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Lord McIntosh of Haringey moved Amendment No. 33:
- Page 4, line 21, leave out subsection (6).
On Question, amendment agreed to.
Clause 5, as amended, agreed to.
[Amendments Nos. 35 to 37 not moved.]
Clause 6 [Opening by Inland Revenue]:
Lord Newby moved Amendment No. 38:
- Page 4, line 26, leave out "a description so selected" and insert "one of the descriptions prescribed by regulations"
The noble Lord said: This amendment brings us back to an issue that we debated in our first day in Committee—the Government's view that the equity-based child trust fund is a superior vehicle in all circumstances. The purpose of this amendment is to give the Government discretion to invest child trust fund money in accounts other than equity-based stakeholder accounts if the circumstances are such that that makes best financial sense.
We have already had a debate about the fact that equities have outperformed deposits in every 18-year period over the past 100 years. However, I should like to take a slightly different case. The Government are not just going to be putting funds into child trust funds at age zero; they will also be putting funds into child trust funds at age seven. With the plans for "lifestyling", the balance of the fund will in any event shift in the later years out of equities and no doubt into bonds. So if one puts money into an equity-based trust fund at age seven, that fund will not be wholly in equities for 18 years. It will not even be held in equities for 11 years. It will be in equities for a significantly shorter period. Over such a shorter period, my contention is that it is reasonable to suppose that some people will do very badly.
The example I should like to use is the hypothetical one of the Government having established this process in 1993 and put in a top-up in January 2000. In January 2000, the FTSE 100 index stood at about 6,700. Four years later, it stood, broadly speaking, at 4,500. It had diminished by about 50 per cent.
In January 2004, the child who was seven years old when the money was put into the fund would be aged 11 and, as I understand it, would be within a year or two of the lifestyling provision coming into force. Obviously, we do not know what will happen to the FTSE index over the next year or two. But I do not know anyone who believes that over the next two years the index will go from 4,500 to 6,700, which is the point at which it stood when the money would have been put in in my hypothetical case.
My contention is that only a foolhardy investor would have put money into an equity-based product in January 2000. For the Revenue to be forced to put money into an equity-based product at every point in the stock market cycle, even when there is widespread acceptance that we are at the top of a bubble, seems to be foolhardy. At the very least, the Government should give themselves the flexibility in legislation to direct those funds that they are establishing away from equities into a deposit-based child trust fund when market circumstances suggest that investing in equities is foolish. I beg to move.
Lord McIntosh of Haringey: I am not in a position to query the particular example given by the noble Lord, Lord Newby. Clearly he has done his homework. But he is talking about a rather extreme case, of the difference between ages seven and 11. He then said that there would be two years before the lifestyling provisions came into force when the child was 13. For the sake of argument, I shall accept his figures, but that does not deny the fact that the final judgment would be taken only at age 18. Most of the money will be invested at the beginning or spread out over the whole of the 18-year period. With a little ingenuity, if one can find one exception to the rule, that does not really cast very much doubt on the principle behind it; namely, that we want to provide the best possible value to all consumers.
The proposals follow the way in which we have introduced stakeholder investment products. Of course, more money can be put into equity ISAs than can be put into cash or insurance ISAs. Generally, I think that all parties have accepted that that is the right way to encourage equity investment.
Even in the particular case raised by the noble Lord, Lord Newby, it is a bit much to describe the investor as foolhardy. The investor might have been mistaken, but we have all done it. We are all in that position. I would rather be called mistaken than foolhardy because I did not anticipate what, in fact, no one anticipated.
Lord Naseby: The Minister is too modest. He will have reflected that the providers operating in this market will, one hopes, have recognised the situation in January 2000 and moved into high-yielding equities
which by any yardstick would have been better than a deposit account at the time of about—I do not remember—1 per cent.
Lord McIntosh of Haringey: I am grateful for that support. And I am not usually called too modest. The point is that the stakeholder account has been selected as the most appropriate type to open for children where the Revenue needs to open an account for them. That is the important point. This is an amendment to Clause 5, which is a particular subset of child trust fund accounts.
