitimate for me 379 to do so. If there are any others I shall respond in writing. On that issue, I think that we can all agree: financial education is a good thing.
§ On Question, Bill read a second time, and committed to a Grand Committee.