Memorandum submitted by the Association
of British Insurers
EXECUTIVE SUMMARY
1. The Association of British Insurers (ABI)
welcomes the Government's proposals for the Child Trust Fund (CTF)
and commends the Government for its willingness to embrace radical
thinking in an effort to extend a savings culture to those that
until now have been unable to save.
2. The proposals for the CTF are ground-breaking.
They offer the potential of furnishing every 18 year old with
a sizeable sum of assets and, in so doing, bringing into being
a more financially confident generation that is aware of the benefits
of saving and is suitably empowered to buy appropriate financial
products to meet their needs.
3. A radical proposal like the CTF deserves
to work, so it is important that the details are right from the
outset. HM Treasury have worked closely with the industry to develop
the product details of the CTF that have already been announced,
but the crucial aspects are not yet known. We need to see Government
make the right decisions on:
— the application, and level, of
any charge cap. The charge cap must be set at a level which
represents good value for money for consumers but which also enables
providers to cover their costs;
— the sales regime and administration
of the account. These should be kept as simple as possible.
Unnecessary and burdensome regulatory requirements will add significantly
to the costs of providing the CTF, discouraging firms from entering
the market and reducing the final fund value available to the
CTF account holder;
— the means of encouraging additional
contributions. Additional contributions from parents and relatives
are the key to boosting the value of the fund for young adults,
and also to improving the economics of offering CTF accounts.
To build on the groundswell of popular support for the CTF, innovative
approaches are required to encourage such contributions.
Whatever the final decisions taken on these
matters, we urge Government to make clear and early decisions
to allow providers sufficient lead-in time to prepare for the
introduction of CTF accounts.
4. If the product and regulatory details
are set appropriately, we should witness the creation of a vibrant
market. But for the CTF to bring about a new savings culture,
additional ingredients are required. Firstly, a high-profile Government-backed
advertising campaign to supplement the marketing efforts undertaken
by industry and ensure widespread awareness among all potential
beneficiaries. Secondly, to make the most of the opportunities
presented by the CTF, we need a long-term strategy to build financial
awareness among both children and their parents. Co-ordination
with the National Curriculum and the FSA's Financial Capability
Strategy is essential.
GENERAL COMMENTS
5. The ABI views the CTF as offering the
possibility of creating a savings culture among the next generation
and, in so doing, building a mass market for financial services.
For this reason we, along with several other organisations, contributed
to the initial work carried out by the IPPR on this subject. Our
support for this innovative policy remains strong.
6. By giving people assets in their formative
years and, in conjunction with this, formulating an education
process that teaches young people basic financial literacy, it
is hoped that future generations will be more aware of the need
to save and, crucially, suitably empowered to buy appropriate
financial products. Given the low levels of financial literacy
among the UK population—and the costs to individuals and
the nation at large[1]—this
policy should be welcomed.
THE DEVELOPMENT
OF THE
CHILD TRUST
FUND
7. The manner in which HM Treasury has developed
the framework for the CTF has been exemplary. Consultation has
been held at each stage of the policy's development and the industry
has been pleased that its comments have been taken on board, for
example in the decision that the stakeholder CTF account should
invest in equities in order to benefit from the potentially higher
returns that might be achieved.
8. The recent document "Detailed
proposals for the Child Trust Fund" (published 28 October
2003) contained useful and eagerly awaited information on many
aspects of the CTF but was silent on the critical factors—the
price cap and the sales regime which will determine whether the
policy is a success and is embraced by both consumers and the
financial services industry. It is imperative that these decisions
are carefully considered so it is right that both areas are to
be the subject of extensive research.
9. However, we would urge Government to
make any announcements on the price cap and the sales regime as
early as possible in order to give companies sufficient time to
make a measured decision on whether to enter the CTF market and
to begin to prepare the systems, personnel and marketing material.
Given that life insurers will have to contend with numerous other
fundamental changes during 2004 (for example making major changes
to their systems in accordance with the simplification of the
pensions tax regime), early sight of the total package of CTF
specifications will be vital if they are to participate in the
phased launch of CTFs which may be as early as January 2005.
10. The following section puts forward the
ABI's views on the key outstanding design issues which have not
yet been decided.
THE APPLICATION
AND LEVEL
OF ANY
CHARGE CAP
11. The Government has stated that it wants
to make sure that the charge cap for the CTF is set at a level
which represents good value for money for consumers but which
also enables efficient providers to make adequate returns. The
ABI concurs with this goal. We have therefore welcomed the appointment
of Deloitte and Touche to conduct independent research on price
caps for the CTF, as the imposition of any price cap must be based
on a thorough analysis of the economics of offering the product.
If the charge cap is too low to allow for a commercial return,
providers may be unlikely to enter the market, or they may find
it difficult to devote their efforts to encouraging take-up and
contributions from those at whom the CTF is explicitly targeted.
