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How can countries help people plan for retirement through financial education in the workplace? Louise Overton and Adele Atkinson, from the Centre on Household Assets and Savings Management (CHASM) at the University of Birmingham, UK, share the findings of recent research on the defined contribution (DC) pension systems in the United Kingdom. Their insights complement the OECD Recommendation on Financial Literacy, the guidance provided in the OECD Policy Handbook on Financial Education in the Workplace and the findings of the OECD Pensions Outlook by highlighting the urgent need for tailored financial education for workers, and the importance of signposting pre-retirees to trustworthy sources of information.
Many employees are still suffering from the negative financial impact of the COVID-19 pandemic. The cost-of-living crisis, alongside economic uncertainty, is now putting additional financial pressure on already over-burdened households, while the real value of savings is reduced as a result of relatively higher inflation. On top of this, adults of working age also face high-stakes financial decisions, from buying or renting a home to planning for retirement. It is within this context that the OECD has recently published the Policy handbook on financial education in the workplace and the Pensions Outlook 2022. This work is both timely and important.
More on the Forum Network: Strengthening pension reforms in the face of global crises by Carmine Di Noia, Director, Financial and Enterprise Affairs, OECD
By working together, governments and employers can and must ensure sustainable pension systems and adequate retirement outcomes for citizens—and in turn support sustainable and inclusive economic growth.
The widespread policy of shifting the risk of longevity onto individuals (as part of an asset-based welfare model) can be particularly challenging for employees. Workers today have more choice than ever when it comes to deciding where to save, how much to put aside, and how to access that money to fund their lifestyle, once they have retired from paid employment. In essence, this means that individuals have been tasked with becoming sufficiently financially literate to create their own welfare through building assets; and crucially, they will bear the brunt of any mistakes they make.
With the increased reliance on defined contribution pension schemes, most savers must accept a reduction in current living standards without any guarantee of the level of protection this sacrifice will offer their future selves.
As the OECD policy handbook notes, “it is essential that individuals have the necessary knowledge and skills to make their own retirement plans and manage their resources in retirement.” If individuals attempt to make such complex financial decisions without the necessary knowledge and skills, they will likely make mistakes. However, knowing what to do is not the end goal, and challenges remain in helping consumers to act on their newfound understanding. These challenges include:
- The issue of choice. While a lack of choice is problematic, an excess of choice can also create issues. A significant body of evidence shows that wide-ranging options can actually create ‘choice-overload’, which paralyses people in their decision-making process and may prevent them from doing anything (the OECD and IOSCO have written an excellent guide on behavioural insights for financial and investor education).
- Insufficient experience to achieve self-efficacy. Each step of retirement planning is different from the last, making it impossible for people to learn from previous experiences. And the decisions are extremely important. In such a situation, the average person is unlikely to feel confident in making a decision.
- High levels of uncertainty. With the increased reliance on defined contribution (DC) pension schemes, most savers must accept a reduction in current living standards without any guarantee of the level of protection this sacrifice will offer their future selves. When they finally reach the point at which they can find the value of their pension savings, and access the money saved, they must once again immerse themselves into the financial landscape and make decisions in the face of uncertainty as they try to maximise their financial security through to old age. To make things even more challenging, in some countries at least, they must also navigate a landscape characterised by relatively high levels of fraud.
- Knowing who to trust. Even if consumers know what to do, they may not know where to turn. Lack of awareness of options, alongside both low and misplaced trust in advisers and service providers is likely to lead to suboptimal decisions, reducing the likelihood that consumers act in their own best interest.
Recent qualitative research on the decisions made by people in the UK as they approach retirement – the ‘decumulation’ phase - provides valuable insights for policy makers seeking to address such challenges. Overton and Smith conclude that people either need to have developed “in-depth, intuitive understandings of this type of decision” or they require access to help and support.
