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Savings, debt and assets
Wealth, funding and investment practice

Depleted assets?

In the third of a series of blogs, Tom Clark looks at what worked – and what didn’t – in past experiments to build 'wealth for all'.

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The UK pursues a raft of policies designed to help people build – and hang on to – assets. The total cost to the Exchequer is counted in tens of billions each year, which might sound like a really serious commitment. From the particular angle of this series of blogs, however, the question is how far these efforts further the goal of 'wealth all round', and from that perspective the picture is much less encouraging. Especially when it comes to liquid assets, the existing subsidies are overwhelmingly slanted towards people who already have.  

In the context of pensions and housing too, the big money also goes to the top end, respectively through £40-odd billion a year in tax (and National Insurance) relief on contributions, and the capital gains tax exemption for windfalls arising from the sale of family homes, a break which costs the public coffers £30-odd billion annually. With the recent move to axe the £1 million lifetime cap on pension contributions, and reports that the prime minister is mulling a cut to the inheritance tax that’s exclusively levied on large bequests, the bias of attention towards the already-wealthy looks set to continue.

But in fairness, there is at least some effort in pensions and housing to do something lower down the scale. For all the problems with Right to Buy for council tenants, the avowed aim was making homeowners of people who hadn’t previously owned property, and various other schemes have specifically subsidised first-time buyers. Meanwhile, auto-enrolment into workplace pensions is one of the largest 'nudge' experiments the world has ever seen, and with an emphasis on people on moderate pay.

By contrast, when it comes to those liquid savings, which my previous blog argued are especially important to navigating the challenges of day-to-day life, the British state today does next to nothing for anyone who isn’t already saving. I say 'next to' nothing because there is a Help to Save scheme for low-paid people (on which more below), but the take-up and thus the resources involved are decidedly modest. The big picture suggests political indifference to the near-quarter of the population who have no net financial assets.  

Trawl through the Budget scorecards from 2015 and 2016, and in the same months that chancellor George Osborne was driving through the most stringent of the benefit cut-backs that now leave so many prone to destitution and debt, and you find billions being earmarked to whack up the ISA contribution limit to £20,000 every year, plus a new savings tax band which, with the low interest rates of the day, meant accounts worth hundreds of thousands could sometimes enjoy entirely tax-free returns.

Notionally, there was a progressive tilt to the savings band at the top end – with a claw-back from high earners – but recent Resolution Foundation analysis has established that, in practice, the gains have overwhelmingly gone to people with serious cash in the bank. Factor in the heavily tax-subsidised shares in growing firms that the wealthy can enjoy through the Enterprise Investment Scheme and the slant is even starker.

In sum, the attention – and the resources – are focused on supporting substantial nest eggs, not the creation of the modest rainy-day funds which could do most to smooth the harsh edges of life. The frustrating thing about this position is that, within the last 20 years, the UK was at the forefront of global initiatives for 'assets all round' through the evolving Saving Gateway and most particularly the Child Trust Fund. Which makes it urgent to ask a blunt question: what, exactly, went wrong?

Doomed by design?

Whereas the first blog in this series considered the broad tide of ideas and the fiscal headwinds that turned against so-called 'baby bonds' in the years after the financial crisis of 2008, we now want to examine the particulars of the policy and ask whether something was awry with the design.

That design involved the parents of every baby born from September 2002 receiving a £250 voucher to open a Child Trust Fund account, boosted to £500 for low-income families. The parents had 12 months to invest their voucher, which could be done in a fairly standard savings-type bank account or alternatively in share-based funds, with or without a 'stakeholder' kitemark. This stamp signalled capped management fees and a commitment to move the funds towards cash and lower-risk assets as the child approached adulthood – and the moment they could claim the funds.

For babies of parents who had not got around to investing the voucher by their first birthday, the Government itself would open such a 'stakeholder' share-based fund. Before the whole scheme was phased out in 2010-11, the Government had started on top-up £250 payments for seven-year olds (£500 for families on benefits) and was a mooting further top-up at age 11. On reaching 18, youngsters would come into possession of the funds with no restrictions on their use.

