Liberal Vision

Fund Managers are first victims of cuts

I popped a birthday cheque for my daughter in the mail today. Destination her Child Trust Fund.

We set the fund up a year ago to take advantage of the discount voucher and in order to save money we hope one day she might use for university fees or bail a future boyfriend of whom we sternly disapprove.

It’s a scheme we use and circumstances permitting will continue to use until it expires on her 18th birthday.

With the scrapping of the Child Trust Fund scheme, she will not have that option for her own children, and some Fund Managers involved in the administration of the funds are outraged on her behalf.

“It’s not over yet. There are a lot of people very angry about this.” says David White of the company we use.

But should they be? The Child Trust Fund is a very odd idea, poorly targeted, and however convenient fails any kind of test of public necessity.  

The original thinking behind it came from “Labour’s favourite think tank”, the IPPR. The political motive is to provide a mechanism for encouraging savings amongst groups who do not traditionally save, and a little cash injection to get things started. This based on the principle that you cannot tackle inequality only by looking at income, asset ownership matters as well, and building a tradition of saving should encourage a life-long habit.

We cannot yet know whether the CTF scheme has been successful against the IPPR’s goals. Started in 2002 the first beneficiaries will not turn 18 for another decade. We can though make some observations.

Asset inequality is a direct consequence of income inequality and inheritence. To save, to build assets you have to earn more than you spend.  This is rarely possible for those on low incomes or benefits as by their nature these provide enough for necessities not a surplus. To inherit assets you have to choose your parents carefully.

The CTF has no impact on inheritance and only those on high incomes can fully exploit the tax benefits of the CTF’s £1,200 a year maximum savings rate. In some respects it acts as a form of tax free inheritance for children before their parents have passed on.

There are also cultural barriers to saving. People who do not have a tradition of saving by necessity can continue to spend what they earn even when their personal circumstance improve substantially. People whose incomes don’t change will still not be able to save and handing out expensive vouchers to everyone in the hope of changing the habits of a nouveau riche niche is a strange project.

If the cultural change target is the children, the CTF does nothing to encourage a savings habit. Instead it hands them a benefit cheque on their 18th birthday. A counter-productive message.

The more obvious place to start with a savings message for adults is pensions. Individual pension accounts that allow people to supplement their basic state pension might be a better opportunity to reward and stimulate savings behaviours. In the long run they should also take a large number of people out of the benefits system.

In a nutshell the CTF Scheme was either a poorly targeted benefit, or largely about shuffling money from middle income taxpayers back to middle income taxpayers.

 The political motives behind it were well intended but lacking in credibility. Widening asset ownership in society can happen, but it requires as all to be richer, not just better distributed.

In the meantime I doubt calls from the Fund Management industry to save the scheme to protect their jobs will elicit much sympathy.