Child Trust Fund choice shows preference for low risk

Of the three types of CTF – savings, stakeholder and non-stakeholder – only one showed a higher percentage of assets after 12 months, according to government figures. Non-stakeholder stockmarket funds accounted for only 4% of CTFs opened, yet after one year they represented 6% of assets.

The government’s pre-Budget report last week emphasised the importance of getting children to save. Its main initiative to encourage parents to save is the Child Trust Fund, which was launched in April 2005.

One year after launch, parents had opened 1.3 million accounts out of the 1.7 million vouchers issued. The remaining 400,000 vouchers were automatically turned into accounts by the government after they expired.

A 75% active take-up of a new government initiative could be argued to be a high figure. But Jason Hollands (pictured top), head of communications at F&C, says the measure of success of CTFs needs to be by how much people are topping up the government’s £250 voucher, not the number of people opening accounts. If the aim of the CTF is to encourage a savings culture, are they encouraging enough parents to save?

“The government is measuring success in part by the voluntary take-up of the vouchers, which get invested anyway,” Hollands says. “But the real measure over the long term, in terms of success at creating a savings culture, will be the extent to which parents or grandparents start digging into their own pockets and topping up.”
According to a CTF report issued by the Inland Revenue in September, 74% of accounts opened were stakeholder accounts and 22% were cash or savings accounts. After one year, savings accounts represented 20% of assets, showing a fall of 2%. The percentage of assets in stakeholder accounts remained the same.

So why are stakeholder accounts the most popular? In stakeholder accounts, investments are initially made in the stockmarket – in reality mostly into index trackers. The investments turn to fixed income or cash around the child’s 13th birthday, to reduce the level of risk as the account nears its maturity.

As well as this lifestyle feature, the government has capped the charges of these accounts at 1.5%. It will also automatically open this type of account, rather than a cash or purely stockmarket account, if parents do not activate their voucher within one year of receiving it. Furthermore, all CTF providers must offer a stakeholder option. While the government seems to be promoting this type of account over the other two, is it necessarily the best option?

Hollands says the best option is the non-stakeholder account, which invests in actively managed stockmarket funds. But this decision needs to be the parents’ and comes down to their appetite for risk.

A low risk appetite is demonstrated by the 22% of CTFs opened in savings accounts, when only 4% were opened in non-stakeholder stockmarket funds. A lot of these decisions could be down to familiarity, Hollands argues. For a lot of people, banks and building societies are familiar, but the stockmarket is not.

Pak Chan, head of investments marketing at Abbey, agrees. Chan (pictured middle) says the government could have simplified the CTF by making it an investment-only proposition. But the fact it did not means a lot of people chose the savings option because it was the most familiar to them.

“Two thirds of Abbey’s CTF clients choose savings because they are more used to that,” he says. “But if that is a way of getting more people to save, it is better than not saving at all.”

Similarly, Peter Hicks, head of IFA channel at Fidelity, says having the choice to put the £250 in a savings account does not educate people about investment. “But it does give people a head start and encourage them to save,” he says. “Two hundred and fifty pounds is not a lot of money these days. But when you are five or 11, it is a lot of money.”

In fact, Fidelity did look into setting up its own CTF, but decided not to. Hicks (pictured bottom) says there were various reasons for this, including the amount of administration that would be involved. But giving people the chance to choose which type of account is right for them is a key feature of the CTF. Matthew Wakefield, senior research economist at the Institute for Fiscal Studies, says giving people more choice is always better.

“There are going to be many families that do understand these types of decisions,” he adds. “There might be some who are more risk-averse and want to have a cash product. As long as they understand what they are doing, giving people more choice is better.”

Indeed, financial education seems to be the main reason for CTFs. It could be argued that they are more about education than anything else.

“Help your child understand personal finance” is one of its four aims, according to the official CTF website. But really the “understanding” initiative is aimed at the parents too. Actively opening up an account for a child and deciding on the type of product involves a level of research and/or understanding.

“You want as many families as possible to make an active decision,” Wakefield says. “Opening an account and deciding where they are putting the money means that children and parents are learning a bit about investing and seeing through an 18-year horizon.”

Indeed, Wakefield points out that the 18-year horizon is designed so children and parents can see how investments grow. “The argument behind that must be you want people to see the cash growing,” he says. “It is learning about financial products and stockmarket returns. They could have just given a £250 cash sum to all 18-year-olds.”

So if CTFs are about education, could the government not have simply set aside more money for financial education and training in schools? Perhaps, but by providing a tangible product it hopes to have found a more effective motivator than an abstract lesson or a new textbook. It has opted for “hands-on” learning, and not just for the children either.