| Child Trust Funds Bill
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Mr. Michael Jabez Foster (Hastings and Rye) (Lab): Despite the eloquence of the argument of the hon. Member for Tatton and his campaign for those financial institutions, I think that the amendment is unnecessary, and I hope that the Minister will not be persuaded by it. This is a market issue. Some organisations have said that they will not take part, and that is well and good, because others will take part at the 1 per cent. that the Government initially suggested. I hope that the Minister will not be persuaded that a higher charge is required. I say that for a number of reasons. First, this is a simple product; it does not require lots of those glossy brochures, which we get in our post, that persuade us to invest in all sorts of things. All that is required is something simple. When people get Sainsbury's Nectar vouchers, they understand that they should spend them; they do not do nothing with them. I suspect that families of all social classes and groups will do something with their child trust fund voucher when it is posted to them. If not, the Bill makes provision for something to be done on the child's behalf. The costs will therefore be low. Mr. Osborne: The hon. Gentleman is focusing only on the setting-up of the account. What I am talking about, and what I am sure he wants to see, is parents and other relatives making regular contributions to child trust funds so that they build up during a child's life. I do not think that anyone on the Committee wants there to be millions of accounts worth £900 to the holder at the age of 18 because no one has put any money into them. If such contributions are to happen, financial providers will have to send that glossy literature that the hon. Gentleman talked about. Mr. Foster: I understand the hon. Gentleman's point, but that would not add significantly to the costs. Certainly, we want people to make regular payments so that the funds build up. However, as they do, the 1 per cent. charge would be levied not on £250 or £500, but on the total value each year. Assuming a 4 per cent. rate of return, which would not be unusual at present, a quarter of that total return would be taken in charges to pay the costs, and if the charge were as great as 2 per cent., half the return would be going in charges. That would be wholly unacceptable; we might as well not have the scheme at all but just send out the voucher. For the reasons that I have given, I hope that the Government will hold firm to the lowest possible cost and test the market. If the market says no, then of course we must think again. However, I am pretty confident that 1 per cent. will be sufficient. Mr. David Laws (Yeovil) (LD): I, too, welcome you to the Chair, Mr. Amess. We should be grateful to the hon. Member for Tatton for tabling the amendment and provoking a debate on a key issue. We should also be grateful to him for explaining the scientific process by which he arrived at the figure of 1.5 per cent., which we could term ''splitting the difference''. I have a degree of sympathy with the Government. It is immensely difficult to calculate a charge or charge cap that would strike precisely the right balance Column Number: 50 between the interests of those owning the trust fund accounts and the providers, who will utilise the accounts and make sure that they earn high returns for the investor. We should approach with some scepticism the representations made by the commercial entities involved in the consultation. I say that as one who used to work in the financial services industry. After all, it is the job of those entities to make sure that they get the best deal out of the Government scheme. They therefore have a clear commercial interest in arguing for the charge to be as high as possible.We should approach with appropriate scepticism the claims, which a number of institutions are making, that they would not take up the scheme at all. One suspects that there will be a lot of spin-off benefits to financial institutions that get people to open child trust funds with them. Those funds are bound to offer future cross-selling opportunities, for products for which financial institutions have offered people incentives in the past. The hon. Gentleman makes a particularly important point in saying that it is difficult to make a judgment about the right level for the charge cap without understanding all the other elements of the Bill. We are still waiting for the regulations on many of those elements. The right level for the charge cap will depend on various administrative and other costs and on Government proposals on transfers. All those issues will have implications for the costs of running the accounts, so it is genuinely regrettable that the Government have not come forward with a figure. I notice that the Financial Secretary is nodding enthusiastically, so perhaps she is about to reveal herself to us and give us the figure. The fact that we do not have the figure makes it doubly difficult for us to say anything intelligent about the appropriate level for the charge cap. We are forced to fall back on the sort of calculation that the hon. Member for Tatton made, which we