International policy issues and initiatives on Financial education: the OECD project on Financial Education and the International Network for Financial education OECD-IOPS 2nd MENA workshop on private pension regulation and supervision Amman, 1-2 - PowerPoint PPT Presentation

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International policy issues and initiatives on Financial education: the OECD project on Financial Education and the International Network for Financial education OECD-IOPS 2nd MENA workshop on private pension regulation and supervision Amman, 1-2

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Title: International policy issues and initiatives on Financial education: the OECD project on Financial Education and the International Network for Financial education OECD-IOPS 2nd MENA workshop on private pension regulation and supervision Amman, 1-2


1
International policy issues and initiatives on
Financial education the OECD project on
Financial Education and the International Network
for Financial education OECD-IOPS 2nd MENA
workshop on private pension regulation and
supervision Amman, 1-2 March 2011
  • André
    Laboul

2
Outline
  • I. International financial education issues
  • The framework
  • Calling for financial education
  • International responses The OECD and INFE
    programme
  • Need for an integrated approach
  • II. Selected pension issues

3
Selected International Trends
  • Increasing financial risks ( financial crisis)
  • Access and inclusion issues (vulnerable groups)
  • Increased sophistication
  • Increased transfer of risk to households who are
    taking on more financial risk and responsibility.
    This is true for instance for both credit
    decisions (mortgage ), and retirement savings (DC
    schemes).

4
Increasing financial risks and transfer of risks
to households
  • This calls for a new regulatory approach
  • New focus on market conduct and not only on
    prudential regulation
  • Focus on financial education but also access and
    consumer protection
  • Awareness is key

5
Lack of awareness
  • The problem is indeed that households may not be
    aware of the risk they face
  • Households may not understand the need to be
    protected or overestimate their protection and
    their understanding
  • Thus, they do not seek protection
  • and mayjust not care

6
Call for further information and awareness
  • Transparent information and disclosure is key.
    This is the minimum
  • Information should be understandable plain
    language should be used
  • Less is more danger of overinformation
  • Information is necessary but not sufficient
    individuals need to understand the information

7
Call for financial education
  • Many individuals are ill-equipped to face risks
    and make proper financial decisions
  • This calls for improved financial education and
    awareness on
  • Risks
  • Financial ,pensions , insurance products
  • Their rights and responsibilities
  • The goal of financial education (a process) is to
    improve financial literacy (the result)

8
Broader impact of financial education
  • Financial education will help build more
    efficient financial markets by
  • improving confidence
  • encouraging the development of new products and
    services
  • and thus increase competition, innovation and
    product quality
  • Financial education can also help to reduce
    poverty and improve social cohesion

9
The situation is serious
  • Recent surveys show that the level of financial
    education is low in most countries, including in
    developed countries.
  • Worse consumers often overestimate their
    financial understanding and thus do not seek to
    improve it
  • This is all the more important as the process of
    financial education takes time
  • Financial education is not just for investors. It
    is essential for the average family trying to
    balance its budget, save for childrens education
    and save for retirement

10
Solutions are encouraging
  • We have found that good financial education
    programmes are effective they can increase
    workers participation in pension plans, reduce
    mortgage and credit delinquency, and more
    generally, increase consumers confidence in
    themselves and in financial institutions.

11
A role for all stakeholders
  • Governments and financial authorities (key role
    of central banks in several countries) working
    hand in hand with parliament (including national
    campaigns, coordination)
  • Schools
  • Financial institutions
  • Employers
  • Trade unions
  • NGOs, etc.
  • There is a strong call for national strategy
    and public-private partnership

12
Win-win strategy for financial industry
  • When objectively promoting financial education
    and awareness, financial institutions help
  • Improve confidence and trust in financial
    markets, products and institutions
  • Improve risk awareness and thus increase demand
    for protection
  • Improve understanding of products and their
    advantages and thus increase demand
  • Reduce losses through better prevention and
    mitigation

