The role of financial education in decision-making for retirement

1. Context
2. The study
3. Key findings
4. Recommendations

Context

There is an on-going global trend to reform pension systems in ways that are likely to extend working lives and reduce benefits for future generations. These are responses to general fiscal pressures and generally ageing populations. The net effect is to place greater responsibility on individuals to provide for their own financial and general well-being in retirement. It is essential that individuals have the necessary knowledge, understanding and skills to make their own plans and manage their resources in retirement.

The study

This study is Chapter 5 of the OECD publication Pensions Outlook 2016. It provides an overview of individual decision-making challenges for retirement with a focus on those related to lack of financial literacy. It discusses financial education initiatives to support individuals in planning and managing their resources in retirement.

It provides background analysis for the update of the 2008 OECD publication – Good Practices for Financial Education Relating to Private Pensions. This is part of a general consolidation of OECD policy instruments on financial education but it is also more generally to support policymakers in the implementation and improvement of financial education initiatives for retirement.

It draws extensively on work by the OECD and the International Organization of Pension Supervisors on the characteristics of pension systems and on the benefit of increasing levels of financial literacy for improving retirement planning.

Key findings

• The main challenges facing people in planning for retirement and managing resources in retirement relate to lack of financial literacy (including lack of awareness, low financial knowledge and low pension-specific knowledge, motivation, confidence and skills). There are also some commonly observed behavioural biases – in particular, present-based time preferences (opting for current rather than deferred consumption), status quo bias (tendency not to want to make decisions that change things), reference dependence and framing (being influenced by how choices are positioned and contextualized), and limited attention, menu effects and choice overloading – that undermine the ability to plan, save and take retirement decisions.
• Lack of financial literacy may have varying impacts depending on the exact structure of each national pension system and personal pension system. Greater financial literacy is more likely to be demanded by pension systems that rely more on private pensions than public pensions; personal pension plans than occupational pensions; and defined contribution pensions than defined benefit pensions.
• Tools to increase awareness and provide information like online information, pension statements, comparison tools and pensions calculators, are in widespread use. Instruction, training and generic advice have the potential to address a wider spectrum of challenges even though they are in less widespread use. Research shows that individual pension statements (about both public and private pensions) and retirement planning seminars can increase knowledge and understanding and change people’s behaviours.

Recommendations

• Overall framework: policymakers should develop national financial education strategies to ensure that people have ways to acquire general financial skills. Financial literacy for retirement should be developed within this more general framework.
• Information and awareness: information about pension systems, pension reforms and private pensions schemes needs to be available and clear and not daunting for the individual. Information about features of private pensions (costs, performance, quality of service, investment allocation and level of risk) must be comparable and standardized. It is important to combine in one place the information relating to all pension schemes the individual is a member of. It is important to complement pension statements with calculators/simulators to maximize the impact of information relating to retirement outcomes.
• Instruction: governments, employers and other stakeholders should consider expanding the provision of financial literacy training for retirement planning.
• Advice: Governments should consider encouraging the expansion of unbiased advice about retirement planning to guide people whenever the system is particularly complex; recent experience has demonstrated that the provision of information and skills is not always enough.

The study closes with suggestions for development of practical tools in two key areas:

• A matrix of financial education needs summarizing the main areas of need in each different pension system and mapping alongside them strategies to address them per local requirements.
• A checklist on financial education available online. It should be capable of use alongside the matrix and is designed to help policymakers to determine the needs of people for information, instruction and advice in relation to retirement.

Full report

The role of financial education in decision-making for retirement - full report