Financial capability
Financial products are becoming more complex, there is more choice available, people are living longer and financial decisions need to be taken at a younger age. But large numbers of people are not buying financial products, including many who could afford to and many who know they need to. So what is stopping them?
Over half of Britain’s adults1 do not have any form of insurance protection. A third of all adults have no retirement savings beyond their state pension2. No fewer than four out of five pre-retired people think that a state pension will not provide them with the standard of living they hope for in retirement, yet over a third of them have not made any additional pension provision. And 70% of people have no savings at all.3, 4
The principal reason for this situation is a lack of financial capability, one of those catch-all descriptions that covers a wide spectrum of issues from people's ability to understand their own financial circumstances, to feeling comfortable about how to invest, save and borrow money, to being motivated to take action. A secondary reason is financial exclusion, the inability of people to access and pay for financial products and the barriers that prevent them from doing so.
Research conducted in 2006 by the Financial Services Authority (FSA), which leads the UK Government’s National Strategy for Financial Capability, found that many people fail to plan adequately for retirement or save enough because they simply do not have the financial knowledge to understand the choices available and know what they are buying. It also showed that of those who do buy financial products, many do not shop around to choose ones that best serve their needs, while some take risks with their money without realising they are doing so. The FSA has identified four competencies that add up to financial capability – the ability to manage money, plan ahead, choose financial products and stay informed.
Financial Education
Financial education is seen as the key to improving the nation’s financial capability but despite efforts to integrate this more broadly into formal education, the challenge of low levels of capability persist and clearly education is not the only answer. A key plank of recent government thinking on financial capability has been the idea that if more people could gain access to generic financial advice, more people would feel confident about asking for it and financial capability would improve as a consequence.
The independent body set up by the government to review this, chaired by Otto Thoresen, Chief Executive of Aegon UK, announced in March 2008 that they believe this idea could work. The Thoresen Review recommends a national ‘Money Guidance’ service, impartial from government and the financial services industry (although paid for by them), that will provide ‘sales-free’ advice to an estimated 19 million people who need it through a range of channels, including the internet, telephone and face-to-face meetings. Although it is too soon to say how this will work, it is designed to complement rather than replace existing financial education initiatives.
Education is still important, therefore, and the National Strategy for Financial Capability covers a wide range of programmes, with projects aimed at children and teachers in schools and young adults in higher and further education, as well as people in employment and those not in education, employment or training (NEET). A growing range of private sector and cross-sector financial capability initiatives has also been launched, such as What Money Means, a primary school initiative developed by the financial education charity pfeg (Personal Finance Education Group) in partnership with HSBC, and RBS’s Face 2 Face with Finance.
In 2007 Friends Provident started to develop its own primary school numeracy and financial literacy programme in partnership with Tower Hamlets Education Business Partnership and Marner Primary School in the London Borough of Tower Hamlets. This is a two-year pilot project from which we hope to develop a model programme that can be rolled out to other schools.
Financial Planning
Of course financial capability isn’t only an issue for those without financial products. For example, not everyone with a pension necessarily understands the implications of retirement planning. In 2006 Friends Provident introduced a financial education website for our group pension scheme members, created in conjunction with Life Academy – an educational charity dedicated to life planning and preparing for retirement. Members can use the site to learn about different aspects of personal finance - including saving and investment, tax, pensions and borrowing.
Friends Provident also provides a range of financial education tools for visitors to our website www.friendsprovident.co.uk/elearn. This gives direct access to the Life Academy website and enables people to download their excellent Learn About Money and Planning for your Retirement workbooks.
In 2007 we developed our partnership with Life Academy by providing Friends Provident’s group pension scheme clients the chance to offer their members approaching retirement age with tailor-made financial planning courses. After a successful pilot scheme, we are looking to expand this initiative in 2008 and investigate other ways we can work with Life Academy on financial capability projects.
Financial Exclusion
People on low incomes, ethnic minorities, people with disabilities and the homeless are just some of the many groups for whom access to financial services is difficult or denied. Financial exclusion is one of the key areas of focus for the Friends Provident Foundation, which funds a range of activities from financial capability work for local communities run by Citizen's Advice Bureaux to a series of television programmes on ITV relating to basic budgeting and money saving.
The Foundation’s Director, Danielle Walker- Palmour, says that while “some degree of financial capability provides people on low incomes with the tools to avoid debt, manage risks and have the knowledge to make choices about the financial services they require”, she is keen that “a focus on financial capability does not obscure the reality that some people, because they are poor, are simply ignored or excluded by mainstream financial services”.
The Foundation has supported a number of projects targeting particularly vulnerable groups such as isolated rural communities, homeless young people and people with learning difficulties, with the Scottish Council Foundation, Centrepoint and the Association for Real Change, respectively. One of the most important outcomes of this work has been the development of some powerful partnerships with organisations who are keen to take this work forward.
The Foundation is also concerned about how fragmented financial capability programmes are, with individual communities of interest applying for funds, rather than the creation of common resources and knowledge. Building on partnerships with the FSA and other key players, the Foundation is exploring the creation of a freely available financial capability core of resources that can be used and adapted by different organisations for different groups of people in different sets of circumstances.
1. Source: MORI
2. Source: Mintel: March 2007
3. Where savings are defined as 'personal provision to cover an unexpected drop in income'.
4. Source: FSA Financial Capability in the UK: Establishing a Baseline March 2006