My speech at the opening of the Bristol Institute of Public Affairs, Bristol University
- Lord Mayor, Mr Pro-Vice Chancellor, Dean, it is a great honour to be here today at the formal opening of the Bristol Institute of Public Affairs. Let me start by thanking both the Economic and Social Research Council (ESRC) and the Leverhulme Trust for their support, and Ian Diamond for his vision.
- Over the past decade the Treasury has had a strong relationship with this university. Paul Gregg, now a Professor in Bristol University’s economics department, joined the Government in 1997 as a founding member of the Treasury’s Council of Economic Advisers. Paul led work on labour market policy and was our key adviser in designing the new deal jobs programme for young people.
- More recently at the Treasury, I have worked closely with Professor Elaine Kempson, Director of the University’s Personal Finance Research Centre, who has 20 years experience of research into personal financial services, and is a valued member of the Financial Inclusion Taskforce. Paul and Elaine are two examples of academic social scientists who recognise and champion the important link between academic and empirical research and public policy making. And they have other distinguished colleagues at the Institute; Carol Propper, working on health, Simon Burgess on Education, Tariq Modood on ethnicity and citizenship, John Rasbash and Harvey Goldstein on modelling. I wish the new Institute every success in building on this experience and reputation in its own work on issues of public policy.
- When Paul invited me here to open this Centre, and asked me to speak to you about an important area of public policy I decided that the obvious topic to choose was the interaction between financial inclusion and savings. I chose this for three reasons. Firstly because of the important role Elaine has played in developing our policies on financial inclusion and savings for those on low incomes. Secondly because the evaluation of our first Saving Gateway pilot was conducted by Bristol’s Personal Finance Research Centre. And thirdly, because I am today able to share with you the conclusions of the second pilot of the Saving Gateway.
- So today, I want to talk about the importance of saving in achieving financial inclusion. And I also want to talk about the Saving Gateway pilots’ findings, which will help to shape our policy on saving incentives for those on lower incomes in the months and years ahead.
Financial inclusion and social justice
- I want to begin by talking about the link between financial inclusion and social justice.
- As a Government, social justice is at the heart of our ambitions for the country, and of our policies. We’re cutting child poverty, and aim to eradicate it – to give every child the best possible start in life. We’re addressing pensioner poverty. And we’re supporting working families – rewarding work through the National Minimum Wage and tax credits, and bringing millions of people into employment.
- Through these policies, and many others, we’ve improved opportunities in Britain. But we recognise that we can do more. And one area where we want to do more is in ensuring that people have access to the financial services they need – the opportunity to make the most of their money.
- Britain has one of the largest, most sophisticated and most competitive financial services sectors in the world. It has responded quickly to the demands of a rapidly changing economy – new technologies, higher living standards and changes to the ways people live and work – and it provides a wide range of financial products to meet evolving needs.
- But there is growing evidence that the market doesn’t meet everyone’s needs. A small but significant minority are unable to access even the most basic financial services.
- I have spoke in the past about the special nature of banks. Banks are fundamental to the working of the economy and are amongst our biggest companies. But at the same time, as I have said, we must recognise the integral role banks play in our society and in our lives. Like any company, banks operate within society and have social obligations and responsibilities. Which is why I welcome the banks’ continued recognition of the role they must play in ensuring that no people or social groupings in Britain are excluded from our financial life.
- The most recent public figures show that, despite real progress made in partnership with the banks in the last few years, 2 million adults in the UK still don’t have access to a bank account. It is estimated that at least 165,000 families in Britain today are forced to use illegal loan sharks instead of affordable mainstream credit. And last year tens of thousands of people, many among our most vulnerable, suffered great hardship with the collapse of the Christmas hamper company Farepak.
- Addressing these issues is about achieving financial inclusion. But it’s also about achieving our wider objectives, of increasing opportunities and increasing fairness – and our ambition for social justice.
- So the Government’s wants everyone to have access to appropriate financial products, the information and capability to prevent avoidable financial difficulty, and access to sources of advice if they find themselves in distress.
- We’ve made significant progress since 1997, working with the banking industry to bring basic bank accounts to the market and piloting the Saving Gateway.
- Debt advice agencies funded through the financial inclusion fund have recruited over 400 new money advisers – with 100 more in the pipeline – who have helped more than 26,000 people since April last year. The Growth Fund has helped make over 21,000 affordable loans through credit unions and Community Development Financial Institutions (CDFIs) to those worst affected by financial exclusion. And the latest data from the Family Resources Survey shows that by 2005-06, the banks and the Government had brought over 800,000 adults into banking.
