We don't need no financial education?

Ellie Bennett finds that boredom and mistrust could thwart plans to create a more financially literate UK population

As far as the financial services industry is concerned, being able to explain how compound interest works, knowing what an annuity is, and understanding the difference between a REIT and an ETF should be common knowledge. In comparison, knowing that the average man on the street could possibly tell you that Henry VII reigned for 24 years, a sonnet is a type of poem and that Dushanbe is the capital of Tajikistan does not really give the industry confidence that the country is equipped to deal with the financial practicalities of life.

Given the social implications of reckless personal money management, it could be argued that if history, English literature and geography have been taught in school for years, then why has financial education received barely more than a whisper?

A major step forward is planned for financial education in the UK this September, with the government proposing to mainstream personal finance education within an economic wellbeing and financial capability programme of study, albeit on a voluntary basis. And considering that a disconcerting 93 per cent of British workers questioned in a recent survey, run by employee benefits provider B&CE Benefit Schemes, do not even have a rough idea of how much money the basic state pension provides, many would argue that this is well overdue.

Furthermore, when asked about what would help make pensions easier to understand, 33 per cent of respondents chose pensions being taught at school. And research commissioned by the RBS Group's education initiative, Face2Face with Finance, found that 30 million (66 per cent) of the British adults surveyed felt that financial lessons would have provided them with the skills to better deal with the financial challenges thrown up by modern life.

John Jury, deputy chief executive of B&CE Benefit Schemes, says that "when kids leave school at 16 they don't know the first thing about personal finance, operating a bank account or savings". They are, in effect, ill-prepared for the reality of life in the ‘big wide world’. He explains that financial education does not have to be complicated; just enough to hopefully get them into the "savings habit" early. However, many things look better with hindsight. How many of those questioned would have actually taken notice when their year eight teacher started talking about the benefits of tax relief?

America is a little further along the evolutionary path of financial education and one scholar in the field, Dr Lewis Mandell, a professor at State University of New York at Buffalo, suggests that financial education is perhaps not what it's cracked up to be.

As part of his research, he analysed samples of senior high school students from the US who were part of the Jump$tart Coalition for Personal Financial Literacy, which seeks to improve the personal financial literacy of young adults. Worryingly, the number of students answering questions correctly fell from 52.4 per cent in 2006 to only 48.3 per cent in 2008. In Mandell's 2006 publication Financial Literacy: If it's so important, why isn't it improving? he rightly points out: "Perhaps more distressing than low levels of financial literacy is the consistent finding that those who have taken a high school class designed to improve financial literacy tend to do no better than those who have not had such a course." He reveals that just one intervention seemed to improve financial literacy and that was "the stock market game", which is "both interactive and fun".

Perhaps it is the method of educating that is shown to be at fault, not the idea of education itself. Darren Laverty, director at the client experience firm Secondsight explains that "the problem with financial education is that you've got to get people to want it first or else it comes across as boring. "To try and educate someone who doesn't want to do it is pointless. It's a bit like when you were at school with a subject you hated. I did English literature at school and it was compulsory so I sat there for two years just not opening the books."

Certainly there is a strong case to make that these issues are better understood later in life, in the context of a workplace and when retirement seems more tangible.
There has been a growing trend for firms to get excited about offering financial education for their workers, a move that transcends even paternalistic employers.

Standard Life’s Greg Thorley, manager of employee communications development, draws attention to research by Professor E. Thomas Garman of Virginia Tech in the United States, who reasons that a relationship exists between ill health and high levels of financial stress. Thorley explains: "If an employee has got financial problems, this affects their health and well being and can lead them to taking time off work." And the monetary impact this can have on business, says Thorley, is a strong driver for providing education.

He believes that the best way to make an impact is to focus on 'life planning' as opposed to singling out pension planning. This means looking at what a person needs to do to cope with each life stage rather than just the 'end-game'. All that is well and good, but even then, will workers engage with a subject that they find boring and even difficult?

Laverty believes that the answer comes largely down to behavioural finance. "Psychologically, people do whatever they can to avoid pain – that's the number one motivator in life. What we noticed with the financial education of pensions is that people attach a lot of pain to saving because there are all sorts of excuses that are given like the credit crunch."

So the answer to this conundrum, he says, is to find out what they don't want at retirement, talk about it, and show them what they are on target for. "Suddenly the pain of not saving becomes greater than the pain of saving and that's when they start to do it."

The presenters have to be well trained, personable and engaging; there needs to be colour, graphics, rhetorical questions, interaction; and so on, according to Laverty. "I was talking to one of the life companies that have a pensions modeller online," he explains. "The usage of it was two per cent, but you could make it 100 per cent if you sent a person along with it to proactively show people where they are headed." Therefore firms would be wise to take on an opportunity cost to benefit in the long-term.

Dietrich Hauptmeier, finance director at PensionDCisions, an independent provider of unique benchmark reporting, goes one step further: "Consumers are able to make decisions about complicated subjects without being specifically educated to do so, for example, when choosing a mobile phone or buying a new car. To do that well, however, they need truly relevant information presented in a way that is meaningful to them. In pensions, people are too often confronted with 'noise'. The framing of information needs to allow for the way that consumers actually make decisions, recognising the human bias towards the short-term and the tendency towards social comparison.

"Discussions about education often become ideological. Arguably, it is more important to decide how to equip people with the right information and the right calls to action, whether financial education has taken place in schools or the workplace. People's real behaviour may not reflect what they have learned theoretically. Evidence about people's actual decision-making needs to take centre-stage."

This isn't to say that financial education is a waste of time. But the use of ineffective techniques certainly is. It is more useful to investigate the most effective ways of grabbing people's attention, and more importantly, retaining it.

Looking past traditional education methods to behavioural finance, interactive practices and innovative reporting styles could make the world of difference and give employees the financial knowledge that everyone clearly needs.

- Pensions Age July 2008