The UK policy framework around pension provision includes information and advice through the Money Helper website and dedicated Pension Wise service, but Overton and Smith find that many people are unaware of the government services available to them, despite policies in place to nudge more pre-retirees to use these services. They show that while pre-retirees understand that there are risks, they do not know how to take them into account when deciding how to draw their pension.
People are simultaneously attempting to assess future investment performance, whilst also taking into account the ‘risk’ of living for many years beyond retirement and the uncertainty around the types of household expenses that will become normal for them as they age. Consequently, some ignore the problem for as long as possible, while others make an uninformed decision so that they can stop worrying about their options. Neither option is likely to lead to the highest level of financial security that they could have achieved with their own money.
For many pre-retirees, the decumulation decision coincides with difficult life events such as bereavement, ill-health, disability, new caring responsibilities and divorce. And for some, it is further complicated by day-to-day worries around managing expenditure and making ends meet. Importantly, Overton and Smith find that these difficulties further limit people’s readiness to embrace the decision-making process. Those with ill-health or caring responsibilities, for example, find it harder to engage with their pension choices.
This evidence points to the need for workplace financial education to include personalised decision support.
Consistent with the Policy handbook on financial education in the workplace and the Pensions Outlook 2022, Overton and Smith identify an appetite for workplace financial education. Some of the respondents in their qualitative research study had been unable to access such education, but felt that it would have been welcome, while others commented that advice and guidance from workplace seminars and financial advisers had helped them to prepare for the time when they would need to make a decision. It is important, however, to keep in mind that requirements for financial education and guidance vary. Some respondents found that the volume of information they had received already was too high, leaving them even more confused, and some elaborated that information without personalised support was unhelpful, either because the significance and complexity of the decision was overwhelming, or because they felt that their situation was unique.
This evidence points to the need for workplace financial education to include personalised decision support. Respondents suggested two approaches that would have been welcome, both of which complement suggestions in the OECD Policy handbook to create a safe environment to discuss financial issues:
- A mixture of examples and scenarios to identify appropriate actions based on personal circumstances. Some suggested that these could be developed into flowcharts that direct them towards appropriate decisions.
- One-on-one advice. Some felt that even a single advice session after considering the issue themselves, was a good way of verifying their own decisions.
Clearly, these respondents were not accessing independent financial advice. The findings suggest that this was due to either the perceived or actual cost of such advice, a general lack of trust in the advice given, or a specific fear of being scammed. Workplace provision may offer a trustworthy alternative for such people, particularly if it follows the OECD suggestion of using direct consultation channels, such as roundtables, or include employee representation when developing content.
The experience of pre-retirees in the UK provides policy makers around the world with clear evidence of the challenges people face when trying to make complex financial decisions by themselves, and illustrates why the OECD recommends widespread financial education in ‘environments conducive to learning, such as […] the workplace’. The research also provides valuable evidence regarding the need for access to personalised guidance, consistent with the OECD recommendation to offer “tailored training, guidance or generic advice, provided in person or through remote channels, to address specific challenges faced by consumers such as managing credit or saving for retirement”.
The research from the UK also provides further evidence that widespread high-quality workplace financial education could be seen as an employee benefit, improving their long-term financial security and well-being.
To learn more, read: Policy handbook on financial education in the workplace
The importance of financial education in the workplace continues to grow as working adults are constantly confronted with issues affecting their immediate and long-term financial resilience and well-being. This policy handbook provides insights for designing workplace financial education, such as understanding the audience, identifying appropriate delivery mechanisms, creating or finding appropriate content, incentivising participation, evaluating outcomes and learning from the experiences of others. It provides case studies and practical guidance to policy makers, employers and financial education providers interested in improving the financial literacy of employees.
The Centre on Household Assets and Savings Management (CHASM) is an interdisciplinary research centre that investigates the causes and consequences of financial risk and insecurity and promotes policies to foster financial well-being. They have a diverse and inclusive research agenda, covering topics such as precarity, savings, debt, inequality, assets, and financial inclusion.
For more information about the research centre and the authors, visit www.chasm.bham.ac.uk