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The right way for gateway

Just when you thought the savings environment could not get more complex, the Government has launched a savings product.

Earlier this month, five pilots of the saving gateway started taking people through their doors.

They will be evaluated before the policy is rolled out nationally. Some may say that we need another savings policy like a hole in the head but the saving gateway is no ordinary policy. It breaks new ground in a number of ways. Although the five pilots are humble beginnings, it could be a sign of things to come for parts of the savings industry.

The saving gateway is an individual account for low-income adults, into which people will save and attract a matched state contribution.

This will most likely be at a rate of one-to-one. The accounts will run for five years, then people will have access to the funds although the pilots will only run for 18 months.

The product is intended to widen access to saving and allow those who are currently financially excluded with no assets to gain the benefits of saving.

The first innovative feature of the saving gateway is the concept of matched saving. Matching to offer incentives to low-income savers was first used in individual development accounts in the US.

These were implemented from the early 1990s and have proved successful, now numbering about 100,000 throughout the US. IDAs have proved so popular in the US they have spawned what could justifiably be called a movement. Thousands of people now deliver or benefit from IDAs and have a stake in their future success.

The second innovative aspect of the saving gateway is the structure within which it will be delivered. Again, this will draw on the experience with IDAs.

IDAs are locally based programmes involving partnerships between financial services companies, community-based organisations and often the government. The saving gateway will also use this relatively novel approach to the delivery of financial products.

It will draw on the expertise of the different organisations involved. Local organisations are better at finding people who need products. They are more trusted and will be able to join up delivery in a way which the private sector and the Government often finds difficult.

For example, they could deliver financial education alongside any product. Obviously, the financial services industry is best suited to holding the money and often providing people with access to a wider range of mainstream financial products.

To complement these partnerships between local organisations and the financial services companies, the Government needs to provide sufficient funding but also to ensure that proper frameworks are in place.

This second innovative aspect of the saving gateway also leads to its biggest challenge. Hands-on support, often tailored to individual needs, which has been an important contributor to the success of IDAs, can be expensive.

Policymakers in the UK must ensure that the saving gateway model can be rolled out across the country. How can we affordably replicate the hands-on approach at a bigger scale?

Even granting that the money was available, a question remains as to which organisations have the capacity to deliver such support nationwide.

What forms of light-touch support, which we can replicate across the country, could be delivered to accountholders? What organisations or combination of organisations can deliver and market the saving gateway to all eligible individuals? If answers to these questions can be found from the US experience, a whole new distribution network for financial services could be developed.

We can also learn other lessons from the US. For example, there are some important differences between the saving gateway and IDAs. In the US, there are tight restrictions while a libertarian approach has been adopted in the UK, with no restrictions.

The prescribed uses in IDAs usually include homeownership, micro-enterprise and education. These restrictions try to channel expenditure positively and encourage people to use their financial assets to invest in areas which will have a lasting impact on their life.

The lack of restrictions for the saving gateway changes the nature of the policy. It becomes more of a pure financial product than an anti-poverty tool. If financial asset-building is to lead to lasting changes in life chances, it is possible that some form of restrictions should be considered. Yet this would be complex to administer, especially when the saving gateway is rolled out nationally.

One option could be for the policy as already outlined to act as a template. Provision could then be made for allowing local diversity and possibly the delivery of saving gatewayplus programmes.

These could keep the unrestricted component but could provide additional incentives for people who save for a particular purpose. This would allow certain areas to develop policies more closely akin to IDAs. Already in Scotland, there are talks about such an approach.

The saving gateway has enormous potential. It introduces some challenging and interesting new app-roaches to the delivery of financial products.

Building on partnerships between the Government, the financial services industry and community-based organisations could draw on the comparative strengths of these different organisations and the use of matched saving will provide incentives to people on low incomes to accumulate assets.

However, if the policy is to be a success, then policymakers must learn lessons from the US experience and meet the challenge of ensuring that it can be implemented nationally.

Will Paxton is a senior economist at the IPPR


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