13
Momentum due to financial crisis
  • Findings from a survey conducted through the
    International Network for financial Education
  • Lack of financial literacy is one of the
    contributors to the crisis and in particular of
    its aggravation
  • The crisis and its consequences have highlighted
    the need for enhanced level of accountability of
    financial institutions vis-à-vis their clients
    and consumers
  • They have also raised awareness on the need for
    increased financial literacy and capability of
    households and policymakers
  • The crisis is a  teachable moment 
  • The crisis is a trigger for policy actions in the
    financial education area

14
OECD and INFE programme on financial education
  • Recognising the need for policymakers and other
    relevant stakeholders to meet the objective of
    improving financial education, the OECD launched
    in 2oo3 its international programme on financial
    education
  • Under the aegis of the OECD Committee on
    Financial Markets and the OECD Insurance and
    Private Pensions Committee

15
OECD and INFE programme on financial education
  • OECD and the network have become the
    international leader on the development of
    guidelines and standards in financial education
  • G8 Financial Ministers recognised, in June 2006,
    OECD work on financial education and requested
    the Organisation to further develop financial
    literacy guidelines based on best practices
  • recently supported by policymakers like Secretary
    of US Treasury, the Council of the European
    Parliament , the governor of Reserve bank of
    India or the Mexican Minister of Finance
  • new G20 mandate (in Seoul and Paris) for FSB,
    with OECD and others to report to G20 2011 summit
    on policy options to enhance financial consumer
    protection and education and for OECD, FSB and
    others to develop principles for the G20 FM and
    CBG meeting

16
Outputs
  • Several publications
  • the first international survey on financial
    literacy
  • Report on financial literacy in insurance
  • Report on financial literacy in pensions
  • Research on behavioral issues in financial
    education, on annuities, communication
  • Stocktake on methodology, financial education at
    school
  • etc
  • An international definition focusing on a
    capacity building process

17
OECD Principles on financial education a
selection
  • Financial education programmes should focus on
    high priority issues (credit, debt, pensions,
    etc)
  • Financial education should be taken into account
    in the regulatory and administrative framework
    and considered as a tool to promote economic
    growth, confidence and stability, together with
    regulation of financial institutions and consumer
    protection .
  • National campaigns should be encouraged to raise
    awareness of the population
  • Financial education should start at school.
    People should be educated about financial matters
    as early as possible in their lives (see session
    VI on financial literacy as a life skill to be
    integrated in schools)

18
OECD Principles on financial education
  • The role of financial institutions in financial
    education should be promoted and become part of
    their good governance with respect to their
    financial clients. Financial institutions
    accountability and responsibility should be
    encouraged not only in providing information and
    advice on financial issues, but also in promoting
    financial awareness of their clients, especially
    for long-term commitments and commitments which
    represent a substantial proportion of current and
    future income. (see session V on social
    responsibility of the financial sector)
  • The development of methodologies to assess
    existing financial education programmes should be
    promoted. Official recognition of financial
    education programmes which fulfil relevant
    criteria should be considered.
  • .

19
OECD Principles on financial education
  • In order to take into account the diverse
    backgrounds of investors/consumers, financial
    education that creates different programmes for
    specific sub-groups of investors/consumers (i.e.
    young people, the less educated, disadvantaged
    groups) should be promoted..
  • According to the needs of the jurisdiction,
    evaluation processes should inter alia involve
    Evaluation on a more systematic basis of the
    risks, of the populations degree of literacy, of
    the education needs

20
OECD good practices (building on comparative
analysis)
  • Good practices for financial education on
    pensions ( 2008)
  • Good practices for risk awareness on insurance
    (2008)
  • Good practices for Financial education on credit
    (2009)
  • More to come (e.g on financial education at
    school 2011)

21
Worldwide reach
  • Setting up of the International governmental
    network for financial education
  • members from more than 150 institutions
    representing 75 countries and international
    bodies
  • International Meetings in Washington, Bali,
    Paris, Rio de Janeiro, Rome, Beirut next will
    include, Canada, South Africa, United Kingdom
  • Regional programmes currently under development
    in South East Asia, central Europe, MENA and
    Latin America
  • MoU with countries (for instance Indonesia)

