Memorandum submitted by Mr Stephen Wynn
1. INTRODUCTION
The introduction of new products such as Child
Trust Funds can have embarrassing outcomes. For example in the
case of personal pensions there was the mis-selling scandal. In
the case of stakeholder pensions, 82% of employer-designated schemes
have no members. There are problems with split capital investment
trusts, mortgage endowments and so on.
It seems surprising that the report of the Treasury
Detailed proposals for the Child Trust Fund (2003), makes
no mention of "trustees" or different kinds of trust.
More generally the Government is seeking to build trust in the
market. For example in the green paper Simplicity security
and choice: Working and saving for retirement (2002) there
is a heading Building trust in the market (page 79). But judging
from the number of problems, the market does not want to build
trust in the Government.
The introduction of CTFs is an opportunity to
set up a scheme run by a new institution as an alternative to
this market approach, where providers compete to sell "products".
These providers are in business mainly to make money for themselves
rather than for investors.
2. DISCLOSED
CHARGES
The Treasury report says: "The CTF can
be wrapped around a variety of products such as cash, unit trusts
or life insurance products." (3.13). There could apparently
be all sorts of products with no restriction on charges and a
poor investment performance. There could be headlines such as:
"Zurich Life stole my baby bond." by analogy with: "Zurich
Life stole my pension." (www.badpension.com).
There will be "stakeholder CTF accounts"
(3.14) which will have a cap on explicit charges. But not all
CTF accounts will be "stakeholder accounts" (3.19).
The stakeholder CTF accounts will be rather like CAT standards
for ISAs. But only a minority, and apparently small minority,
of ISAs have the CAT mark.
People are being required to negotiate charges
individually with the financial services industry using taxpayers'
money. Investors get a better deal where negotiation is on a collective
rather than individual basis.
The Consumers' Association has recently publish
a report Blueprint for a national pension policy, Restoring
confidence and trust in pensions (2003) saying that as a method
of providing pensions, the retail model where millions of people
are left to negotiate individually with pension companies simply
does not work. Why should the retail model be any more suitable
in the case of CTFs? Individuals are at a disadvantage in negotiations
in comparison to groups. This is the reason for example for "share
classes" discussed by Fitzrovia on its website (www.fitzrovia.com):
"There is a rapid movement by many fund
management companies towards the creation of new share classes.
This allows the segmentation of retail and institutional investors.
Institutional classes have lower fees and a better track record
of performance."
In the US an example of discrimination in favour
of institutional shareholders is the current mutual fund late
trading scandal—giving preferential treatment to the largest
customers.
But Government policy seems to favour saving
on an individual basis. In its report Standards for retail
financial products (2001) the Treasury states:
"In the modern world people will increasingly
need to look after their own financial interests for themselves."
(paragraph 15)
3. UNDISCLOSED
CHARGES
The occasional paper of the FSA To switch
or not to switch that's the question: An analysis of the potential
gains of switching pension provider (2002) by Isaac Alfon,
states that personal pensions "tend to have high portfolio
turnover and high undisclosed charges" (page 16, footnote
20). Will CTFs also have high portfolio turnover and high undisclosed
charges? What is to prevent this? Undisclosed charges are not
mentioned in the above report of the Treasury. They are mentioned
in FSA publications, such as the report Comparative Tables
(May 2001), which discusses CAT standards for ISAs:
"On average, disclosed charges are about
1.4% of the funds under management each year, but disclosed charges
on a CAT-marked product are capped at 1%. . . . reduce the amount
they pay for annual charges by an average of 0.4 percentage points."
(paragraph 55) . . . "We assume here that undisclosed charges
remain constant." (footnote 15)
Contradicting the FSA, the Treasury says on
its website (eg www.hm-treasury.gov.uk/documents/financial-services/savings/fin-sav-maksum.cfm),
that ISAs with CAT standards have "no hidden charges"
and "no hidden costs".
The Treasury Committee starts the Conclusions
and Recommendations in its report Split Capital Investment
Trusts[5]:
"We believe that transparency in all aspects
of the charges borne by shareholders should be paramount".
In the case of stakeholder CTFs will parents
and guardians be told: "There are no hidden costs".
