Trust funds failed to give children the level playing field they deserve

Millions of children will be returning to school this week. For many, it will be the first time that they have been in five months. The consequences of this loss of schooling will be profound, persistent and socially unjust.

The evidence is now overwhelming. Those from poorer backgrounds will have suffered most. They have had less support from their schools, have done less work at home and have lost ground relative to their better-off peers. They, and we, will be reaping the consequences for decades to come.

Action, and inaction, by government often has more effect in the long run than it does immediately. Examples of both the government and electorate ignoring this fact are legion. But this week some young people, most of them still at school, will reap the rewards of a decision made decades ago. They will benefit from a policy, long forgotten by most, that was announced all the way back in April 2001, formally launched in the 2003 budget delivered by Gordon Brown and finally went live in 2005.

Child trust funds were accounts made available for all those born from September 2002 onwards, into which the government paid £250, or £500 for those growing up in families receiving means-tested benefits. A further £250 or £500 was paid on the child’s seventh birthday. They can be accessed once the child reaches age 18 — hence the first pots being available from tomorrow. My own twin sons will be able to access their CTFs in December.

Parents, or indeed other relatives, have been able to top up the accounts, with returns accruing free of tax. They have been able to top up to such an extent that a small number of funds could now be worth more than £50,000. Not bad for a few lucky 18-year-olds. The bad news is that very few will be that lucky. The median pot size is nearer £650, representing little more than was put in by government in the first place.

Modest though these sums are, given what’s been happening to this generation recently the timing looks pretty good. For the next eight years, millions of 18-year-olds will be able to access this handy windfall. Not after that, though. The policy was abandoned by the coalition government in January 2011, meaning that it is only those born in the eight and bit years after September 2002 who will reap the rewards. Given the focus on austerity at that time, this was an easy saving of about half a billion pounds a year. All the losses were well into the future. And in truth there wasn’t much fuss made at the time.

The policy arose from an idea, developed in the late 1990s, known as asset-based welfare. Traditionally, the welfare state has topped up people’s incomes when they have fallen on hard times. The proponents of asset-based welfare recognised that access to financial assets was valuable and important in itself. Wealth provides security and opportunity. Young people with assets were more likely to start their own business or to invest in their own education. And, of course, wealth and opportunity are extremely unequally distributed.

Whether CTFs have helped much is, however, rather doubtful. Part of the problem lay in the confused policy aims right from the outset. As Gavin Kelly, an early proponent of the idea and adviser to the Blair government, has written, the CTF “had multiple objectives — developing a saving habit, distributing wealth more equitably, promoting financial resilience — some of which were in tension”. The sums involved were nowhere near enough to make a real dent in the unequal distribution of wealth. Indeed, as you’d expect, it was better-off parents who put more into their child’s trust funds. This may well be money they would have given to their sons and daughters in any case, but, like most forms of wealth, CTFs are hugely unequally distributed. A few contain a lot of money; most contain rather modest sums.

The long-termism apart, this is all unfortunately typical of government policymaking: trying to achieve too many laudable, but often incompatible, aims with any individual policy; over-claiming the likely effects for spending relatively modest sums of money; not placing individual policies as part of a wider strategy; and not implementing policy in a way that engaged the public. On the last point, it is notable that almost a third of the accounts were opened by HM Revenue & Customs on behalf of parents rather than by parents themselves. Significant numbers of accounts appear to be dormant, in that they have not been added to or otherwise engaged with in many years. Expect to hear more about that in coming months.

It’s a pity, in fact, that Mr Brown didn’t have more of the courage of the convictions of those promoting asset-based welfare. If he had really wanted to reduce wealth inequality and to increase the financial resilience of the least well-off young people, he would have been better simply giving a few thousand pounds to the poorest third or quarter of 18 or 21-year-olds. That would have been a meaningful sum that not only would have been affordable but also would have come without all the unnecessary paraphernalia of special funds sitting around for decades with little in them and little meaning for most. It might even have been more difficult for the next government to get rid of.

Rishi Sunak, his successor, might not want to go down that path. He does, though, need to find a way of providing additional support for the school students who have been so severely disadvantaged over the past few months. That must be a national priority.

Effective investment in their human capital — their education and skills — is most important. Some targeted financial capital might not go amiss, either.

This article originally appeared in The Times and is used here with kind permission.