This year’ Budget held almost nothing of interest and was instead focused mainly on explaining why Britain is better placed than its international partners to face the hard times ahead. The one substantive announcement was of the definite implementation of the child trust fund.
This was first announced immediately prior to the 2001 general election. It has certainly gone through a long gestation period and has experienced the odd birth pain along the way.
After months of mixed messages from the Government, we now know that all children born after September 2002 will be eligible for an account and a contribution of at least £250 from Chancellor Gordon Brown’ coffers.
For those who have put so much energy into the idea, the thought that there are children now alive who will benefit is rewarding. For the financial services industry, perhaps, the feeling is more one of how are we going to get this thing up and running by 2005?
It is worth taking a step back and considering the implications of the announcement. In the long term, the child trust fund could come to be seen as the small but radical beginnings of a new approach to welfare policy that moves us towards a system of progressive lifetime accounts for all.
Already, some people have suggested the idea of a life account. This would be available for all adults and would provide a fund on which they could draw in times of adversity. Some of this money would be deposited by the Government and some might be saved by individuals. As with the child trust fund, these accounts would provide an asset and encourage autonomy, allowing people to think in the long term and plan with greater confidence.
Policymakers now realise how important the dynamics of people’ wellbeing are. How do they move in and out of poverty? What happens when circumstances change?
Such a system of life accounts would help support people over time and recognise that they themselves can be the best judges of when they require extra support. If such accounts were established, there seems little doubt that the private sector would play a significant role.
Of course, immediate concerns remain with the child trust fund. It appears that the policy was brought forward in order to make a relatively thin Budget feel a little more substantive. As a result, some of the details remain to be decided upon. From a policy perspective, the most important remaining decision regards the possibility of state top-ups throughout the life of the child. In the initial 2001 proposal, top-ups were planned at ages five, 11 and 16. These would be £100 for children from a low-income family and £50 for those from wealthier households.
Although top-ups will still be made, the precise timing and amounts will be announced later this summer. There is a case for not having a top-up at the age of five and instead focusing additional state support on older children. This way, their circumstances immediately prior to turning 18 and making the transition into adulthood will be reflected in the level of support they receive from the state.
Two other outstanding issues of more direct relevance to prospective providers of the child trust fund regard investment strategies and charges. Because the Government has opted for an open market approach, there is likely to be a range of different investment options for people to choose from. Some people will want to opt for relatively safe investments while others will take more risks. The fixed length of the investment period – 18 years – will allow some form of lifecycle approach to be taken to the investment. More risky investments can be made initially and then any gains can be solidified towards the end.
Whether or not charges are capped for the child trust fund is an issue currently tied up with the Treasury’ work on a suite of Sandler products. The financial services industry will be keen to convince the Government that price-capping will reduce the number of market entrants, the variety of products on offer and the advice made available.
If the case can be made that these impacts will be significant, then relaxing any proposed charges on the child trust fund should be considered. The bottom line is that the value of funds should be maximised, especially for those on low incomes.
Over the coming months, we will have answers to these questions and in 2005 the child trust fund will finally be properly born. All children will then grow up with a financial product and will learn about money by talking about the child trust fund at school and at home. They will be more financially literate and confident consumers. Who says politicians will not take radical long-term decisions?
Will Paxton is a research fellow at the IPPR