22
INFE Subgroups
  • The measurement of financial literacy and
    inclusion
  • The evaluation of financial education programmes
  • It is important to provide financial education,
    however it is essential to provide efficient and
    effective financial education programmes.
  • Financial education at school
  • The development of national strategies and
    related issues
  • Future sub group on financial inclusion/access
    (but avoiding duplication)
  • Future sub group on financial education and women

23
OECD/INFE work
  • work on pensions issues, which will be undertaken
    by the OECD in co-operation with the IOPS
  • work on credit, savings, investment with the
    objectives to develop guidelines work on the
    role of financial intermediation in the financial
    education process
  • work on behaviour economics (essential to
    develop adequate financial education strategies)
  • Work on communication/awareness campaigns, social
    marketing and development of appropriate related
    tools
  • Work on vulnerable groups
  • the development of the financial literacy option
    in PISA 2012 (support through the subgroup on
    financial education programmes in schools)
  • Review and adaptation of current guidelines

24
International dissemination
  • Conferences/presentations all over the world
    Brazil, Columbia, Egypt, France, Hong Kong,
    Hungary, India, Indonesia, Malaysia, Mexico,
    Russia, Singapore, Turkey, UK, USA
  • Issue a newsletter, several publications
  • Co-operation with other international
    organisations (IMF, EU, IOPS, FinCoNet etc.),
    including a close co-operation with the WB
  • Setting up of an international Gateway at
    www.financial-education.org, (currently in
    upgrading phase)

25
International Gateway on financial educationwww.
Financial-education.org
26
Financial education is not enough necessarybut
not sufficient
  • Other measures are needed to overcome consumers
    myopia and passive behaviour
  • To deal with fraud, miss-selling
  • To protect consumers against bankruptcies
  • And more generally to protect consumers rights

27
Financial education part of a system(pension
example)
28
Financial consumer protection
  • Financial education and financial consumer
    protection are closely linked
  • OECD 2009 survey on financial consumer
    protection
  • Policies focus mainly on disclosure (which thus
    call for education)
  • Need to test relevance of existing disclosure
  • Less is more
  • Other tools explored in some countries
  • Importance of adequate redress mechanisms

29
Integrated pillars
  • Access and inclusion
  • Prudential regulation and enhanced governance
  • Consumer information and protection
  • Competition
  • Financial education and awareness
  • They are interconnected and interactive

30
Conclusion of the first part
  • In the framework of increasing risks and
    increasing transfer of risks, of gaps in coverage
    and lack of education and awareness there is a
    strong need for improving financial education and
    awareness
  • This process calls for national strategies,
    public-private partnership and important role of
    NGO
  • It should start at school
  • Is should deal with priority areas such as
    pensions, credit, savings and risk awareness
  • It should allow for special role by financial
    institutions whose responsibility should be
    encouraged
  • it should address vulnerable groups
  • It calls for efficient education and methodology
    to measure both literacy and efficiency of the
    programmes
  • Financial education is indispensable but
    financial education alone is not the panacea it
    is part of a wider policy approach, complementing
    prudential regulation and calling for consumer
    protection
  • It calls for a worldwide approach

31
Pensions
  • Awareness national campaigns
  • DC schemes
  • Communication
  • Financial education
  • Financial consumer protection

32
Dedicated work on financial education and
awareness for pensions and insurance
  • Started in 2006 on the recommendation of the OECD
    Council
  • Complement the OECD general work and
    recommendation on principles and good practices
    for financial education and awareness
  • Developed by the OECD Insurance and Private
    Pensions Committee and Working Party on Private
    Pensions
  • Involved broad consultation of a wide variety of
    stakeholders
  • Adoption by the OECD Council in April 2008 of
    2 Recommendations on Good
    Practices for
  • Financial Education relating to Private Pensions
  • Enhanced Risk Awareness and Education on
    Insurance Issues
  • Publication of Improving Education and Awareness
    on Insurance and Private Pensions, 2008