Under the amendment, the Revenue—not the parent or responsible adult—would have to make a decision about which account to open. On what basis would the Revenue be making a decision? One can see the basis on which parents or responsible adults can make different decisions, but I cannot quite see what criteria would apply. It could mean that very different types of accounts are opened for children about whom the Revenue, by definition, knows nothing.
So the allocation of accounts by the Revenue is done by selecting the next provider of these accounts in rotation from the list. Providing for these children to have very different kinds of accounts opened for them by the Revenue by rotating through the providers and the types of accounts being offered would turn the whole thing into a lottery. I do not think that that is what the noble Lord, Lord Newby, would want.
I suggest that, in the light of the potential for children to be provided with less tightly specified accounts and the questions that arise over their potential to deliver the best returns over the long term, thus providing good value for money if they are not subject to the charge cap, means that I hope that the amendment will not be pressed today and, further, will not be brought back.
4.15 p.m.
Lord Newby: I am grateful to the Minister for that detailed reply. He has outlined a fascinating concept. Parents with varying degrees of financial literacy will be able to exercise judgment, but the Revenue will not be able to do so. That is a new one on me. I can only assume that what the Government really have in mind here is the fourth of their requirements for child trust funds; namely, that they will help to finance the education of the children involved, who may well find that their funds are worth significantly less than they might have envisaged. In effect, this may prove to be a costly demonstration of the fact that equities may go up and, equally, they sometimes go down. I shall not press the amendment, but beg leave to withdraw it.
Amendment, by leave, withdrawn.
Baroness Wilcox moved Amendment No. 40:
- Page 4, line 40, at end insert ", or
The noble Baroness said: In moving Amendment No. 40 I shall speak also to Amendment No. 41. The purpose of these amendments is to probe how
The amendments are probing in nature and are designed to find out how accounts will be opened for the children of children. They are alternative amendments dealing with the position of parents who are "responsible persons" aged under 16 years and under 18 years respectively. I believe that, under Clause 6, the Inland Revenue must wait until one year has passed before an account is opened for the child of a child. That is how Clause 6(5) appears to be constructed. I can see no reason for the one-year delay and the loss of compound return because, according to the regulations, it is impossible for a child responsible for a child to open the account. They have to rely on the Inland Revenue.
The amendments would require the Revenue to open the account without waiting for one year. I believe that the Government have accepted that 16 and 17 year-old parents can open accounts—we discussed that point on our previous day in Committee. However, there appears to be no alternative for under-age parents to open an account other than by waiting for one year. In that case, I hope that Amendment No. 40 will commend itself to the Government. I beg to move.
Lord McIntosh of Haringey: The first amendment would require the Inland Revenue to open a child trust fund account where the child is under 16 and the person with parental responsibility is also under 16. In fact, the Bill already provides in Clause 6(5)(b) for the Revenue to open a child trust fund account for a child whose parents are aged under 16. That is because a person aged under 16 cannot act as a responsible person for the child trust fund. The amendment, therefore, is already covered by the provisions in the Bill.
The Revenue cannot open an account for children with parents aged under 16 automatically, which is what the amendment would require, because it will not know from child benefit claimant details whether or not there is a person who can act as a responsible person for the child's account. Where there is a person who is able to exercise the parental responsibility in this way, we want that person rather than the Revenue to have the opportunity to take an active role in the choice and management of the child trust fund account. In other words, if a grandparent can assume the role, that can be done; or it can be done by the Revenue. However, we can deal with this on a case-by-case basis. The amendment would prevent us from doing so. But if there is no one who can act as a responsible adult, parents can contact the Inland Revenue when they receive a voucher so that the account can be opened for the child as soon as possible—again, there is no question of having to wait for a year.
The information pack will make it clear that when there is no one with parental responsibility aged 16 or above, all that will be required is a simple telephone call to the Inland Revenue to arrange for an account to be opened. Parents under 16 will be able to change the account type or the account provider, if that is what they desire, as soon as they turn 16.
The second amendment would require the Inland Revenue to open a child trust fund account where the child is under 16 and the parents are under 18. I do not understand why we need the intervention of the Inland Revenue here, because parents of 16 and over are able to open a child trust fund account for their child. That is covered in Clause 3(10). I really do not understand why the two amendments are tabled together. I trust that on that basis the amendments will not be pressed.
( ) the child is under 16 and the responsible person in relation to the child is also under 16."
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