Child Trust Funds (CTFs) were launched by the government in 2002, typically giving £250 (or £500 for some qualifying on low incomes) to children born on or after 1 September 2002 in a savings account. Once opened, parents or grandparents could make additional contributions of up to £4,260 a year. No new CTFs were written after the scheme was abolished in 2011 and replaced by Junior ISAs. The reason that they are newsworthy now is that in September 2020, the first CTFs will start to mature.
Once a CTF has reached maturity, the assets must be transferred to a new account. The CTF cannot accept new investments and cannot be retained as an investment vehicle. Maturing CTFs can be transferred into a new ISA account without breaching the annual contribution limit whilst counting towards the Lifetime ISA limit. Alternatively, from 6 April 2015, it has been possible for people with CTFs to switch to Junior ISAs before the CTF matures. Such a switch may have the benefit of better rates on cash and/or lower investment charges and automatically converting into adult ISAs at maturity.
Where no instructions have been received from the account holder on maturity, the assets can be held in a protected account (e.g. ‘maturing CTF fund’, cash ISA or stocks and shares ISA) pending instruction. This arrangement protects the tax status of the assets until instructions are received and may be helpful for those who have temporarily lost CTFs.
Some key facts
There is limited information on CTFs. The last government figures were produced in 2012 shortly after announcing the closure of CTFs. At that point there was £6bn AuM and there were c70 approved child trust fund providers;
There are estimated to be 6.3 million accounts, opened since launch but around one in six of these are thought to be lost – e.g. where a house move has led to parents losing track of the accounts;
After the first maturities in September 2020, an estimated 800,000 CTFs will mature each year for next few years;
Once the account matures and the holder reaches 18, the account will be under their control and parents / guardians will no longer have any jurisdiction over the account. Providers will only accept instructions from the account holder.
Opportunities and challenges
CTF providers are presented with some unique opportunities to develop relationships with future savers as well as facing a number of challenges in doing so.
Retention – if CTF providers wish to retain maturing business, their customer proposition will need to appeal to the 18 year olds whose CTFs are maturing. To be engaging, they will require fully digital systems that account holders can access, offering an appropriate and suitable range of alternative investment options as a destination for their maturing CTF.
Administration costs of supporting the business and keeping administration costs manageable – by definition these funds have been largely accumulating and the ability to efficiently administer maturity claims has not yet been tested. To date, many CTF providers have benefited from annual management charges. Have these factored in the cost to service maturing contracts? Are the administration team set up to process the anticipated spike in activity?
Lost policyholder contracts – it will be important to establish best practice treatment for lost policyholders. With an estimated 1 in 6 contracts lost, the number in this category could be large. There will be a focus on reuniting these individuals with their unclaimed investment proceeds, perhaps using forensic tracing techniques, particularly where a new saving relationship can be established.
How can Hymans Robertson help?
We currently have a 40-strong team of dedicated insurance specialists who are able to offer in depth expertise across the actuarial spectrum. We are able to provide specialist support – whether that is in relation to new products, business retention and customer proposition, investments and ALM, risk and capital, longevity or transactions support.
We would be delighted to work with you to manage the areas we have highlighted. We have tools to help with positively engaging policyholders with a view to switching to an appropriate Junior ISA, ISA, Lifetime ISA product.
We could also help you manage any gone-away contracts. Goneaways have been a focus for the FCA for some time and that focus is unlikely to diminish in the future.
We also have a team of transaction specialists who can assist with divestment of non-core business portfolios as well as supporting the acquisition of target portfolios.
We are proud to have won InsuranceERM’s awards for both ‘Actuarial team of the year’ and ‘Mortality/Longevity team of the year’ for three consecutive years - 2018, 2019 and 2020.
We are also pleased to confirm that we are members of the FCA/PRA’s Skilled Persons’ Reporting Framework preferred panel for Insurance.
Our wider team also brings extensive representation on industry bodies. Members of our Life and Financial Services Practice chair or sit on many IFoA working parties, including Matching Adjustment and Transitional Measures on Technical Provisions. We also serve on Investment and Life Assurance Group’s Board and Regulatory and Financial Reporting practitioner working groups, where we have contributed to numerous IFRS and Solvency II consultations.
If you would like to discuss anything mentioned in this newsflash, please do get in touch.
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