The economic events of recent months have shown without doubt that financial education is not only needed, but is a vital requirement, particularly about financial benefits such as pensions. For most of the 20th century, the majority of people who were members of an occupational pension scheme enjoyed the benefits and sense of security of a final salary arrangement in which financial education was not seen as a priority.
Now, with many millions of people belonging to defined contribution schemes and more set to join their ranks in the future, the need for knowledge and understanding going forward should be at the top of everyone’s agenda.
When speaking at a conference several years ago on the subject of choice, I remember contrasting a stakeholder scheme with only two investment choices and another that had 301 options. The former had too little choice, and the latter would have baffled even the most astute and erudite financial adviser. What this highlighted was the need for members to understand the funds that were available, where they stood on the risk spectrum, and the importance of keeping their decisions under review.†
Risk aversion
Recently, I spoke to some new staff Barnardo’s was acquiring under Transfer of Undertakings (Protection of Employment) (Tupe) arrangements, who were keen to show me their benefits statements. I asked them how they would rate their risk aversion and all would have been low-to-medium. My eyes immediately alighted on the chosen investment fund, which was adventurous. It soon became apparent that this fund had been chosen for them without discussion.
They had no idea that their contribution, plus that of their employer, had been invested in a high-risk fund. After running through the basics of investment with them, including the importance of understanding risk and reward, hopefully they will be able to make better decisions in the future.
Since the current banking crisis began, the number of people asking about the safety of their pensions has multiplied. The amount of irresponsible and uneducated chatter about investments has increased even more. Endless numbers of people have been speaking about the need to cash in or alter their investments because they fear they have lost a great deal of money. But in such circumstances, they should question whether they actually need to have their money instantly. Their answer is inevitably no. The fact that no loss has been made until such time as the investment has been sold appears to have passed most people by. Instead, there is often blind panic brought about by financial illiteracy, which drives most people’s investment and disinvestment decisions.†
Potential disaster
The recent financial crisis should have taught us all that the first £50,000 of our savings held with banks and building societies is now guaranteed. Unfortunately, that particular problem also highlighted just how many people have significant amounts of money in only one institution instead of spreading their risk by holding deposits in many other banks or building societies. Two significant areas of learning through one potential disaster can not be bad and will provide valuable lessons for the future.
But why do we all wait to learn until it might be too late? We need to take the initiative individually to learn more about money and there is a great deal employers can do to help increase employees’ financial literacy, for example, by giving staff access to interactive financial education tools online through their intranet sites.
Graham Brown is pensions manager at Barnardo’s
- The need for financial education has become even more apparent in the current economic climate.
- The continuing move from defined benefit to defined contribution pension schemes is increasing the need for staff to have a greater knowledge and understanding on issues such as investment.
- Employers can do a great deal to improve employees’ financial literacy, for example, by providing online tools.
†