THE ADMINISTRATION
OF THE
ACCOUNT AND
THE SALES
REGIME
12. Another, perhaps complementary, means
of ensuring value for money for consumers would be to focus on
making the CTF so simple that costs are kept to an absolute minimum.
A simple product sold through the simplest possible process would:
— help the economics of delivery;
— offer the best way to engage with
the vast majority of consumers who are put-off by complicated
products which require advice; and
— ensure that consumers have access
to products which represent good value for money.
13. To allow the CTF to be delivered in
an extremely cost-effective way the costs involved in offering
the product must be reduced. In this regard there are important
lessons to be learned from other financial products. Some of the
typical cost components involved in offering a product include:
— distribution costs including advice
to customers where necessary;
— marketing costs involved in promoting
the product;
— set up costs, which represent the
one-off cost involved in setting up systems and developing procedures
to process the new business;
— compliance costs generated by the
need to comply with anti-money laundering and other regulatory
requirements;
— costs associated with annual account
maintenance, which includes sending out statements, handling enquiries
from policyholders and meeting Inland Revenue requirements;
— transaction costs for receiving and
administering payments in;
— transfer costs associated with processing
switches from other providers and the administration involved
in arranging transfers out;
— fund management costs for the expense
incurred for investments; and
— termination expenses including receipt
and processing of requests, compliance with legal requirements,
realisation of funds, payment of policy and updating of records.
14. For stakeholder pensions, for example,
ABI work shows an annual fund charge of 1% is needed on a monthly
premium of around £150—or 2% if the premium were only
£80pcm—simply to meet those costs, which are substantially
influenced by legislation and regulatory requirements. [2]
15. The CTF offers an opportunity for much
lower costs per account than stakeholder pensions. Yet, capped
at just £100 per month, contributions are likely to be much
lower than to a pension. So it is even more vital that Government,
the regulator and the industry work together to design the CTF
so that costs are minimised. Each area of the sales regime and
administration of the account needs to be scrutinised to establish
the minimum activity needed to give the customer good service
and to ensure that legislative and regulatory requirements do
not add unnecessarily to the costs.
16. One minor example may help to ilustrate
the way that additional and unnecessary costs may be imposed which
deliver no obvious benefit to the consumer. Box 6.1 of the "Detailed
proposals for the Child Trust Fund" describes the process
for opening a CTF account, with Step 3 stating "on receipt
(and retention) of the voucher the provider opens an account".
This negates the possibility of providers keeping costs to an
absolute minimum by enabling parents to open CTF accounts by more
cost-effective and customer-friendly means—eg over the telephone
or on the internet. The requirement to collect the vouchers means
that even if such methods are used to register an account, it
cannot be authorised unless the voucher is physically sent to
the provider. This, in turn, creates additional administrative
complexities (and associated costs) for providers who must (i)
make sure that the voucher has been received; (ii) chase individuals
who fail to send it in; (iii) cancel accounts where the voucher
is never received; (iv) store the vouchers for no discernible
purpose. Although a very minor example, such requirements make
it more difficult for providers to operate efficiently and offer
consumers value for money. Moreover, such requirements may also
have an adverse effect on take-up, given that it is generally
true that the more complex the procedure to open an account the
higher the drop-off rate.
17. If the Government gets the sales regime
right, then that should also greatly reduce distribution costs.
We were encouraged to note that Government has stated that "the
Sandler philosophy of tight product regulation leading to reduced
regulation of the sales process could lead to lower up-front marketing
and distribution costs".[3]
We understand that the Financial Services Authority (FSA) is to
conduct research into this area, alongside its work into the sales
regime for other stakeholder products. We welcome the investigation
to determine the most appropriate methods for accessing a CTF
account but would point to a number of factors unique to the CTF
which we believe should result in a light-touch sales regime;
lighter even than that for other stakeholder products.
18. Firstly, the CTF is a universal account.
Every parent must open a CTF account on behalf of their child
or they will have one opened for them. The mandatory nature of
the product suggests that conventional notions of a "sales
regime" are not applicable. The question is not "should
one invest in a CTF?" but "where should one invest
in a CTF?". Moreover, Government donates the initial endowment
so an individual's competing financial priorities do not need
to be considered. Questions around the type of CTF would obviously
remain but we would suggest that it would be sufficient for an
individual to identify the appropriate CTF through answering a
small number of filter questions, relating to attitude to risk.
19. If the Government is keen for all families
to benefit from the potential higher returns that might be achieved
through equity investments these questions will need to be carefully
framed. Additional information and/or advice may be necessary
for individuals who choose to invest in anything other than the
stakeholder CTF account.
20. Secondly, we come to the issue of the
regulation of additional contributions from relatives and friends.
