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
1International 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
2Outline
- 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
3Selected 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).
4Increasing 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
5Lack 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
6Call 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
7Call 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)
8Broader 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
9The 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
10Solutions 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. -
11A 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
12Win-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
13Momentum 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
14OECD 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
15OECD 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 -
16Outputs
- 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
17OECD 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)
18OECD 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. - .
19OECD 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
20OECD 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)
21Worldwide 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)
22INFE 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
23OECD/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
24International 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)
25International Gateway on financial educationwww.
Financial-education.org
26Financial 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
27Financial education part of a system(pension
example)
28Financial 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
29Integrated pillars
- Access and inclusion
- Prudential regulation and enhanced governance
- Consumer information and protection
- Competition
- Financial education and awareness
- They are interconnected and interactive
30Conclusion 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
31Pensions
- Awareness national campaigns
- DC schemes
- Communication
- Financial education
- Financial consumer protection
32Dedicated 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
33National 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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37Initial 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)
38Defined 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
39Communication
- 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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42Good 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
43Good 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
44Integrated 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
45OECD 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.
46OECD 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.
47implementation
- 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
48implementation
- 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
49IOPS 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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51- THANK YOU
- more information at
- www.oecd.org/daf/financialeducation
- and www.financial-education.org