Returns were exempt from both income and capital gains tax, which obviously boosted the funds, but also provided an incentive for parents and grandparents to top them up, which they could initially do up to a relatively modest annual limit of £1,200. Even at this level, this facility revealed some of the tensions inherent in the asset-based agenda. The aims were simultaneously universalist ('every child will have an asset'), progressive ('poorer children will receive a bigger endowment') and supportive of bourgeois thrift ('those who can afford to should be encouraged to invest in giving their child a head start'). The peculiar upshot invited a U-shaped distribution, where children of the worst-off and the better-off had bigger funds, and those of the 'squeezed middle' typically less. Arguably, pursuit of three impulses – all of which pulled the policy is slightly different directions – might have impeded pubic understanding of the purpose, and hence the chance of the initiative becoming 'entrenched'.   

Subsequently, things clarified: both universalism and progressivity have gone, while the fostering of thrift enjoys pre-eminence. All the public contributions have stopped, but the freedom for those families with private money to make such tax-privileged contributions in existing Child Trust Funds and the new Junior ISA, have been ramped up, and now stand at £9,000 per child per year. Nothing better illustrates the shift from supporting 'assets for all' towards simply supporting assets – without being detained by the distributional consequences.

The 'results' that have come in

The formal evaluation by a Bristol University team was published in 2011, a peculiar moment for reaching a judgment not only because the policy had already been killed off, but also because none of its beneficiaries were anywhere close to benefiting: the oldest being just eight at the time. Its emphasis was, inevitably, on the views and behaviour of parents, principally from a consumer experience point of view.

It chalked up some prosaic positives (most parents had found the accounts easy to open), and some snares (instead of becoming empowered investors, half of parents didn’t know what sort of account they’d got, and even more were clueless about how they could switch). The evaluation was downbeat about the effect on saving behaviour, finding little evidence that the policy had made a clear difference, barring odd exceptions such as parents saving relatively more for older siblings who had missed out on a Child Trust Fund – an understandable impulse, but one that did nothing for the policy’s efficacy if that extra saving came at the expense of the sibling in the Trust Fund cohort.

But all of this is a bit 'in the weeds' in terms of the lofty original hopes of a society where every adult starts out with a stake. On that agenda, there was already by 2011 one glimmer of light: with clear statistical evidence that total savings had been boosted for children in rented homes, a group by definition locked out of one of the main sources of family wealth.

Nine years later in 2020, to mark the first of the 'baby bonders' turning 18 and becoming eligible to claim their money, a neat little crunch by the IFS established that median wealth for the 2002/03 birth cohort “was £1,200, compared with just £100 among those born slightly too early”, with over 40% of the latter group having no savings at all. If, as I’ve suggested, having some ready cash available is important for managing life and especially anxiety, this sounds like a meaningful shift.

Back when the policy was being developed, a particular bone of contention concerned the so-called 'Ibiza scenario'. The Treasury resisted all restrictions on the use of the cash as complex and unenforceable, but others suggested that in their absence, that feckless 18-year-olds might grab the sudden drop of funds into their lap to indulge in drug-fuelled parties in the sun.

After the very latest analysis from the National Audit Office (NAO) in March this year, this fear looks upside down. The chief NAO concern in 2023 is less irresponsible splurges than the number of mature accounts being left untouched, a possible sign that a significant proportion of youngsters have simply lost track of their funds. Although it was tough to truly nail down that money was being mislaid, rather than being left alone until needed, the NAO suggested, because the Government itself had ceased to keep adequate tabs on the policy.

Perhaps we should not be so surprised to find something of a problem with forgotten funds. The financial services industry has often prospered through consumer inertia, creaming off fees or interest from funds left dormant in accounts with suboptimal terms. Even though many accounts were administered by non-profits within the industry, its whole culture is unhelpful. If the aim were creating pro-active investors who always know how to get hold of what’s theirs, then relying so heavily on that industry may not have been wise – at least, without extremely strong requirements to keep beneficiaries posted. The NAO also confirmed that, just as expected, private payments were bigger for richer than poorer families, and also found disappointingly modest funds in the accounts of children who’d grown up in care.

