Savings (Government Contributions) Bill (Second sitting)

Debate between Huw Merriman and Ian Blackford

Tuesday 25th October 2016 Public Bill Committees

[Huw Merriman]

Q Perhaps I can just ask one more question—maybe it is more of a point. Surely one of the issues is that Help to Save will be targeted at many people who will be on benefits, but what has not been offered is a commercial product that treats them exactly the same as some of the people who may read the adverts in the financial press, who may not require help so much. Again, I would have thought it would play to the sector that you are representing that, all of a sudden, those people are in the game as well and being supported.

Bryn Davies: Yes, I do not want to be too much of a wet blanket. I am sure there are some people out there for whom the Help to Save scheme will be of great assistance. I do not think it will be that many—I do not think it will be a lot of help—and many of them are not the people who do not already have a rainy-day fund. Did I get that the right way round? Most of those it will help already have a rainy-day fund. So how is that money actually being used effectively to provide more people with rainy-day funds? We really do not know, from the evidence that is available.

[Ian Blackford]

Q I wonder, Mr Davies, whether you would agree that it is unlikely that there could be a scenario where a saver would be better off in a LISA than they would be in a workplace pension scheme. Could you just comment on the fact that we have not got the final architecture of automatic enrolment, in so far as it affects low-paid workers and the self-employed, and there is a danger in the short term, if this were adopted, that workers could be seduced into taking out LISAs when their best interests would be served through a workplace pension?

Bryn Davies: There is no doubt that the LISA is an attractive offer. People will be attracted by it, although whether they are seduced—that suggests it is against their best interests. It is difficult to know exactly how it will work.

One of my main criticisms of the LISA is that it is a sort of bait-and-switch for a change in pension taxation, because its finances are unsustainable. Those of you who are familiar with the jargon will know that the existing occupational pension scheme taxation is known as EET—exempt, exempt, taxed—so the roll up, the accumulation, is tax free and then it is taxed when the money is paid out. That is compared to an ISA, which is taxed on the way in and the roll up and pay out are tax free. You are either taxed at the beginning or taxed at the end. The oddity about the LISA for a standard rate taxpayer is that there is no tax at all—it is actually EEE—and, as such, I do not think it is a sustainable basis. That is why I am saying it should be looked at as an overall view of how people save for retirement.

A system that was entirely based on the pension LISA system for provision for retirement would be economically unsustainable. In that sense, it is a loss leader. It is not sustainable as a long-term policy, because it is so generous. That is the answer to the question. It is very generous and possibly some people in the short term might do well, depending on the expenses that are charged. We do not know how expensive LISAs are going to be. They could offer a financially attractive deal, but if that is at the cost of destroying an adequate pensions system in the long term, the whole of society will be losers.

It is not difficult to sustain a case that everyone will lose out because they choose a LISA rather than an automatically enrolled pension, particularly if employers choose to contribute to the LISA as well. There is nothing to stop them, if they see it as a way of avoiding the legislation.

--- Later in debate ---

[Ian Blackford]

Both of you.

Jonquil Lowe: Automatic enrolment, yes, is definitely superior. The employer’s subsidy is very valuable so it would be extremely concerning if people switched to lifetime ISAs. The problem for women with caring responsibilities is that they simply do not have a lot of money to save. It is very nice that they can have a bonus if they can save, but if they cannot save, where does that leave them?

The value of unpaid caring is huge. The Office for National Statistics tries to measure it and reckons the value of unpaid childcare is about £320 billion a year and unpaid adult care about £57 billion a year. The figures are huge—about a fifth of GDP. Countries address the problem in different ways. For example, Finland has a home care allowance that recognises the value of unpaid work and gives some income that can be used to buy childcare to release the woman for work, or perhaps for other matters, which might be setting money aside to save for emergencies or later life. Simply saying, “If you save, here’s a tax bonus,” does not solve the problem of the people who cannot afford to save.

Martin Lewis: It doesn’t, and some people should be paying off their debts, which again is a problem I mentioned earlier, especially with the Help to Save scheme. I would stretch Help to Save a little lower and allow younger people to engage in the scheme as well as people who work fewer hours but do work. If I were in charge, I would bring it lower down the net. I agree with you on that point.

The problem about the people who do not auto-enrol going into lifetime ISAs when they should auto-enrol is that products, once they become commercial—effectively Help to Save is not because it is from NS&I, but the lifetime ISA is—are sold, and they are sold to encourage people to engage. Therefore, you have competing sales messages.

