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Case Study: OPAL solution addresses the Child Trust Fund ‘Time-bomb’
OPAL was invited to provide consultancy services on the future administration requirements of Stakeholder Child Trust Funds (CTFs) by one of the UK’s leading providers.
CHILD TRUST FUND OVERVIEW
Child Trust Funds were established as an investment vehicle for ‘vouchers’ worth up to £250 issued by HM Treasury to each child born between 1 September 2002 and 2 January 2011. A total of 6.3 million CTFs were opened.
There are 2 types of CTF available - Stakeholder and Non-Stakeholder. Stakeholder plans were by far the most popular representing 78% (4.8million) of all CTFs. These plans have to follow strict rules around the risk profile of the shares / assets they invest in. Stakeholder plans are also restricted to a maximum 1.5% annual fee.
Non Stakeholder CTFs are either simple interest bearing cash deposits or equity investments with no constraints in terms of fees or risk profile.
Once the CTF is set up relatives are able to contribute additional funds (only 17% do), however no withdrawals can be made until the child reaches the age of 18. Additionally, HM Treasury opened CTFs for those children whose parents did not. These ‘Revenue Allocated’ CTFs represent about 30% of the CTF total.
Each CTF has to be held until the child reaches the age of 18 therefore all CTFs will mature between 2020 and 2029.
Our investigation identified that when the CTFs enter the ‘maturity phase’ in 2020 there will be a sudden, sustained increase in administration activity and potentially a 5-fold increase in related costs. Although the providers have always been aware of this increase in activity at this point in the product’s lifecycle, four key factors which have negatively affected the performance of CTFs will come together, like a perfect storm and create a ‘Time-bomb’ for providers. Those factors are:
- Low balances - Far fewer parents / relatives have added funds to CTFs than providers originally anticipated.
- Low investments returns -The financial crisis of the late 2000s and subsequent low interest rates have had an adverse effect on the investment returns.
- Following a change of Government the vouchers issued by HM Treasury to each new born child were stopped. CTFs were replaced with more flexible Junior ISA’s. The removal of Government payments for each new born child launched a Junior ISA (to replace the CTF) in 2011 and removed the provision of HM Treasury payments to each new born child. This has meant that CTF products have been effectively consigned to closed book status and therefore the rates of return offered are not as attractive as the current JISA.
- As a result of 1) and 2) the actual value of the annual 1.5% stakeholder charge is much lower than anticipated.
- Current manual maturity processing fees – Providers data security / Anti-Money Laundering and IT security requirements mean largely manual processes, such as ID and bank account verification
The capped stakeholder charging structure has been largely unsuccessful with other financial products too due to a failure to attract high enough balances to cover the basic day to day administration fees. In the case of CTFs, if we assume that the average balance at maturity of £1,000 in the final year’ charge of 1.5% is worth just £15. This is very unlikely to cover the costs of the current manual maturity process required by the providers and will effectively be subsidised from the fees from the remaining (diminishing) number of plans.
OPAL has considerable experience in administering similar investment products and a thorough understanding of providers current ID verification and maturity processes. Almost all of these processes typically have a significant manual element (for example, checking, logging and posting back passports / bank statements and so on.). The challenge to ‘de-fuse’ the ‘Time-bomb’ is to develop a more efficient, automated online maturity process.
Simple, low balance, low fee products such as CTFs are ideally suited for online administration. All CTFs belong to the first generation to have grown up with both the internet and smart phones. They would expect or even demand to access their CTF online.
OPAL recommended a fully optimised online customer portal utilising a combination of online ID Verification techniques and straight through maturity processing resulting in a BACS payment to the customers chosen account within 24 hours. This process required no manual intervention, was highly secure and would deliver the level of customer experience expected by 18 year olds in 2020!
OPAL further suggested it was to wise wait until 2018/9 before deciding on which online ID Verification technology to adopt as it is a fast evolving market and choosing a solution in 2015/6 will close off potentially better future solutions.
OPAL has developed a sophisticated administration Software-as-a-Service with a fully optimised customer self-service portal, ideal for financial products. Any aspect of the customer’s account can be serviced by them at any time day or night. The portal provides straight through processing, removing the need for manual intervention and reducing processing fees whilst delivering an excellent customer experience.