The Government "is keen that families...should play an active
part in building the accounts themselves" and has demonstrated
the major impact that additional contributions can have on the
final size of the CTF account. [4]The
ABI views additional contributions as critical to the success
of the CTF, and we analyse the major impact they can have in more
detail below.
21. To encourage additional contributions
to flow into CTF accounts, the means of contributing must be simple,
straightforward and readily accessible to all sections of society.
For these reasons we are attracted to the potential offered by
the idea of "tokens" which could be bought in the same
way as book or phone tokens from high street outlets, newsagents
etc. Yet such a system is incompatible with the imposition of
a rigorous sales regime—for example, there is no scope to
determine whether the individual concerned would be better served
putting the money in a cash ISA rather than putting it in to a
child's CTF. Perhaps some form of "Financial Health Warnings"
to be included with the token could alert people to other, potentially
more important, financial priorities. In addition, one other potential
stumbling block is that CTF accounts will be owned by the child
and be in the child's name so it is not clear how the FSA might
attempt to regulate people making gifts to children.
ENCOURAGING ADDITIONAL
CONTRIBUTIONS
22. As mentioned above, additional contributions
are vital to make a real difference to the size of the final CTF
account. The initial Government contribution, to be paid at the
birth of the child, will kick-start the CTF and the additional
Government contribution to be paid at age seven will rekindle
interest. But for the CTF to make a real difference to a young
adult's life chances, additional contributions from parents and
relatives are vital and should be encouraged. The stark difference
that even relatively small additional contributions can make is
shown by the fact that a Government contribution of £500
would produce a fund worth only £900 in today's prices at
age 18. Yet a modest additional contribution of £10 per month
from parents would boost this figure to £5,000 (or £2,800
in today's prices).
23. To further illustrate the profound effect
of additional contributions, a child who receives the lower endowment
from Government (£250) but whose parents pay their Child
Benefit into the CTF might look forward to receiving a fund in
the region of £19,000 in today's prices. Table 1 below
gives further details. The large difference that can be made by
saving even a proportion of Child Benefit in a CTF suggests that
the link between the two should be solidified and it should be
possible for parents to automatically divert a proportion of their
Child Benefit straight into their child's CTF account.
Table 1
PROJECTED CHILD TRUST FUND VALUES AT AGE
18
£, today's prices
| Balanced fund |
| Parental contribution (per month) |
Government contribution |
| £250 | £500
|
| £0 | £452 | £904
|
| £10 | £2,791 |
£3,243 |
| Child Benefit (£63) | £19,221
| £19,673 |
| | |
NB: fund growth assumed 7% pa, AMC assumed 1% pa
24. It is encouraging that already people appear to be
keen to contribute to their child's CTF account. Research conducted
by YouGov for the ABI in September 2003 revealed that 82% of parents
would contribute to their child's Fund. This includes 75% of those
parents who do not currently save for their children. The poll
showed that 6% would pay in the maximum amount allowed, 55% would
pay in regular amounts each month and 21% would contribute occasionally
or annually. To harness this enthusiasm, it must be as simple
as possible for family's relatives and friends to contribute.
25. Rather than unnecessarily restricting parents' contributions
to their child's CTF account to £1,200 per year—a limit
which is unlikely to produce a fund large enough to cover the
costs of university fees[5]—it
may be preferable for Government to extend the contribution limit
to £3,000, in line with the annual limits for a cash Mini
ISA (which is available to young adults aged 16). Alternatively,
a simple, easily understandable incentive (eg matching up to a
prescribed limit) with which all consumers (including those on
lower incomes) are well acquainted might encourage all parents
to give serious consideration to making regular additional contributions
and, in so doing, help foster a savings habit.
26. Of course, additional contributions not only boost
the final lump sum that the young adult will receive at age 18
but also help the economics of delivering the CTF, assisting in
the creation of a vibrant market which will ultimately benefit
the consumer.
27. While we recognise that Government were faced with
a difficult choice in deciding on a specific date from which children
would receive a CTF account, we consider that children born before
1 September 2002 are being unnecessarily excluded from the benefits
of the CTF. Even if the Exchequer rejects extending the distribution
of the Government endowment to more children, we consider that
a strong case can be made for extending the CTF regime so that
parents could open a CTF account in their child's name even if
they did not receive Government money. With regard to this issue,
the Government merely states "some parents may also want
to open savings accounts for children who do not qualify for CTF
accounts. There is a wide range of accounts on the market for
children and in most cases the income will be free of tax".[6]
Yet, as we understand it, outside of the CTF parents can invest
up to only £25 per month on a tax-free basis (from income
tax and capital gains tax). Introducing the CTF necessitates the
adoption of an arbitrary date after which children will receive
CTF accounts. Children born before that date will be penalised
as they will not receive the Government endowment. They should
not be doubly penalised through an unnecessary restriction on
their parents' ability to save for them in a tax-free environment
which is available to those born after 1 September 2002.