33
National campaigns
  • Most of the OECD countries are facing the
    challenge of how to maintain sustainable pension
    systems in the face of aging populations. Many
    have undertaken pension reforms which
    frequently involve the introduction of policies
    which may be seen as unpalatable to parts of the
    population. These reforms also often involve
    individuals having to take more responsibility
    for saving for and funding their retirement
    income.
  •  
  • Several OECD governments have therefore launched
    public awareness campaigns to help explain to
    their populations the need for reforms, the
    policy undertaken and the increased
    responsibilities which individuals have for
    funding their own retirement.
  • This report contains a review of some of the main
    campaigns that have been launched in OECD and
    selected non-OECD countries and provides a
    preliminary assessment of their effectiveness in
    terms of extent to which original goals were
    achieved. Case studies include a comparison
    between CEE countries, as well as Ireland,
    Sweden, Singapore and others

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Initial conclusions / good practices
  • Governments first need to define their role in
    the campaign (which should focus on explaining
    systematic change and building confidence)
  • When explaining reforms of a pension system
    objective information is essential
  • Government campaigns work when they clearly
    distinguish between information and advice
  • To be successful governments need work with many
    partners and to use varied channels
  • Building on existing financial education work and
    campaigns can boost effectiveness
  • Governments need to coordinate their campaigns
    carefully with these other stakeholders
    particularly private sector advertising
  • Campaigns may be divided into different stages
    e.g. an initial stage may choose to focus on
    opinion leaders, who can subsequently provide
    independent information /advice to others
  • Governments may include an element of targeting
    journalists in the media in their campaigns
    with these groups then able to explain reforms to
    the broader population.
  • For campaigns to work they should not only target
    older people information needs to be delivered
    to those still working and the young.
  • People need a unified picture of their pension
    options hence projections are important
  • Governments should not shy away from linking
    pension reform to other topics such as labour
    market issues (e.g. need to work longer)
  • To have the long lasting impact aimed at,
    campaigns need to be on-going
  • The impact of campaigns needs to be regularly
    evaluated
  • Behavioural economics shows that some groups will
    not or cannot save and governments should
    therefore consider linking their campaigns with
    other mechanisms (e.g. automatic enrolment and
    well designed default options)

38
Defined contribution schemes
  • DC schemes transfer longevity and investment
    risks on individuals
  • This affects investment choice but also level of
    contribution
  • Call for proper communication
  • Call for financial education

39
Communication
  • The importance of DC pensions is growing rapidly
  • DC plans require individual members to bear
    significant risks to take a much more active role
    in managing their pension savings than would be
    the case in a traditional DB pension
  • To successfully manage risks, individuals need to
    understand both the nature of their pension plans
    and their responsibilities and to receive
    periodic and recurring updates on the status of
    their pension savings. Such updates are
    typically provided by the pension statement.
  • Policymakers, plan sponsors and plan members
    generally agree that communicating pension
    benefits in a clear, understandable and timely
    manner benefits all stakeholders, yet there is
    little consensus as to what information should be
    included or excluded from the pension statement
    or how that information should be presented.
  • The main purpose of this project is to assess
    what countries include in their pension
    statements, discuss its design, what information
    it should include in order to most effectively
    communicate information about members pension
    benefits and how the statement can help the
    encourage greater savings

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Good Practices on Financial Education relating to
Private Pensions
  • Rationale
  • Unique nature of the pensions product makes
    financial education particularly important
  • Long-term nature of contract, complex products,
    wide social coverage, low risk tolerance, large
    number of pension schemes, potential impact on
    financial markets and economy
  • .Combined with demographic and systematic
    trends
  • Increased longevity , shorter working lives,
    lower birth rate, Decline in public pensions,
    shift from DB to DC schemes
  • Lack of financial knowledge relating to pension
  • Lack understanding of the changing retirement
    environment, of the need to save, of investments,
    lack of trustee and fiduciary capability,
    passive behaviours and individual choice

43
Good Practices on Financial Education relating
to Private Pensions
  • Key messages
  • Role of governments
  • Explaining the interaction between public and
    private sources of etirement income
  • Informing on pension reform and other relevant
    evolutions
  • Ensuring the provision of sufficient, practical
    and simple information on pension issues and
    pensions projection in particular
  • Importance of national campaigns and school
    programmes, evaluation process
  • Specific needs of members of DC schemes
  • Role of key stakeholders plan sponsors, pension
    funds, fiduciaries, intermediaries, social
    partners
  • Financial education limits importance of
    disclosure, limited choice, automatic enrolments,
    default options