That goes back to my original point of mandating messages at each point in the journey towards getting it to try to block people out. The person in charge of lifetime ISA savings at one of the big banks is incentivised by how many lifetime ISA savings he brings in and his staff, some way down the line, will be incentivised—or at least their jobs will be contingent on it—to get people to bring in lifetime ISA savings. They will not have a vested interest in telling you to put money in your pension instead, so you need to make sure that they cannot avoid doing so.

That is a subtle point, but it is about misprioritising. Every single product we have on the market, from credit cards to savings accounts and bank accounts, misprioritises someone’s finances if used incorrectly. That is not a reason for not doing the product, but this is the joyous point: we are creating a new product in our nice internet and app-based era where it is rather easy to mandate people to give certain messages. That is why I suggest you do so, in a way that you could not when everything was individually sold by incentivised sales staff sitting in a closed-room office of a bank branch, as it was 20 years ago. Now, most of these things can be automated, so make them automated.

[Huw Merriman]

Q Mr Lewis, this morning we heard from some of the representatives from the financial services industry, who seemed to think that this was a complex product.

Martin Lewis: They are not very bright people.

Savings (Government Contributions) Bill (First sitting)

Debate between Huw Merriman and Ian Blackford

Tuesday 25th October 2016 Public Bill Committees

[Huw Merriman]

Thank you.

[Ian Blackford]

Q I want to come back to the issue of risk. We all know that when you invest in a pension scheme, the trustees will then look at the appreciation of risk that you would expect to take on board. They obviously look at the timeline of when you expect to retire and gear any assets according to that assessment.

If we have a situation here where an individual can invest in an ISA, and can invest up to 100% in equities, they may decide to draw down that pot at any time for a particular type of event. We know that there is always a risk of a downturn in the market. Most actuaries will tell you there is a one in seven year risk of a downturn in the market. Are we not inadvertently exposing consumers to risk? Does it not come back to the point that was raised by my hon. Friend the Member for Banff and Buchan that we are exposing consumers to risk, not just of mis-selling, but of investing in an asset where there could be a risk of a downturn in the market seriously impacting the choices that they then make?

Carol Knight: There is always that risk, but I do not think we are looking at the lifetime ISA as an alternative to a pension. We are looking at it as complementary to a pension. Firstly, the lifetime ISA could go into a cash ISA, but as a long-term savings product it is generally accepted that cash is not necessarily the best way to do that. Again, it points to getting good guidance and information to people to help them make informed decisions as to the type of assets they are going to put into that product.

--- Later in debate ---

[Huw Merriman]

Q I have one more question. This takes me back to my misspent youth, more than 25 years ago, when for four years as a student I worked for Abbey National as a cashier and customer service adviser. We would sell this type of product. We had a whole suite of products that had penalties if, say, you were five years into a bond and withdrew early. This is not rocket science. We could explain that to our customers, and that was without the benefits of the internet. I am still a bit sceptical about why this landscape is so complex to your members; it does not seem that different, and we were easily able to sell things 25 years ago.

David Wren: The landscape has probably changed slightly in 25 years. We very much welcome the Financial Conduct Authority consultation on this, because its view on how we engage with customers and make sure that they get the right protections is really important. Yes, a range of products are available, but as Tom said earlier, a lot of people will now buy online, through a call centre or through an app, so they are not going to see someone face to face. Again, we need to make sure that people are given access to the right information to allow them to make the right decisions. That is absolutely doable, and, as I said earlier, we hope that the Government will work with us on getting the right information to people. It is the landscape that is complex, as opposed to the individual products.

[Ian Blackford]

Q David, in your submission, you say:

“In particular, there is a concern that cash held in LISAs will only be suitable for those looking to buy a home, whilst stocks and shares will be more suitable for those investing for later life, looking towards retirement.”

Is there not a risk that if an individual invests in stocks and shares and then buys a home at the wrong time because the market has fallen, we inadvertently expose consumers to risk as a consequence of this policy?

David Wren: I think that is exactly right. That is exactly why we need to make sure that people are getting the right support in picking a product, and in the underlying investment for that product. I am sure that Tom is more expert in this than I am, but for pensions, stocks and shares are typically viewed as the right investment. Those ups and downs will average out over the course of your life. I assume that most people are saving for a home in a relatively short time-window—five to 10 years. Stocks and shares are inherently more risky. The point at which you are starting a family and want to buy a home may be the point at which the market is not going through a particularly buoyant phase.

We also need to recognise that for a lot of people—bear in mind that lifetime ISAs are available from 18—buying a house is a medium-term activity. That may well be over a more than 10-year timeframe. That becomes a very challenging time. It is not obvious that cash is the right investment; it is not obvious that stocks and shares are the right investment. That is a very difficult decision for someone to make.