The Child Trust Fund comes of age
It presents a unique opportunity to learn about the difference that asset ownership can make
With little fanfare the UK is about to witness a mass experiment in the extension of access to capital. Other nations may have sovereign wealth funds, and some have experimented with universal basic incomes, but the UK is the first to create a citizen’s endowment for all young adults.
From 1st September, those turning eighteen will start gaining access to their Child Trust Funds with an estimated average worth of around £1200. From now until 2029 around 55,000 young people every month will gain access to their accounts: the 2020s will, among many other things, be the decade of the Child Trust Fund. For a generation with the odds stacked against them in many other respects it may feel like a rare, if small, glimmer of light.
The policy was announced in 2001, implemented in 2005 and abolished soon after David Cameron arrived in office in 2010. An initial endowment of £250, or £500 for children from lower-income families, was given to those born after 2002 (some also received a second contribution of £250 or £500 at age seven pre-abolition) and parents could top this up subject to an annual cap.
It was a policy that attracted support, and opprobrium, from across the political aisle. It drew on intellectual currents straddling the market-socialist left as well as popular-capitalist right and energised an eclectic coalition of thinkers and practitioners — from the UK and abroad. It helped open up a new strand of thinking in social policy about the importance of assets as well as income in creating opportunity and resilience. But it also enraged those opposed to all universalism and drew criticism from some on the left who decided that any focus on assets would, somehow, jeopardise the dramatically larger increase in spending on conventional cash-benefits and public services that was underway. It was bemoaned for its modesty of ambition by some and held up as symbol of state-largesse by others.
A decade after it was first announced it became an early victim of the austerity era. The Liberal Democrats at the time were particularly keen to abolish it, though it wasn’t many years later that Vince Cable, as leader, called for a universal endowment for young people. It’s also worth recalling that the Child Trust Fund was introduced as a package alongside a matched-savings system for low-income adults, the Savings Gateway, which was also abolished in 2010 (after years of painstaking piloting and evaluation). The Conservative government reintroduced the same policy, under a different label, a few years down the line. In the US there are current proposals to introduce state level ‘baby bonds’ and this agenda featured in the recent Democratic Party Presidential candidate contest.
The idea of directly supporting families to accumulate financial assets still has traction because the challenges that sparked the creation of this agenda around the millennium — a relatively benign and optimistic moment — have greater force in the 2020s.
The total stock of UK wealth has increased dramatically over time from three times national income back in the 1970s to more than seven times today. Yet inheritance taxes are steadily losing their bite at the same time as the relationship between parental wealth and the chances of a 30 year old owing property have strengthened. The sharp growth in net wealth across society as a whole over the last decade has coincided with a deterioration in the balance sheets of families who have the least of it. Indeed, a large chunk of the country has next to no reserves to fall back on: over a quarter of the UK’s working-age families have less than £500 in savings; well over a third have less than £1000. At the same time the evidence surrounding the positive impact of owning some financial assets on a person’s future economic and social prospects — controlling for a range of other factors — has grown both in advanced nations like the UK as well as in developing countries.
None of this is to suggest that the Child Trust Fund would ever have been the answer to all these challenges. Looking back, it was never going to bear the weight of expectation created.
For a start it had multiple objectives — developing a saving habit, distributing wealth more equitably, promoting financial resilience — some of which were in tension. It’s also the case that while baby bonds cost enough to make them a target for cuts they were far too small to ever make a dent in the wider distribution of wealth. Redistributive ideas — like generous matching payments for contributions from low-and-modest income families — were also removed in the name of simplicity. It was certainly a novel attempt at spreading asset ownership but it was never allied to a broader agenda of properly taxing concentrations of wealth. It was also naïve, if admirably long-termist, to launch a policy that failed to create ‘cash in hand’ winners for at least 18 years, leaving it exposed when austerity arrived. Indeed, it was a shortcoming that the wider democratic case for this agenda was never properly made: it emerged from a think-tank report and moved swiftly through Whitehall largely untroubled by the vicissitudes of rigorous public debate. Nor did it get shaped by a consensual process, like the Turner Review on pensions, that can help cement long-term policy commitments that rely on the acquiescence of future governments. For a policy with a rich intellectual heritage it had shallow roots.
Yet, for all that, it also spoke to a deep and real problem. Capitalism without widely shared access to capital, makes for an inherently unjust, and unstable, system. The Child Trust Fund was an innovative, idealistic and imperfect attempt to ensure that all young people started off in life with a material stake in society. For the next decade, uniquely, that will happen.
That provides us with a rare experiment that Britain, and other nations, should learn from. The experience of the six million young adults that make-up the trust fund generation will give us insights that can be put to use to help those coming of age in the 2030s. They are going to need all the help they can get.
Disclosure: two decades ago I co-authored the think-tank paper proposing ‘baby bonds’ and then went into government to help develop the policy working with colleagues like Nick Pearce, Carey Oppenheim and Matthew Taylor.