Treasury Committee


REPORT PUBLISHED ON CHILD TRUST FUNDS


The Treasury Committee today published its Second Report, Child Trust Funds (HC 86, Session 2003-04).

Michael Fallon MP, Chairman of the Treasury Sub-committee which undertook the inquiry, said that:

"The Government is seeking through Child Trust Funds to provide a financial asset to all children when they reach the age of 18, and to change people's behaviour to saving. But the Government is committing itself and its successors to an untried programme costing over £4 billion in Government endowments to children. It will be some 18 years before the first accounts mature and we see how the money is spent in practice.

Better-off families are likely to benefit most from the programme as the final value of Child Trust Funds will depend, primarily, not on the size of the initial Government endowment, but on the level of tax free additional contributions made by family and friends.

To be successful the Government needs to attract a wide range of providers. But whether this will be achieved depends upon a number of factors that have not yet been decided, in particular, the level of any charge cap and the regulatory regime that will apply."

Note for Editors

Mr Michael Fallon is available for comments on the report on 0797 367 6506. The Report can be purchased from Stationery Office Bookshops (tel: 0345 58 54 63). The full text will also be available on the Internet (www.parliament.uk) at or before 3.30 pm today.

List of the Report's conclusions and recommendations

The objectives of Child Trust Funds

The Child Trust Fund is an ambitious, pioneering programme which seeks, through a significant long term investment by the Government, to provide a financial asset to all children when they reach the age of 18, and to change people's behaviour towards saving. Whilst those with higher income may make most use of the opportunity, we feel that this gives less well off families an unprecedented chance to build up a tax-free sum for their children.

We note the Treasury's figures showing the potential significance of additional contributions from family and friends to the value of Child Trust Fund accounts at maturity. The Government is right to acknowledge the possibility that some families could lock away funds unwisely in Child Trust Fund accounts in the belief that this was in the best interests of their children. We therefore welcome the commitment to provide advice in both the information pack and promotional literature. We endorse the proposal to set out a hierarchy of savings objectives that promotes firstly paying off debt and secondly saving for a rainy day, ahead of any additional contributions to the Child Trust Fund. This information and advice needs to be clear and unambiguous.

The Government has decided not to place any restrictions on the use of Child Trust Funds when they mature at age 18. We endorse the Government's hope that the funds will be spent on worthwhile projects, and acknowledge the practical difficulties of devising a scheme to ensure that this is the case.

We note the Government's intention to monitor and publish regularly reports on the progress of the Child Trust Fund programme. We may wish to return to this subject in the light of the information these contain.

Entitlement to a Child Trust Fund

We recognise that a cut-off date for entitlement to Child Trust Funds is required and consider that the choice of 1 September seems sensible. We note that the Government plans to recompense children born between 1 September 2002 and April 2005, when Child Trust Fund accounts are due to be available, for lost growth in their accounts by means of higher initial Government endowments, and that the additional amounts will be set out in regulations.

We consider that the natural reaction of parents with children born on either side of the cut-off date will be to try to see that they are treated equally. This may mean that those parents with sufficient financial resources will make additional provision for children who do not qualify for a Child Trust Fund account. We believe they would be encouraged to do this if Child Trust Fund accounts, identical in all respects save the absence of a Government endowment, were available for their other children.

In the light of the evidence that the costs to the Treasury of the extra tax relief afforded by Child Trust Funds is negligible, we recommend that consideration be given to extending the availability of Child Trust Fund accounts but without Government endowments, to children born before 1 September 2002.

Advice to parents

We support the proposal that simple, low cost, accessible and risk-controlled stakeholder Child Trust Fund accounts should be developed. We note the Government's firm preference that Child Trust Funds be invested in equity-based accounts on the grounds that these are likely to generate higher returns over the longer term than cash accounts. However, we also note that the potential for higher returns from equity based accounts is accompanied by a higher degree of risk that some families may not wish to face. We recommend that this be made clear to all parents in the information pack so that they can take into account their individual circumstances when deciding. If an easily understood risk evaluation can be designed, it should be provided with the information pack.

Revenue allocated accounts

We support steps to ensure that no child loses out from parents, or someone acting in that capacity, not opening a Child Trust Fund account on their behalf. In such cases the Revenue will open an equity based account and choose, albeit by rota, the provider to manage that account. We note the evidence from the Treasury and the Inland Revenue that they have

obtained legal advice to the effect that in the event of any subsequent difficulties any accusations of mis-selling would be unsuccessful.

Interaction with the welfare system

There is a potential interaction of the Child Trust Fund with the welfare system (or any other entitlements that might be affected by possessing an asset) which might deter additional contributions to Child Trust Fund accounts from family and friends, if the result were to be a potential reduction in benefits for the child in the future, or an actual reduction in benefits for the contributor.

The Government therefore needs to clarify the extent of this potential interaction, in order to overcome fears of potential disadvantage to the child in later life. We believe it is essential that this is done before the scheme starts, and we therefore welcome the statement by the Financial Secretary that this will be the case. We believe it would be helpful if these matters were clarified and resolved during the passage of the Bill through the House.

Providing Child Trust Fund accounts

We consider that the success of Child Trust Funds will depend in part on attracting a wide range of providers. Whether sufficient providers enter the market will depend on the level of any charge cap and the regulatory regime that applies to Child Trust Funds, factors on which decisions are still awaited.

We note that some key players have indicated that they are unlikely to provide Child Trust Funds if charges are capped at 1%. We consider that low charges will be important to ensure that adequate returns are generated from sums invested in Child Trust Funds.

The Child Trust Funds Bill was introduced into the House without the relevant regulations covering important aspects including the proposed sales regime. We consider that these must be produced in time for the standing committee to consider them thoroughly.

Conclusion

The Child Trust Fund programme has the potential to make a significant impact, particularly on people's attitude to saving. But the Government is committing itself and its successors to significant expenditure under this initiative, potentially over £4 billion over the next 18 years. It must therefore get the details of the scheme and its implementation right.

obtained legal advice to the effect that in the event of any subsequent difficulties any accusations of mis-selling would be unsuccessful.

Interaction with the welfare system

There is a potential interaction of the Child Trust Fund with the welfare system (or any other entitlements that might be affected by possessing an asset) which might deter additional contributions to Child Trust Fund accounts from family and friends, if the result were to be a potential reduction in benefits for the child in the future, or an actual reduction in benefits for the contributor.

The Government therefore needs to clarify the extent of this potential interaction, in order to overcome fears of potential disadvantage to the child in later life. We believe it is essential that this is done before the scheme starts, and we therefore welcome the statement by the Financial Secretary that this will be the case. We believe it would be helpful if these matters were clarified and resolved during the passage of the Bill through the House.

Providing Child Trust Fund accounts

We consider that the success of Child Trust Funds will depend in part on attracting a wide range of providers. Whether sufficient providers enter the market will depend on the level of any charge cap and the regulatory regime that applies to Child Trust Funds, factors on which decisions are still awaited.

We note that some key players have indicated that they are unlikely to provide Child Trust Funds if charges are capped at 1%. We consider that low charges will be important to ensure that adequate returns are generated from sums invested in Child Trust Funds.

The Child Trust Funds Bill was introduced into the House without the relevant regulations covering important aspects including the proposed sales regime. We consider that these must be produced in time for the standing committee to consider them thoroughly.

Conclusion

The Child Trust Fund programme has the potential to make a significant impact, particularly on people's attitude to saving. But the Government is committing itself and its successors to significant expenditure under this initiative, potentially over £4 billion over the next 18 years. It must therefore get the details of the scheme and its implementation right.