Gordon Brown’s baby-bond proposal has certainly captured the public imagination. But is it really, as he claims, the first step in a determined effort to build a genuine savings culture in Britain – or simply an inspired electioneering tactic that will be quietly forgotten in the aftermath of victory?
Although details of the proposal have yet to be clarified, one thing is transparent: the per capita sum of money is not generous. At, for example, eight per cent gross interest, £500 takes nearly nine years to double in value. So, any 18-year-old should have no great expectations, especially after the ravages of inflation have taken their toll.
But baby bonds are immensely symbolic. They send out an indirect signal to the public that the government means business about individuals making financial provision for themselves (ironically employing nanny-state methods to wean us off the nanny state). This signal will be encouraging to the financial services industry on two counts. It suggests a new (and universal) range of products, aligned around the likes of ISAs and stakeholder pensions, to which it can bend its talents. And, more broadly, it marks a deepening of the relationship between the public purse and the private sector – which is unlikely to have negative repercussions for financial services.
Yet the task of building an effective savings culture is monumental; for two reasons. The first is that the amount people save is strongly driven by cyclical economic behaviour, which bears little relationship to government incentives, or commercial sector marketing budgets. Right now, for example, household spending has been comparatively strong and savings weak as a result of a long period of prosperity, aided – latterly – by a decline in interest rates. Which means that Brown’s initiative has a mountain to climb.
The second is that the public has a profound distrust of the financial institutions which will be responsible for selling these savings products. This lack of confidence goes well beyond the headline issues of Robert Maxwell, pensions misselling and Equitable Life to the very way that retail financial services companies present themselves in public. Most persist in building their enticements – such as lower interest rates – around what they think the competition can bear, rather than what the consumer may actually want. It makes, by and large, for dull, confused marketing – if not confusion marketing.
So much the better, then, for the few – like Egg, First Direct and Virgin – which appear to have a clear branding and customer service proposition. But long-term confidence measures will require a great deal more than clear branding. Financial services companies need to be less tactical in their approach to the market – as instanced in the cynical way that some address the ISA market: by committing the largest part of their resources to faddist themed funds at the end of the tax year. In short, what’s needed is more transparency, a simpler message and a convincing commitment.