- These initiatives have made a real impact, but more needs to be done. That is why, in the new financial inclusion strategy published two months ago, I set out a range of measures strengthening the Government’s commitment to financial inclusion.
- These include:
- A new financial inclusion fund for the next spending period;
- A ministerial working group to deliver a detailed action plan later in the year; and
- The continuation of a Financial Inclusion Taskforce to monitor progress and advise the Government up to 2011.
- In this strategy, I also set out the Government’s response to Brian Pomeroy’s independent Review of Christmas Savings Schemes. This considered the implications of the Farepak collapse for Government policy on saving and recommended a new agreement with the hamper industry for an industry-led scheme to protect consumers’ funds in secure ring-fenced accounts; and a £1 million Office of Fair Trading awareness campaign to ensure that customers are aware of their saving choices.
- And in addition, the financial inclusion campaign launched in January this year, “Now Let’s Talk Money”, is working with local charities and community organisations to promote the important role credit unions can play as trusted alternatives to hamper schemes.
- This is particularly important in the context of the issue I want to talk to you about today – how the Government’s savings strategy can help us achieve financial inclusion.
- Since 1997 our savings strategy has focused on improving the environment for saving, providing adequate incentives to save and empowering individuals with the capability to make the right saving choices.
- Where we have the Child Trust Fund for children, the Individual Savings Account is the Government’s primary vehicle for tax-advantaged savings for adults, outside pensions. ISAs have been successful in extending saving more widely throughout the population – including among the young and low-income groups. This morning, I have visited Bristol Credit Union and seen how, with funding from the Growth Fund, they are providing services to low-income communities in Bristol. Following the Farepak collapse, they have recently launched a Christmas savings account and are set to launch a Child Trust Fund account in the coming weeks.
- But tax relief is not an effective incentive for lower income earners who pay little or no tax.
- Our research shows that lower income households may be less likely to save than other households and may not have sufficient levels of savings to draw upon, for times of adversity or to plan ahead and take advantage of opportunities such as lifelong learning.
- Indeed the latest data from the Family Resources Survey shows that in 2005-06 28% of households had no savings, rising to 43% for households earning less than £300 per week.
- And so a particular challenge has been providing targeted saving incentives for lower income households who may not have much previous experience of saving.
- In response, and as many of you here today will know, since 2002 we have been piloting the Saving Gateway – a savings account targeted at lower income households to encourage a saving habit and promote engagement with mainstream financial services.
- In the initial pilot, the Government matched individuals’ savings pound-for-pound up to £25 per month over an 18 month period.
- In 2005, a second, larger pilot was launched to test alternative match rates, different monthly contribution levels and a range of financial education support. The accounts were also made available to a wider range of income groups than the first pilot.
- Building on the conclusions of the initial Saving Gateway pilot, I am able to share with you today the findings of the second evaluation, which was carried out by MORI and the Institute for Fiscal Studies.
Final evaluation findings
- Overall, the evaluation found that the pilots were very successful in generating savings – around 22,000 participants managed to save a total of around £15 million and earned a total match of over £5 million.
- Saving responses varied but the evaluation finds that the Saving Gateway encouraged some lower income participants in particular, to save regularly and to reduce their expenditure in order to save. There was also a positive impact on participants’ attitudes to saving, which was most marked among those who had little or no prior experience of saving.
- The research also found that the pilots gave participants a sense of achievement – in particular among those new to saving – and an increased sense of security.
Key lessons learnt
- Some important policy implications can be drawn from the results of the pilot. The findings point overwhelmingly to the success of matching as a targeted incentive for lower income savers.
- Participants in the pilot liked the concept of matching. Like many of us, they found it easier to understand pounds rather than interest rate percentages.
- This echoes the findings of the first pilot. However the results of the second pilot go further, demonstrating, that while higher match rates may have a small effect on take-up, there is no need to offer match rates as high as pound-for-pound in order to incentivise people to save.
- The evaluation also finds that monthly contribution limits provide a structure for regular savings. One interesting point from both pilots is that participants tended to see the monthly contribution limit as a target, with the amount most commonly saved being equal to the contribution limit. Overall, the pilots suggest that, for those at the lower end of the income distribution, £25 per month is an affordable saving limit.
- In addition the evaluation found that most participants in the pilots believed they would continue to save after Saving Gateway ended. This suggests that a time-limited account – 18 months in the pilots – could kick-start a saving habit among those new to saving.