all chuckled over, but which is probably no better or worse than any other calculation—he is right about that. The issue is particularly important when we consider the substance of the Government's proposals in the Bill, and how much money is likely to be in the accounts as a consequence of the various regulations and detailed measures that the Government are introducing. The Government's consultation paper, published in 2003, contained an illustrative table to show projections for future fund growth. The Financial Secretary will want to confirm that the table used a nominal rate of return of 7 per cent. That gave people the impression not only that it was reasonable to assume such a return, but that there would not necessarily have to be any deduction for charges from that 7 per cent. Since the document was released, the Financial Secretary and others have spoken of the figures that it suggests one would arrive at after 18 years as if they were a legitimate description of the likely outcome, whereas if a charge of 1 per cent., 1.5 per cent. or 2 per cent. were levied, it would have a significant impact on the returns to the account. It Column Number: 51 might also have an impact on the extent to which people should be encouraged to take a large amount of risk with the account.If people took such a risk and, as a consequence, ended up paying a higher charge to financial market providers, that could wipe out any alleged advantage from high returns in the equity market when compared with putting the money on deposit, or in a long-term bond with far lower risks. A substantive issue concerning the returns from child trust funds arises from the assumptions that we make. Another important issue that I hope that the Minister will take particularly seriously, and that the hon. Member for Tatton alluded to, is how far the accounts will be structured so as to help people on low incomes to save. The Minister referred a number of times, when giving evidence to the Treasury Committee, about people on low incomes who might be saving some £5 a month, which is not an unreasonably low amount for people on the very lowest incomes who are reliant on means-tested benefit. It was clearly in the mind of Ministers that people might be saving as little as £5 a month, or £60 a year. The Minister will be aware that many of the financial market providers suggested, in their evidence, that they would not wish to accept monthly deposits of anything less than £20, or in some cases £50. Obviously, that would depend in part on the charge that they levied for administering the account. The implication is that the more small payments are received, the higher the charge that they would want to set. I am concerned that if the charge is set at the wrong level, it could not only erode the yield from the child trust fund accounts in a serious and unnecessary way, but make it difficult for the Government to achieve their objective of encouraging those on very low incomes to use the child trust fund to save. Mr. Osborne: Having been rude about the way that I came up with my calculations, the hon. Gentleman now seems to be coming up with exactly the same numbers. He says that, on the one hand, the charges cannot be too high and, on the other, they cannot be too low. Mr. Laws: I thought that I was extremely generous to the hon. Gentleman, because after teasing him about the back-of-the-envelope method that he used for his calculation, I suggested that that was perhaps the only legitimate way of arriving at a reasonable number, given that the Government have put so little information into the Bill and have left so much to regulations that we do not know, and cannot easily assess, what the cost will be to financial market providers. For all those reasons, I hope that the Financial Secretary will follow through on her enthusiastic nodding at the beginning of my speech, and tell us what she has in mind for the charge cap.
Column Number: 52 3 pmRuth Kelly: I am grateful to the hon. Member for Tatton for setting out the objectives behind the child trust fund, which are to encourage savings, to encourage people to understand the benefit of savings, to make better financial choices and to have the benefit of a financial asset. However, the hon. Gentleman falls in to the trap that is all too common among his hon. Friends: he assumes that an asset that builds up to about £1,000 at the age of 18 is of no material relevance to the average 18-year-old. I strongly dispute that and I remind the Committee that research based on the national child development survey shows that an asset sum of about £300 will have a material impact on a young person's opportunities at the age of 18. We hope that it will also encourage savings and that children will contribute from their own funds and that parents, grandparents and other relatives will do so on the child's behalf, so that the asset builds up to a higher amount. There will be a further Government endowment when the child is seven. Encouraging the level of savings is just one of the objectives of the child trust fund; it is certainly not the only one.
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| ©Parliamentary copyright 2004 | Prepared 6 January 2004 |