Or will they be told as in the DWP publication Stakeholder Pensions—your
guide:
"As well as the one per cent, the law allows
pension providers to recover costs and charges they have to pay
for certain other things. For example, when they have to pay any
stamp duty or other charges for buying and selling investments
for your fund, or for particular circumstances . . . " (page
6)
The FSA states in its 2002/3 Annual Report:
"The main economic justifications for financial
regulation are information asymmetry and externality."
High undisclosed charges are associated with
high portfolio turnover. Nevertheless the FSA says in its consultation
paper (CP 170):
"We have decided that we will not bring
forward proposals to require disclosure of portfolio turnover."
(5.81)
Fitzrovia (www.fitzrovia.com) have published
a 234 report Portfolio Turnover of UK Funds (2002) giving
the portfolio turnover of unit trusts and OEICS.
Many people think that portfolio turnover should
be disclosed. The Investors Association has written an open letter
to the Minister Ruth Kelly on this topic with a copy to your Committee.
There is a large literature indicating that
low portfolio turnover is beneficial for investors. I can supply
further information on this topic. A Google search on "portfolio
turnover" produces 235 thousand websites. Hidden costs are
often higher than explicit charges. For example, Kathryn Cooper
writing in the Sunday Times "Revealed: true cost
of stakeholder" (20 May 2001) reports that the FSA says
that stakeholder pensions could have 1.3% of capital per annum
of hidden charges:
"The Financial Services Authority, the City
regulator, says dealing costs and stamp duty could add up to an
extra 1.3% a year, which means that pension savers could in effect
pay 2.3%.
Portfolio turnover should be disclosed in key
features documents so that parents and guardians choose funds
with low turnover to minimise hidden costs. But then at the stressful
time of having a baby parents cannot be expected to address the
issue of portfolio turnover. CTFs are a "charter for churners"
(www.comparativetables.com).
However the Treasury does think that the trustees
of occupational pension schemes should know about dealing costs,
especially in view of the recommendations of the Myners Review.
On the Treasury website it says:
"Trustees, or those to whom they have delegated
the task, should have a full understanding of the transaction-related
costs they incur, including commissions."
A national scheme run by a new organisation
would be able to have trustees or staff who can look after dealing
costs.
4. HOW ARE
THE CHILD
TRUST FUNDS
TO BE
NUMBERED?
The Treasury report says that the CTFs will
have:
"A unique reference number possibly using
the same format as the NI number." (6.2)
The "unique reference number" could
actually be the NI number—if NI numbers serve as identity
numbers given to people at birth, as suggested in the recent green
paper of the Treasury on entitlement/identity cards. It is proposed
that CTFs should also have a "provider reference number"
(6.29). Why is there a need for more than one reference number?
Are parents or guardians to be expected to remember or keep a
record of these numbers? What happens if they have lost them?
Will knowing the name of the provider be adequate? People can
be expected to remember their identity number.
Since babies have only one CTF, if identity
numbers are introduced which are given at birth, then the unique
reference number should surely be this identity number. Numbers
on products such as ISAs sometimes change which causes confusion
for investors and executors, and may be a reason for the large
quantity of unclaimed assets.
NI numbers should arguably be put on all financial
products. They are generally not included on life insurance products.
All financial products should contain full name, date of birth,
NI number. Suppose a provider has lost contact with a CTF holder
and wants to contact them when they reach the age of 18. The Letter
Forwarding Service of the DWP says that NI numbers are "very
useful" for forwarding letters, although name and date of
birth may be adequate. Since NI numbers are already used extensively
for identity purposes, they should surely be the same as the new
identity number proposed by the Home Office.
Someone may have lost the whereabouts of their
CTF, and forgotten the name of the provider when they reach age
18. They will not be able to claim unless they can enquire at
the register of all CTFs with this information, or the provider
contacts them.
5. THE REGISTER
OF CHILD
TRUST FUNDS
Since the Government pays into CTF accounts
it seems clear that the Inland Revenue will have a register containing
a) name, b) date of birth, c) identity or unique reference number,
d) name of the provider of the CTF account.
The Treasury report says:
"When a child holding a CTF dies the parents
of the child will notify the provider." (6.15).