- So matching and monthly limits worked well, especially for savers on lower incomes. But the evaluation found that participants on higher incomes were more likely to save in their accounts by recycling existing savings. This suggests that the policy focus on people on lower incomes – up to around £15,000 household income as used in the first pilot – is about the right level.
- The evaluation also found that individuals living closer to a Halifax branch were more likely to open an account than those who lived further away – demonstrating the importance of ease of access. This is likely to be especially important for those on lower incomes who prefer to save in cash.
- Participants in the Saving Gateway were able to access their money in both pilots. But very few withdrawals were made: 98% of savers left their savings untouched throughout the 18 month period.
- We can draw parallels here with Brian Pomeroy’s findings in his recent review following Farepak. Customer workshops found that while people were willing to accept – and indeed welcomed – a lock-in of their own money when they are pre-paying for goods for Christmas, they are not attracted to a lock-in on general savings. An important conclusion is that Christmas Hamper Schemes and the Saving Gateway meet quite distinct savings needs and so each may require distinct product characteristics.
- On financial capability, the first Saving Gateway pilot provided significant support to participants, especially at account-opening, through the Community Finance Learning Initiative.
- However, the account-opening process in the second pilot was operated directly between the Halifax Bank and participants. And a wider range of community finance education support was provided alongside.
- The results of the second pilot demonstrate that, on the whole, take-up of opt-in financial capability opportunities linked to the Saving Gateway was low. In general, individuals simply did not think it was relevant for them.
- Like the first pilot, the second pilot found that many on low incomes are skilled money managers as they have little financial room for manoeuvre each month and little in the way of disposable income.
- But there may still be a need for some measure of additional support. Although many participants of the second Saving Gateway found the accounts easy to understand and operate, less financially-confident savers said they would have liked a meeting to explain the account in more detail at account opening and more guidance on options for their money at account maturity.
- On the one hand this may suggest that we should build appropriate defaults into the system so that, for example, Saving Gateway accounts should automatically roll-over into cash ISAs on maturity.
- But it also suggests that less financially-confident savers might still need to draw on some additional measure of support with understanding product rules such as the right to withdraw money and pay in by direct-debit.
- The second pilot demonstrates that there are financial inclusion benefits to extending a structured matched savings account to people on lower incomes. The evaluation found that the scheme brought some individuals into contact with a bank for the first time, that the experience was useful in familiarising new savers with the mechanics of saving and encouraged them to think more carefully about their finances.
- To quote a member of the Halifax Bank in the East London area:
“It brought in a lot of people that we have never seen before … got them on that step to banking. Gave them a bit of confidence, not just in Halifax but any bank really.”
- Overall then, the Saving Gateway pilots provide a wealth of data on which to base informed policy decisions about how to target incentives on lower income savers. We can conclude that there are clear benefits around formalising informal savings, promoting regular saving and getting people into financial institutions for the first time.
- But even having conducted these extensive research pilots, there remains a key set of challenging policy decisions to consider as we move ahead.
- A key challenge will be the eligibility criteria that would apply to any roll-out of the Saving Gateway and how that would be administered. Would we ‘passport’ access through existing benefits and tax credits? How would that work in practice? Or would a separate income or asset test be more appropriate?
- Given that the Saving Gateway is a short-term account to kick-start a saving habit we would also need to consider whether we should restrict eligible individuals to one account in their life-time. But this brings its own challenges – policing the rule and equipping individuals to make informed decisions about when to take up the opportunity.
- And then there is the appropriate delivery model. This might be open-competition like the Child Trust Fund with a range of providers around the country – but there are other models. And we would need to consider the valuable role that local organisations such as housing associations and credit unions can play in reaching the hard-to-reach.
- And of course all of these challenges will have to meet a tough value-for-money test.
- We will need now to spend some time further analysing and reflecting on the evidence emerging from the second pilot.
- I am publishing the final evaluation report on the second pilot as conducted by MORI and the IFS on the Treasury website. I hope many of you will take time to look at the report, and let us know your views on the way ahead. I especially look forward to hearing the views of Elaine Kempson and her team.
- Following an initial gathering of views, and further analysis of the findings of the pilot, we plan to make further announcements on the next steps for the roll out of the Saving Gateway in the Pre-Budget Report.
- In conclusion, we have made real progress on financial inclusion and saving but there is still a lot more to do.
- Tackling financial exclusion, spreading financial capability and helping to set more low income earners on the path towards a regular saving habit is essential for both our economic prosperity and for social justice. It is good both for individuals and for society and the economy as a whole. This is an area in which Bristol University has led the debate. I look forward to working with you and colleagues at this new Centre all to drive this agenda forwards in the coming months.