How far does policy towards pensions, debt and the financial sector reflect the public’s level of financial capability?
The public’s level of financial capability is an area that is causing policy makers great concern, especially in these times of economic uncertainty and instability. Financial capability is about being able to being able to manage money and keep track of your finances. It is also about being able to plan ahead and choosing the right financial products and about staying informed about financial matters. The rapidly changing demographics of our population and the associated changes in our society means that policy makers are having to
This essay will firstly look at the concept of financial capability. It is a relatively new idea without an established consensus about what it actually means. This essay will try and determine some of the key characteristics of this concept. It will then turn to consider how financially capable the public is as a whole. Finally this essay will consider just what this means for policy makers in pensions, debt and the financial sector and how in line current policy is with the how the public view these areas.
Atkinson et al (2006) provide the most comprehensive study of financial capability in the UK. From their studies they have determined that this concept can be broken down into four key domains. These are, managing money, planning ahead, choosing products and staying informed. It is worth looking at these terms in a little more detail. Managing money is how well you are able to make ends meet and how well you are able to keep track of your money. It should be noted that those on a higher income may be able to make ends meet but have no money management skills. Planning ahead is the ability to deal with financial commitments that are coming in the future and also unexpected events. Retirement is one of the most significant financial commitments that people are expected to deal with and plan for. Choosing products is the knowledge and the ability to choose financial products that are best suited to the needs of the individual such as credit cards, mortgages and loans. The final domain of financial capability is staying informed. This is measured by how well people keep informed about financial issues, whether their own or financial issues in the wider world.
It would be useful to now look at how financial capable the public is in the UK. Again, the most comprehensive work in this area comes from Atkinson et al (2006) who conducted a survey of over 5000 people to determine just how financially capable we as a nation are. It is important to note from the outset that because financial capability is broken into these four separate domains, it is possible that an individual can be capable in one but not so capable in the others. This essay will now turn to look at each of these separate domains in turn to determine the financial capability of the public.
Atkinson et al (2006) found that on the whole the UK is quite good at making ends meet. They did identify a minority who did not do so well. Those were young people who rented their homes and managed a cash budget. This group included lone parents, the unemployed and those who had been out of work for a while due to illness. Atkinson et al (2006) found that there was no pattern to those who kept track of their money. They suggest that it is a skill that some people acquire over time.
Planning ahead was an area that Atkinson et al (2006) found that the UK was not very good at. They found that over half the people they surveyed had made any provisions for a drop in income. This trend was also evident in preparing for retirement. The survey found that older people and those on higher incomes were better at planning ahead. Education also played a key role with those having achieved A-levels or higher being more likely to plan ahead. However, the survey found that if presented with the opportunity to plan ahead by an employer then people are more likely to take them up.
The 2006 survey found that the public was generally poor when it came to choosing the appropriate financial products for them. It found that people were not willing to shop around to find the best product for them. Only a small minority had sought advice before purchasing products and only a small minority of this group had read the terms and conditions on these products. The survey did find that capability usually went up with the more products that people bought. In a sense, you learn by experience. Middle-aged people scored most highly in this domain, while young people scored badly.
Atkinson et al (2006) found that most people surveyed felt it was important to keep up to date with financial changes but few actually did so. The survey found that an important aspect of financial capability is the ability to deal with disputes and complaints. Here, people are more likely to complain about financial services rather than about financial products. This could be that they didn’t know who they could complain to.
On the whole this survey paints a picture of the UK public not being that financially capable. The public is strongest when it comes to making ends meet but in the 3 other domains there lacks any level of real financial capability. This essay will now turn to look whether policy in pensions, debt and the financial sector reflects that.
The 2006 white paper from the pensions department entitled, Personal accounts: a new way to
Save, sets out the governments vision when it comes to pension policy. It recognises the fact that the public isn’t so capable when it comes to choosing the best financial products for them. Therefore, the government is trying to limit the amount of choices that the individual has to make. The white paper states that it is trying to give savers, “flexibility without complicating their decisions”. The government is also trying to improve the public’s knowledge about financial products so that in the future they will make better informed choices. Raising awareness and educating people about financial products is a key government policy in this area. John Tiner, the FSA Chief Executive argues that, “if people know what they want and how to get it, the market for financial services becomes less one-sided and a lot more efficient. Consumers will demand better, cheaper and more appropriate products and services” (2004).
Debt is an interesting area because it is an area where there has been massive change over the past few months. A Treasury Study conducted in 2007 stated that most consumers were able to manage their credit successfully and that over-indebtedness was only a problem for a small minority. This is certainly in line with the findings of Atkinson et al (2006). However, recent events have shown that the problem of over indebtedness is much larger than could have been anticipated. The government is trying to ensure that there is transparency in the financial sector and better access to services such as debt advice. The government currently has three priority areas for tackling this financial exclusion. These are access to banking, access to affordable credit and access to face-to-face advice. The 2006 survey found that the public as a whole are far from capable when it comes to seeking out help and advice so the government policy certainly reflects the public’s capability in this area.
Government policy in relation to the financial sector has also been affected by the events of the past few months. Perhaps the most obvious example of the government’s commitment to making sure that the public are treated correctly was the formation of the FSA with consumer protection and awareness at the heart of it’s remit. The government is trying to get the financial sector to simplify it’s products so that the consumer has a better chance of choosing the right product for them. The government has also called on the financial sector to lend responsibly so that levels of over-indebtedness don’t go up.
The government recognises the value of financial capability as an important life skill. Having a public that is financially capable means that they are less likely to go into debt, can handle unexpected financial obligations and they are more likely to save for future events such as retirement. Good financial capability also increases competition in the financial sector as customers seek out the best deals for them. The government’s policies largely reflect the public’s current levels of financial capability. However, more effort must be made to increase awareness about financial products and services that are available to them.
Bibliography and References
Department of Trade and Industry, Tackling over-indebtedness: annual report, 2006.
Department for Work and Pensions, Personal accounts: a new way to save Regulatory Impact Assessment, December 2006.
Financial Services Authority, Building financial capability in the UK, 2004.
Financial Services Authority, Personal Finance Research Centre: University of Bristol, Levels of Financial Capability in the UK: Results of a baseline survey, March 2006.
HM Treasury, Promoting financial inclusion, December 2004.
HM Treasury, Financial Capability: the Government’s long-term approach, July 2007.