CTF Liberation - Friend or Foe?
CTF Liberation - Friend or Foe?
Child Trust Funds have been a policy success in getting parents to save and invest more for their children’s start to adult life.
For those who actively manage their CTF account in cash or in investments, the ability to switch to Junior ISA opens up additional choice, which is great. But this is only 22% of accounts, and typically for more confident customers. The vast majority – 78% or 4.7m of 6.0m CTF accounts are in Stakeholder strategies and the move to a JISA would trigger a loss of the associated government-endorsed protections. It is the move from Stakeholder CTF to Unrestricted JISA that requires closest and urgent examination.
Stakeholder CTF vs Unrestricted JISA
Millions used CTFs encouraged by the government endorsement and the clear protections around Charges, Access and Terms, that protected consumers from excessive costs (with a price cap of 1.50%) and protected them from excessive market risk on approach to expected withdrawal (5-year lifestyling).
While JISA providers are promoting themselves as having more choice and therefore more benefit compared to the CTF ‘poor cousin’, we think the truth is the other way round. The protections around fees and investment risk enforced by the government’s ‘stakeholder’ label are exactly why CTFs enjoyed such great popularity, particularly for more vulnerable customers who may lack the confidence, time or interest to make and manage their own investment choices. The risk of customer detriment if these savers make an uninformed transfer to an unrestricted JISA is material.
Indeed, in the event of these accounts being impacted by market risk around expected withdrawal date when children reach 18, there is a potential for a mis-selling scandal as savers realise they were enticed away from protected CTFs (with regards to fees and lifestyling) to unrestricted JISAs, where it is harder to compare costs from provider to provider, where there is no price cap on the funds offered, and also have none of the capital protection that lifestyling provides.
Is the charge cap important?
Yes. Without a charge cap, and with no ability to compare pricing of old CTFs (single charge figure) to new JISAs (platform charge + fund Ongoing Charges Figure), there is the potential for CTFs transfers to JISAs being shoe-horned into expensive funds that are linked to the JISA provider, or where the investment strategy is not fit for purpose. In any case the absence of lifestyling in JISA will affect children’s savings just when they need those protections most.
Is lifestyling important?
Absolutely. When a child is a baby, the pot size is small and the time horizon is long, so additional contributions can make up for market volatility that is the flipside of the higher growth coin. Besides, as the pot can’t be accessed, there is no urgent need for the money and the investment can be left to do its thing. When a child is approaching their 18th birthday, their pot will have more in it, so any sudden downswings in value will damage the value of their whole pot just when they want to withdraw it to fund a better start to adult life – for higher education, skills training or to start a new savings journey. This, after all, was the original policy objective.
So, without lifestyling, those pots will be “at risk” for all JISA providers and, for customers who moved investments from the protected world of Stakeholder CTF, there would be disappointment and outcry. Obviously, this is only a problem if markets behave badly. But there’s no knowing how markets will behave in 1, 5 or 10 years’ time and it’s better to design out that risk.
What is the government and regulatory position?
In the HMRC Consultation that closed on 2nd January 2015, AFM’s submission rightly flagged its concerns about the loss of protections but the consultation was remarkable for its lack of questions to consult on. The FCA has provided no guidance on the matter. With only one month to go, how has this gone unnoticed by the investment industry and the press?
How can AFM members protect and grow their business?
JISA providers are revving up to grow their business at the expense of CTF providers. The lapsed enthusiasm from the government for CTFs is, of course, disheartening. Are CTFs a lost cause? We don’t think so. We think that a vigorous rethinking of how CTFs are managed and priced can put CTF providers back in the driving seat. CTF providers can engage with their customer to protect and grow their business by taking the following steps:
Our Five Point Plan
1. Make the media and public aware of the loss of cost and investment protections that could affect Stakeholder CTF holders migrating to unrestricted JISA products and how this affects the majority (78%) of all CTF accounts – some 4.7m children’s’ savings.
2. Ask directly, or through AFM, for HM Treasury, HMRC and the FCA position on this and how the potential loss of these protections has been evaluated in terms of customer outcomes.
3. Consider replacing existing lifestyling strategies, that are costly to deliver, with target date funds which offer lifestyling within the fund, and within the cost of the fund. There are now a number of providers to choose from.
4. Pass through the benefits of the removal of the lifestyling administration cost to customers to reduce the cost of your Stakeholder CTF whilst maintaining or expanding margins.
5. Work individually, or collectively, to build or badge a platform to offer JISAs, or even ISAs and SIPPs too, so that you can offer JISAs to your CTF holders and have the capability to expand your product range further at low marginal cost, should you wish to. There are platform providers out there who can do this on a turn-key basis, so no need to reinvent the wheel.
Target Date Funds explained
Target Date Funds are multi-asset funds that offer the ‘lifestyling’ inside the fund which means there is no need to monitor and manage all the switching of individual plans. This reduces the cost of providing a CTF and enables CTF providers to compete on price whilst maintaining the protections that lifestyling offers.
Has this been done before?
Not in the UK, but in the US we researched the ‘529 plan’ market where target date funds are used as the investment engine to provide those protections along the investment journey. We summarised this research and our proposal as to how Target Date Funds can lower costs to providers and customers alike whilst retaining the protections of lifestyling in a position paper we wrote for the Centre For Policy Studies. You can download that paper here:
The changes to the rules on CTFs create challenges. Some energy and creative thinking around this could ultimately create a tremendous opportunity.
Henry Cobbe, CFA
Elston Consulting is a specialist investment consultant that helps asset managers and intermediaries develop innovative investment solutions for their customers.