The new Child Trust Fund probably won't bring big returns, but if it teaches young people about the shiftier ways of the financial markets it will be worthwhile

Gordon Brown's Child Trust Fund vouchers are dropping through the nation's letter boxes. Many have criticised the Chancellor for what they see as a shameless pre-election bribe, but if it is a bribe, I am not sure it will succeed. For every parent getting £250 or £500 for their little darling, eight parents will miss out because their offspring are too old. They may feel miffed.

Children older than two and a quarter in September 2002 do not qualify. And what about parents with children on both sides of the qualifying date? Those who like to see all their children treated equally may feel obliged to bankroll a similar fund for their older kids.

The scheme works like this. The families of newborn babies are sent vouchers which they take to banks, building societies or other companies, which in turn set up funds in the names of the children. These tax-free vehicles can then be invested in a range of financial services from ordinary savings accounts to share-market funds.

Parents and families can top up the funds by as much as £1,200 a year and the government has promised to chip in an unspecified additional sum on the child's seventh birthday.

Those who dismiss it as a gimmick are both right and wrong. Certainly, the funds are being served up with large dollops of marketing bollocks and they do contain the usual weasel terms and conditions that will catch out the unwary. But look at it another way: what better way of educating our children about the more rapacious practices of the financial services industry?

Thanks to these funds, for example, children may learn before they leave primary school that the headline rate of interest that is promised (Abbey is trumpeting 5.25 per cent) mysteriously drops once they are signed up and committed. By the time they do GCSEs they may discover that the miracle of compound interest and the claims for stock-market investment look rather pedestrian once fees have been clipped off their nest eggs.

By the time they leave school they should know that the more commercial the outfits running their funds, the less is left for them. And who knows, they may even notice that fund managers who make bold claims for market returns rarely achieve them, while those picking shares with pins usually do better.

It promises to be a great introduction to the ways of the shearing shed. Children will, I suspect, reach their 18th birthdays with less than the Chancellor imagines, but they may be a bit more savvy when it comes to big decisions of the grown-up world such as mortgages and pensions. At a cost to the taxpayer of £240m a year, that looks like value for money.

Sir Ralph Halpern gave me a nice little story the other day when he opined that listed-company bosses weren't paid enough. Coming from a former chairman whose boardroom rewards in the 1980s were a byword for excess, this was jolly.

In his heyday as Burton boss he had executives not only on three-year rolling contracts but five-year rollers - the holy grail of the idle and useless. (Getting sacked brought five years' money.) Sir Ralph was paid more than £1m a year and was eventually sacked with a £2m pay-off.

His point now is that executives of listed companies aren't motivated in the same way as their private-company counterparts, who are routinely given share packages that pay off spectacularly if they do the job. Even the biggest listed companies do not match the potential rewards of the unquoted sector.

The result, according to Halpern, is that the best talent is being lured away from listed companies to run private ones. (The latest is Lord Hollick, leaving United Business Media to work for Kohlberg Kravis Roberts, the big private equity player.) The losers, says Sir Ralph,

are the millions of pension-fund members and others who rely on listed-company performance to swell their nest eggs.

Up to a point. Better-paid public-company bosses are fine so long as they create sustained value for shareholders. It is comparatively easy to squeeze extra stated profits out of a business by slashing costs, cutting capital investment, scrimping on service and letting the pension-fund deficit rack up. In this way, private equity backed companies are adept at polishing up businesses over three years for resale.

Creating sustainable, long-term value is much harder, as Sir Ralph knows. Burton Group shareholders made a fortune from his efforts in the first half of the 1980s but lost most of it in the second half, when his expansion strategy proved a dud. By the time he was ousted in 1990, Burton was almost bust. The point is that it is not until years after the event that an executive's efforts can be gauged accurately. What seemed around 1985 to be Sir Ralph's flair and courage turned out five years later to be self-interest, recklessness and over-optimism.

Patrick Hosking is investment editor of the Times

Post your comment

Please note: you will need to login or register before you can comment on the website