Fund managers have a crucial role in lifting global financial literacy but “must decouple marketing from thought leadership” in the process, according to a new study.
The report produced by UK-based researcher Create in association with Principal (formerly known as Principal Global Investors) says asset managers can improve financial literacy standards by “turning the spotlight on… investment basics”.
“Previously, their efforts at educating end-investors have been reportedly seen as part of their marketing effort, in many cases…,” the Create paper says.
“Instead, what is needed is objective, jargon-free emotionally inspired education that shows how knowledge of investment basics is one of the primary drivers of a sufficient retirement nest egg.”
However, the report, titled ‘Financial literacy: the path to improved retirement savings’, says a range of other agencies – including government, employers and financial advisers – can also contribute to raising the general level of financial comprehension.
The Create study says the need for higher standards of financial literacy has become more urgent following a substantial acceleration of the trend towards defined contribution (DC) retirement schemes since the GFC.
“The winds of change continue to shift all retirement risks from the employer to the employee,” the report says. “Risk is being increasingly personalised as primarily a matter of necessity and not by choice, implicitly giving rise to the model of ‘employee as a retirement planner’.”
In the six-year period ending in 2015, the share of global retirement assets held in DC schemes has jumped from 41 per cent to 49 per cent with a concurrent decline in the defined benefit (DB) fund proportion from 59 per cent to 51 per cent, Create says.
Over the same period total global pension assets grew from US$23.2 trillion to $36.9 trillion as DC schemes jumped from US$9.5 trillion in 2009 to US$18.1 trillion by 2015.
“So powerful are the undercurrents that it is now predicted that DB plans may well be the preserve of the public sector in the next 10 years in the world’s two largest pension markets — the UK and the US,” the paper says.
“There and elsewhere, four other significant trends are also discernible: plan restructuring, lifecycle funds, the role of governments in education, and nudge economics.”
As retirement schemes move inexorably towards the DC model – albeit with some retaining a few DB-like characteristics – offerings like lifecycle funds and ‘nudge’ tools such as auto-enrolment can help members avoid the worst of their in-built behavioural investment biases, the report says.
Government-led financial education programs also have a role to play – although results to date have been inconclusive.
“This is unsurprising,” the paper says. “Some of the national initiatives aimed at saving and making ends meet are relatively new. Additionally, specific initiatives on how to invest in financial markets are few and far between. In the sphere of retirement planning, progress at this stage is slow and patchy.”
Nonetheless, the Create paper says a couple of global studies have found a correlation between financial literacy and good investment outcomes.
In particular, a recent research project found that in addition to confirming “a link between financial literacy and successful retirement investing, [the study] showed that the relevant understanding in this context is not so much about math as about simple basic knowledge of the relative costs and benefits of the major asset classes”.
Despite the best efforts of government and industry so far, overall global financial literacy standards remain woefully low, according to Create.
The report cites a 2014 State Street Centre for Applied Research study that scored the average financial literacy levels across 16 major economies at just 61 per cent – or a D.
“Investors globally scored barely a ‘D’ grade in a financial literacy test,” the Create paper says. “Nearly half of them didn’t know the annual return on their investments. 64% didn’t know the fees they were charged. The key reason: ‘because it’s too difficult to calculate/find out’.”
The State Street research rated Singapore as the most financially literate society – with a 70 per cent score and the only C mark in the bunch – followed by Australia with a D-score of 67 per cent.
Create says the research highlights the need for a “holistic approach” to delivering education on fundamental investment concepts in all countries relying on DC pension schemes to fund retirement income.
“But in the literature review conducted for this paper, we found little mention of investment basics that employees in DC plans should be especially aware of,” the report says. “Personalisation of risk should not just be a polite abdication of responsibility on the part of plan sponsors or governments, but an opportunity to transfer knowledge in line with the transfer of responsibility.”
The Create report was based on a literature review, US data, and interviews with 10 global asset managers.