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Making assets of our young people

In the twilight of Labour&#39s first term in office, the Prime Minister, flanked by a handful of his Cabinet colleagues, announced a radical new policy agenda whereby the benefits of savings and assets would be extended to all.

The child trust fund and saving gateway were announced. Little has been heard of this publicly since. The Government&#39s attention has been largely diverted away from the domestic policy scene. However, many financial services companies and others resp-onded to the consultation on the policy proposals. Treasury officials have been working up the proposals in the initial consultation document Assets and Savings for All. Progress is being made.

This announcement was indicative of important shifts in Treasury thinking on savings policy.

First, there is an increased concern about extending a saving culture and asset holding to a wider proportion of the population. Perhaps this is partly because of a worry about overall wealth distribution. Recently published Inland Revenue data present a worrying picture of increasing wealth inequality.

Ninety-four per cent of wealth in 1998 was held by the top 50 per cent of the population. In the same year, the top 1 per cent of the population owned 23 per cent of all personal wealth.

This has increased from only 17 per cent in 1988. At the other end of the scale, the percentage of households with no assets at all doubled from 5 to 10 per cent between 1979 and 1996.

A second shift in Govern-ment thinking has been a linking together of savings and welfare policy. Traditionally, the two have been developed separately. There are a number reasons that they are now being linked.

In a number of policy areas there have been a shift in responsibility from the state to the individual. A clear example of this has been the increase in private pensions.

The Government points to new evidence which shows that holding assets leads to positive welfare outcomes. As David Blunkett, then Secretary of State for Education, argued in 2000: “Holding assets has an independent effect on individuals&#39 life chances and attitudes, beyond such factors as their social class background or educational achievement.”

Holding an asset in early adulthood is associated with a positive effect on welfare outcomes such as good health and labour market performance in later life.

In the first term, this Labour Government&#39s att-empts to extend asset-holding saw stakeholder pensions and Isas being introduced. These products are designed to be more attractive to those on low incomes.

They are part of the Government&#39s attempt to spread saving to a wider section of society, both for the long-term need of retirement income and for the shorter term.

Stakeholder and Isas have advantages over other savings vehicles. For example, Isas have proved slightly more attractive to people on lower incomes than Tessas and Peps were. However, the tax incentives they rely on are now thought by the Govern-ment to be insufficient encouragement for all people to save. New ways of encouraging saving were required.

In the first few years, the Government was shuffling along in an attempt to widen access to savings and assets. Critics pointed out that it was largely tinkering at the edges.

The Prime Minister&#39s announcement of the child trust fund and saving gateway was a recognition that a more fundamental reform was necessary. They are part of a new and more radical strand of Government thinking which has been dubbed “asset-based welfare”.

The child trust fund is aimed at ensuring all young adults have an asset to give them confidence to plan their future.

The saving gateway is targeted specifically at low-income adults. It does not rely on tax incentives to encourage saving, instead it is proposed that for any money deposited by the individual, the Govern-ment will provide a matched contribution, probably at the level of a pound for a pound.

The implementation of these specific policies raises a number of difficult questions. The exact form that the products will take remains unclear. Some key questions include whether or not individuals will be able to access the funds and what investment strategy should be used.

There are also important questions about how the saving gateway will relate to the existing savings environment. There is a danger that complexity will increase, which raises troublesome questions for individuals and IFAs about the provision of advice. How will the generous incentives to save into the saving gateway affect savings for a pension? The Government hopes that the saving gateway will enable people to get a foot on the assets ladder and to go on to save in stakeholders or Isas. How can this be ensured?

Although questions rem-ain, the savings gateway and the child trust fund were in the Labour manifesto at the last election. Mr Blair is committed to implementing them before the next general election and, if they are allowed to be born in the current uncertain political and fiscal climate, a truly radical policy will have been implemented.

All children will have a pot of money growing over time and all young adults will have an asset or stock of wealth. And not least, all young adults will have a bank account and have engaged with financial products throughout their schooling.

A world where financial exclusion and financial literacy is wiped out and all young adults have an asset? Surely a pipedream? Well perhaps not if the Government makes good on its promises.

Will Paxton is a researcher for the Centre for Asset-Based Welfare, Institute for Public Policy Research

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