28. To recap, it is clear that additional contributions
are vital to allow young adults the opportunity to accumulate
funds large enough to make a real difference to their life chances.
Such contributions also enable providers to better cover the costs
involved in offering CTFs, enabling them to provide a better service
to the consumer. So it makes sense to facilitate, and encourage,
parents and other family members to make additional contributions.
HIGH-PROFILE
GOVERNMENT-BACKED
ADVERTISING CAMPAIGN
29. If the product and regulatory details are set appropriately,
we should witness the creation of a vibrant market. But for the
CTF to bring about a new savings culture, additional ingredients
are required. The Government has undertaken to launch the CTF
with an advertising campaign, and this is to be welcomed, though
there may be a need for the campaign to be sustained over a suitably
long timeframe. Co-ordination of this initiative with marketing
efforts undertaken by providers should help to ensure a high awareness
of the product.
30. Such an advertising campaign is likely to prompt
a multitude of questions and queries. Government needs to be ready
to provide this information, and the development of a dedicated
CTF website will help in this regard. Yet if Government is keen
to achieve high penetration among those on lower incomes there
may be a need for a supplementary CTF helpline to enable those
without internet access to request information. As well as the
creation of new resources, the Government must also ensure that
those who deal with parents and children (eg health visitors,
nursing staff) are sufficiently aware of the CTF, its aims, eligibility,
means of applying etc. The Government's proposals for Inland Revenue
awareness-raising roadshows are a step in the right direction.
A LONG-TERM
STRATETY TO
BUILD FINANCIAL
EDUCATION
31. CTFs will furnish young adults with a pot of assets
at age 18, but they also offer the potential to meet social policy
goals, in terms of the provision of personally relevant financial
education. Cleary, there is a wish for such education, with nearly
9 out of 10 adults agreeing that there is a need for more education
and training in financial matters. [7]To
make the most of the opportunities presented by the CTF, we need
a long-term strategy to build financial awareness among both children
and their parents. To achieve this, it will be imperative that
Government works closely with the FSA as they discharge their
statutory objective to promote the public understanding of the
financial system.
32. Government has stated that CTF-related learning will
build on existing practice in schools, and has undertaken to produce
a range of teaching and learning resources which will assist in
teaching children about different aspects of finance. Support
for teachers in this endeavour is essential, and we are pleased
to learn that Government will consult with organisations which
carry out valuable work such as PFEG (Personal Finance Education
Group) in order to produce relevant information.
33. However, we would suggest that there should be a
step-change in the approach to teaching financial education in
schools, tied in to the introduction of CTFs. At present, 6 out
of 10 adults (59%) feel that their education did not sufficiently
prepare them to deal with their personal finances. [8]So
more needs to be done. We would suggest that careful consideration
be given to take advantage of the interest generated by the CTF
and making financial education a statutory part of the National
Curriculum. It is clear that there is a great cross-generational
appetite for such an approach, with 85% of 15-19 year olds stating
that they would like to receive personal finance education in
school, with 78% of grandparents agreeing, and more than 80% wanting
it to be examined and compulsory. [9]
CONCLUSION
34. The proposals for the CTF are ground-breaking. They
offer the potential of furnishing every 18 year old with a sizeable
sum of assets while creating a more financially aware generation,
one which is aware of the need to save and which is suitably empowered
to identify their needs and take decisions to buy appropriate
financial products.
35. Government, the regulators and providers must not
dash the hopes for the long-term effects of the CTF by over-engineering
the product. Complicated products are more costly to produce,
sell and regulate and put people off, particularly less financially
sophisticated consumers. A simple CTF which is easily understandable
to the general population and which can be sold with a minimum
of regulation offers the best hope of enabling the CTF to achieve
its potential and playing a leading role in the creation of a
nation of informed and empowered consumers.
November 2003
1
According to the Institute of Financial Services (IFS), poor
financial literacy standards cost the UK more than £2 billion
every year. Back
2
ABI Response to HM Treasury Consultation on Sandler Products,
May 2003, p27. Back
3
Detailed proposals for the Child Trust Fund, HMT, October
2003, p31. Back
4
Detailed proposals for the Child Trust Fund, HMT, October
2003, p11. Back
5
Source: National Union of Students Press Pack 2002-03.
Estimated average expenditure (for students resident in England
and Wales and studying outside of London) of £7,317 for academic
year 2002-03, including tuition fees at a maximum of £1,100,
assuming inflation at 2.5% a year for three years (September 2002). Back
6
Detailed proposals for the Child Trust Fund, HMT, October
2003, p16. Back
7
"Prudential's new Financial Literacy Survey reveals overwhelming
need for a National Financial education Strategy", Press
Release, 13 October 2003. Back
8
ibid. Back
9
"AITC finds overwhelming enthusiasm for personal finance
education at school", Press Release, 27 August 2003. Back
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