For all these problems, as of April 2021, the average claimed mature fund was worth a non-negligible £2,142. The 45% of mature funds that then lay unclaimed – whether through drift or lack of need for the cash – were actually worth somewhat more: £2,721 on average, implying a total of £394 million was lying dormant at the moment of this statistical snapshot, just a few months after the first accounts matured.

In principle, if failure to claim the money proved stubborn, this number would have rapidly swelled as the cohort came of age, and really undermined the whole basis for the scheme. At that point, reformers might have started to eye the dormant asset scheme which sets sleeping savings accounts, left untouched for years on end, to use for social purposes. For some forgotten accounts, this scheme might indeed have a role somewhere down the line. But in practice, over the few months that follow maturity, quite a chunk more of the trust funds appear to be getting claimed: looking only at accounts that had matured at least a year ago in Summer 2022, the industry non-profit the Investing and Saving Alliance suggested the unclaimed proportion was not 45% but just 27%.

That figure is still troublingly high, but does suggests that getting on for three-quarters of the cohort are getting their hands on their money by the age of 19. If so, the policy is beginning to work for the clear majority of most of its beneficiaries – and is doing something meaningful to achieve a little wealth all round. It cannot be dismissed as an outright flop on purely technical grounds.

The real failing

The deeper failing with the policy – and the obstacle confronting anyone hoping to do something similar in future – is not technical, but political. Indeed, the political scientist Ben Ansell considers it as a case study in his new book, Why Politics Fails. He sees the 18-year vesting period as a huge handicap in democratic terms, asking “who,” exactly, a 19-year-old should cast a vote for today if they want to “say thank you to Tony Blair for their trust fund?”. Political credit is overwhelmingly earned in the present, and from the Beveridge Pension in the 1940s to the insurance fund for failed workplace pensions introduced in the 2000s, social policies designed to guard against future contingencies have ended up having to be rejigged to relieve present suffering.

Another Oxford academic, Jane Gingrich, reflects on why this policy, like many others in the Third Way era, proved unable to nurture a "constituency" that would mobilise to protect it: the gains were too diffuse, too hazily articulated and “just too small".

The lack of passion to defend Child Trust Funds stands in marked contrast to the dark emotive magic stirred in another very different assets policy from the same era – the Bush administration’s move to axe the estate duties paid on large inheritances in the US. Rebranding it 'the death tax' worked a dark emotive magic, and the levy’s enemies came close to abolishing it for good before the financial crisis intervened. Anyone wanting to design a policy for 'assets all round' needs to reflect on how they can frame the case for it with similar force – if they want their efforts to endure the next time around.  

You can’t abolish an idea

Asset policies can and have been abolished: Child Trust Fund, the Saving Gateway and, in the US, Federally-backed Individual Savings Accounts have all been axed. But the idea of making sure everyone has some sort of asset to fall back on hasn’t gone away – and it is an impulse that is likely to keep bubbling back up for as long as palpable problems are being caused by the large numbers without any wealth at all.

Thus it is, for example, that since Washington defunded IDAs in 2017, various individual states have been working to fill in the gaps with their own initiatives, such as CalKIDS – the California Kids Investment and Development Savings Program which offers a (very modest) downpayment for any parent opening an account for their child, with more for youngsters living in poverty. The former premier of New South Wales, Dominic Perrottet was working on plans to introduce a 'future fund' with a close resemblance to the Child Trust Fund just before he lost power this spring.

Closer to home, within six years of aborting the Saving Gateway, the Cameron government had announced a remarkably similar scheme of matched saving for low-income earners, Help to Save. Eligibility is restricted to people in work, it was introduced rather sluggishly and take-up remains low – but it is much valued by those who do use it, which is one reason why the Resolution Foundation has been calling for a major expansion.

In sum, the problem of people who lack all assets is so stark that people will continue to dream up fixes for it. But their schemes face myriad minor practical problems, and two far bigger obstacles which are particularly difficult to overcome when, as in recent years, they apply in combination – namely, tight public funds and public indifference. My next blog, the last in the series, will detail the questions we need to confront if we want to overcome them both.  

 

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