44
Integrated approach
  • Information, communication, financial education
    necessary but not sufficient
  • Behavioral factors
  • Default mechanisms
  • Move option from opt in to opt out
  • Need also for consumer protection

45
OECD Core Principle 5 Rights of members and
beneficiaries and adequacy of benefits
  • Non-discriminatory access should be granted to
    private pensions schemes. Regulation should aim
    at avoiding exclusions based on age, salary,
    gender, period of service, terms of employment,
    part-time employment, and civil status. It should
    also promote the protection of vested rights and
    proper entitlement process, as regard to
    contributions from both employees and employers.
    Policies for indexation should be encouraged.
    Portability of pensions rights is essential when
    professional mobility is promoted. Mechanisms for
    the protection of beneficiaries in case of early
    departure, especially when membership is not
    voluntary, should be encouraged.

46
OECD Core Principle 5 Rights of members and
beneficiaries and adequacy of benefits
  • Proper assessment of adequacy of private schemes
    (risks, benefits, coverage) should be promoted,
    especially when these schemes play a public role,
    through substitution or substantial complementary
    function to public schemes and when they are
    mandatory. Adequacy should be evaluated taking
    into account the various sources of retirement
    income (tax-and-transfer systems, advance-funded
    systems, private savings and earnings).
  • Appropriate disclosure and education should be
    promoted as regards respective costs and benefits
    characteristics of pension plans, especially
    where individual choice is offered. Beneficiaries
    should be educated on misuse of retirement
    benefits (in particular in case of lump sum) and
    adequate preservation of their rights. Disclosure
    of fees structure, plans performance and benefits
    modalities should be especially promoted in the
    case of individual pension plans.

47
implementation
  • Access to plan participation, equal treatment and
    entitlements under the pension plan
  • Employees should have non-discriminatory access
    to the private pension plan established by their
    employer. Specifically, regulation should aim at
    avoiding exclusions from plan participation that
    are based on non-economic criteria, such as age,
    gender, marital status or nationality. In the
    case of mandatory pension plans, those plans that
    serve as the primary means of providing
    retirement income, and those that are
    significantly subsidised by the state, regulation
    should also aim at avoiding other unreasonable
    exclusions from plan participation, including
    exclusions based on salary, periods of service
    and terms of employment, (e.g., by distinguishing
    between part-time and full-time employees or
    those employed on an at-will and fixed-term
    basis). Regulation of voluntary and supplementary
    pension plans also should aim towards similarly
    broad access, although the extent of such access
    may take into account factors including the
    voluntary nature of the arrangement, the unique
    needs of the employer establishing the pension
    plan, and the adequacy of other pension benefits

48
implementation
  • Benefit Accrual and Vesting Rights
  • Accrued benefits should vest immediately or
    after a period of employment with the employer
    sponsoring the plan that is reasonable in light
    of average employee tenure. Benefits derived from
    member contributions to the pension plan should
    be immediately vested.
  • Pension portability and rights of early leavers
  • Disclosure and availability of information
  • Additional rights in the case of member-directed,
    occupational plans
  • Entitlement process and rights of redress

49
IOPS Financial Education Project
  • IOPS project will focus on the role of pension
    supervisory authorities in providing information
    and education to members of pension funds
  • Part I will examine campaigns run by pension
    supervisory authorities in response to the
    financial crisis stressing how pension savings
    are long-term and attempting to preserve
    confidence in pension systems
  • Part II looks at the types of comparative data on
    performance and costs which are provided by
    pension supervisory authorities to help
    individuals choose between providers
  • Part III looks at some innovative financial
    education campaigns which are being run by
    supervisory authorities in countries such as
    Chile, Kenya, Singapore and Turkey

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  • THANK YOU
  • more information at
  • www.oecd.org/daf/financialeducation
  • and www.financial-education.org
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