But they might not. The Revenue should know
if CTF account holders die and could inform the respective providers.
More generally the main reason for unclaimed
assets seems to be financial institutions not knowing when people
die. The Inland Revenue knows when people die and apparently informs
occupational pension schemes but not, for example, insurance companies.
The Letter Forwarding Service can apparently
not at present be used to trace relatives of people who have died,
since it does not forward letters to the deceased. It could be
required to do so, at least for people who have recently died,
as a way of contacting relatives.
Insurance companies could be informed when people
die using NI numbers, if they were on insurance policies.
6. "DIVERSITY
OF PREFERENCES"
Under the heading "Other CTF account preferences"
the Treasury report says:
"The Government recognises the diversity
of preferences amongst the population. . . . For instance some
consumers prefer to invest in ethical funds or investments compatible
with their religious beliefs and the Government would welcome
CTF providers including such CTF products in their range."
(3.19)
Since these other CTF accounts do not have capped
explicit charges, it seems that people with certain ethical and
religious beliefs will have to pay extra!
The report of the Sandler review complains about
the "proliferation of products and product differentiation
that does not reflect true differences in what is being offered"
(3.13) suggesting that a large choice of products is largely an
unhelpful dilemma. Surely all babies are alike? Those babies with
the more astute parents are likely to make a better choice of
CTF. Is this fair?
Perhaps parents would like the option of paying
only £2 per annum in expenses like the Danish ATP scheme
(www.atp.dk). In the year 2002:
"Pension activity costs were recorded at
DKK 27 (about £2) for each member, while investment activity
costs were DKK 16 per member."
But then this is apparently not on offer. They
are instead to be offered a large choice of relatively expensive
"products" from "providers".
A reason why the Danish scheme is inexpensive
is that it is compulsory. So is the CTF scheme. An advantage of
compulsion is that in theory it eliminates marketing costs. But
the CTF scheme will have compulsion and nevertheless have marketing
costs.
If a new organisation was set up to manage CTFs,
there would be no need to issue vouchers which parents then take
to providers. Funds would be paid directly to the new organisation.
CTFs could be accessed through Post Offices.
7. ENCOURAGING
SAVING
The CTF scheme is intended to encourage saving.
CTF accounts will need to be easily accessible such as at Post
Offices. People should not for example need to write to an insurance
company every time they wish to make a deposit. There will be
"a wide range of providers" (1.12). Will they all provide
easy access to the CTFs?
Tokens are suggested as a way of encouraging
saving. (4.5) But surely children and teenagers are too likely
to lose them.
Will we know whether CTFs encourage saving or
not? Will statistics be collected of the amount of additional
contributions into the accounts?
The Treasury report states that the CTF:
"will ensure that in future all children
will have a financial asset at the start of their adult live"
(1.6)
But how much? Will we know about the overall
investment performance of the accounts? The FSA has been reluctant
to monitor investment performance.
8. CONCLUSION
The CTF proposals will result in hundreds of
thousands of people per annum negotiating charges individually
with financial institutions. Probably only a minority of CTFs
will be stakeholder CTFs in the same way that only a minority
of ISAs are CAT-marked ISAs. Most will have explicit charges not
restricted by the 1% cap. There will in addition be undisclosed
charges.
I am not opposed to encouraging saving and accumulating
assets, but have misgivings about the CTFs as proposed because:
they present parents with the dilemma of choosing a provider and
type of account; probable high and hidden charges for many CTFs;
possible inconvenience of making deposits for some CTFs; some
CTFs might become unclaimed assets.
The alternative to individually negotiated contracts
is to set up a new national scheme run by a new organisation.
This would look after the CTF accounts and make investments.
There has been a consultation about CTFs with
responses discussed in the report of the Treasury Delivering
Saving and Assets consultation responses (November 2001).
There is a general problem with such consultations. When there
is an analysis of the responses we are not told who are the respondents,
most of whom are generally from the industry. For example under
A3 in the Treasury report it says "over half of the responses
were in favour of progressivity". Carrying out the wishes
of the majority is then carrying out the wishes of the industry.
This is a feature of FSA consultations, which in my opinion makes
them largely invalid.
4 November 2003
5 Third Report HC 418-I Session 2002-03. Back
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