The financial services marketplace: structures,
2.7 Saving and investing
2.7.1 Background
the consumer culture extends its spread. Figures from the Bank of England suggest that the ratio of household debt to household income in 2003 was around 200 per cent for the Netherlands; around 140 per cent for the UK, the USA and Australia;
around 120 per cent for Japan; and fractionally above 100 per cent for Germany.
Of particular note is the evidence that points to the beneficial effects of asset-hold- ing on children, especially with regard to children from low-income families. The USA introduced the Assets for Independence Act in 1998, which has served as a cat- alyst for the majority of states to introduce asset-accumulation programmes. The Act was an attempt to address poverty by building wealth among the poorer sec- tions of society rather than just by redistributing income.
The notion that the encouragement of personal financial assets, albeit of quite modest proportions, represents a social policy goal has resonated with governments across the globe. In Singapore, the government has introduced an analogue to America’s IDA called the Children’s Development Co-Savings Scheme. Introduced in April 2001, this new approach to saving comprises two elements: the Baby Bonus and the Children’s Development Account (CDA), known as ‘tier one’ and ‘tier two’
respectively. Under the provisions of the Baby Bonus scheme, parents receive a cash payment of $500S for their second child and $1000S for their third. Every year for the next five years, the parents will receive an additional $500S and $1000S respec- tively for the second and third children. Thus, there will be payments totalling
$3000S and $6000S for the second and third children of the family respectively. In commenting on this scheme, Sherraden observes:
In domestic policy, it {Singapore} is probably the most innovative nation on the planet ... the baby Bonus and CDA policy is a bold and positive step forwards.
Also in Asia, the Taiwanese government introduced the Family Development Account in June 2000. The FDA is a matched savings scheme aimed at low-income families, and forms part of the government’s strategy to relieve poverty.
Research in the UK by Brynner and Despotidou (2000) has corroborated evidence from the USA regarding the impact of financial assets on life outcomes. Their study has played a role in the decision by the British government of Tony Blair to intro- duce the Child Trust Fund and saving gateway. The Child Trust Fund is a scheme whereby children born after September 2002 are eligible to receive a lump sum from the government – £500 for those from less affluent families, or £250 for those from more affluent families. The scheme went live with effect from April 2005, and Case study 2.1 outlines the responses of one provider, Family Investments.
Thus there is a growing realization of the benefits to be gained from encouraging the saving habit. The remainder of this section provides some perspectives on the nature of the savings and investment markets and producers.
The Child Trust Fund (CTF) represents the UK government’s most radical initiative to date in the area of asset-based welfare. The principal aim of the CTF is to provide every child in the country with a nest egg of savings when they reach adulthood at age 18. All children born on or after 1 September 2002 and whose par- ents or guardians are in receipt of child benefit are included in the CTF scheme.
Case study 2.1 Family Investments and the Child Trust Fund – an example of private-sector support for public policy
The mechanics of the CTF are as follows; when a parent registers for child benefit, he or she also receives a CTF voucher worth £250, an Inland Revenue booklet explaining the CTF scheme, and a list of companies which are involved in its provision. The parent then contacts a CTF provider to set up a CTF account for the child and sends the voucher to the provider, who then claims the money from the Inland Revenue to invest in the particular CTF account. Once this has been done, voluntary savings of up to £1200 per annum can be added to the account by parents, grandparents or indeed anyone involved in the finan- cial welfare of the child. The government automatically sets up CTF accounts for children whose parents do not do so. The money placed into a CTF account accumulates free of income and capital gains tax, and may be invested into various asset classes, including equities, bonds and cash.
A key feature of the scheme is that money deposited in a CTF account is owned by the child and will be locked in the account until he or she reaches 18.
Only in extreme cases involving the death or terminal illness of the child can the money be accessed before the age of 18.
According to Family Investments:
As the leading provider of long-term tax exempt savings for children, Family Investments sees the CTF as an exciting addition to our product range.
Our analysis of the market is that, as with anything new, it will take time for the public to get used to the CTF, especially because of its universal nature, which means that over half the parents involved will be new to long-term savings in any form, let alone saving specifically for children. On the other hand, with an official launch date of 6 April 2005 but eligibility backdated to 1 September 2002, some 1.6 million vouchers have been issued in the first quarter of 2005, giving a massive kick-start to the CTF scheme.
Despite the best endeavours of the Revenue, which has issued a comprehen- sive brochure explaining the CTF, many parents remain confused by the choices available to them. Our approach has been to keep our proposition as simple as possible. This we have done by solely promoting the CTF stake- holder account, which we believe over 18 years carries the best balance of risk and return on the money invested.
Secondly, we have used our existing expertise in the children’s savings market to put our proposals to parents at the right time using our established marketing style involving the Mr Men characters, with which many parents are familiar.
Thirdly, we have partnered with a number of well-known and trusted brands whose endorsement will provide confidence to people entering the savings
Case study 2.1 Family Investments and the Child Trust Fund – an example of private-sector support for public policy—cont’d
Continued