28 April 2016
Who is responsible for our financial education?
by Frank O’Nomics
So class, do you know what an ISA is? How about a LISA? Ok, very good, now how would you decide between taking a fixed or floating rate mortgage? Finally, for a bonus point, can anyone tell me what a UFPLS is?* Not really the kind of questions that you would have expected at school, but how did you learn about how to budget and to manage your savings and investments? For most of us the answer will be that we have taught ourselves and have generally learnt the hard way – getting a great deal wrong and suffering the consequences, many of which (particularly those regarding mortgages and pensions) can be quite long-term. There are obligations on those that sell us financial products to ensure that we are aware of the pitfalls and alternatives, but this is not the same as managing your financial affairs from a sound holistic economic and budgetary basis. So just who should be responsible for ensuring that you have a proper start in terms of managing your financial health?
In February 2013, the government, following some significant petitioning, acknowledged that it had a responsibility by announcing that the financial education would become compulsory within the National Curriculum and if you search the PSHE education (Personal, Social Health and Economic) website you will see that Economic Wellbeing and Financial Capability sits within their remit. However, while the level of education surrounding a healthy diet and the benefits of regular exercise have a high profile, the level of financial literacy in the country seems to have progressed little. It is one thing to say that something needs to be taught, and quite another to find a way of effective teaching, beyond a couple of questions on compound interest for the smart kids in a maths class, or some elements of personal finance in citizenship classes.
When one looks at the level of personal debt in the UK, and how quickly it is rising, you can see just how important this is. Taking credit card debt as an example, the total debt level for the UK in February hit £63.82bn and for those who can only make the minimum repayment each month, it would currently take over 25 years to repay the debt on a card bearing the average interest. Adding in mortgage debt gets the total up to £1.465 trillion and the Office for Budget Responsibility has forecast this figure to hit £2.551 trillion within the next 5 years. For those that can service such high levels of debt there is the issue of how to make sufficient provision for retirement. Pensions seem to be a much maligned concept, with a recent MRM survey of 18-25 year olds showing that around 33% saw getting on the housing ladder a key priority, while only 7% thought a pension was important; interestingly 21% had saving for something specific such as a car or holiday as their main focus, which might in part be conditioned by the fact that 42% of those surveyed did not think that they earned enough money to save, thereby negating the point of whether saving for a property or a pension was more important. Of particular concern is the fact that, according to Citizen’s Advice, unsecured debt among 17-24 year olds averages £12,215, with levels of engagement and trust in financial services low. Part of the problem here may be that many young people regard the unused balance of their credit card limit as an asset, along with any savings that they have.
That it is possible for financial health to be a part of a school day seems to be well illustrated by developments in the US. 44 states now have a compulsory finance course at school, with 13 of those having a personal finance module. A good example is to be found in Fairfax, Virginia, where students spend 4-6 weeks (a total of 21 hours of teaching) on budgeting and saving. At the end of this process 12 and 13 year olds are encouraged to role play as older people and consider ways to cope with the financial constraints and objectives that adults face. Local financial services firms happily get involved and the benefits are not only that school leavers are much better placed to manage their savings and spending, but also that they are able to export this knowledge to the rest of the family, thereby helping to fill the knowledge gap. Those entering the 9th grade (14 year olds) face having to achieve one unit of credit in Economics and Personal Finance to graduate with a Standard or Advanced Studies Diploma. These requirements have not been in place for long enough to illustrate the benefits in terms of a decline in numbers defaulting on their debts, and the economic cycle may have a greater bearing in the short-term, but the initiative is in the right direction.
For those of us whose school days are a distant memory, there is still an issue of financial education, particularly given the number of changes in legislation surrounding pensions. The number of employers entering into auto enrollment this year begs the question as to whose role it is to educate members about the pension scheme and to make sure that they know how much they are contributing. NEST have said that up to 60% of employers will need ongoing support with auto enrolment, with many wanting to outsource the set-up and management so that they can get on with running their businesses. The problem is that this is not feasible for smaller employers and the low margin nature of the schemes will mean that many financial advisers will see little incentive to get involved. The Pensions Regulator has overall responsibility for auto enrollment but, as yet, does not seem to have an adequate system in place to educate the employees who are now getting involved. Pension Wise has been set up to help the over-50s navigate the options available to them as they approach retirement and want to access their pension pot, but does not present solutions to younger people, only covers defined contribution schemes and is still laden with jargon. Those with a final salary or career average schemes can go to the Pensions Advisory Service or the Money Advice Service.
None of this factors in the importance of insurance, which is at best regarded as a cost, and for many brings thoughts of misselling. However, if people are taught to insure for what can go wrong so that they can invest for what can go right, they might start to have a different approach to term assurance and income protection. The industry has a lot to answer for in terms of an overuse of jargon, with very little by way of simple explanation.
Overall, the government has taken steps to improve financial literacy and has created vehicles to explore options for products such as pensions but, without greater education at a young age, official efforts will always be too late to be of real help. Will any of the need for financial education be negated by robo advice? The financial industry itself will be incentivized to “pile it high and sell it cheap” when it comes to pensions and other savings products. However, this is not the same as managing ones personal finances and learning how to budget effectively, and there is little point in having a systematized process for selling savings products if we don’t teach people how to generate the excess cash for a mortgage or a pension in the first place.
*In case you care, a UFPLS is an uncrystallised funds pension lump sum, which is money that, following the new pension freedom rules, investors can take directly from their fund from age 55.
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