There is an alarming financial literacy gap in the UK, between those who are capable and confident in managing their money and those who are not. This is resulting in added pressure on the financial services sector to take on a bigger role in helping to fill it.
As recently reported by the Institute for Fiscal Studies (IFS), almost one-fifth of private sector employees in the UK (3.5 million people) are not making any pension savings in a given year. For self-employed people, who do not benefit from the behavioural nudge of auto-enrolment, the figure is far lower: fewer than one in five.
What’s more, according to the same IFS study, 61% of those private sector workers who are saving into a pension regularly are contributing less than 8% of their income, which may not be enough to give them a decent chance of a comfortable retirement.
Add this to the familiar figures about how few people have enough savings – a quarter of UK adults have less than £100, according to the Money and Pensions Service (MaPS) – and the picture looks grim.
While the cost-of-living crisis may be one of the reasons for such concerning data, it’s also increasingly apparent that too few people are knowledgeable, or aware, enough to make a reasonable assessment of their financial situation and plan for their future accordingly.
Economic education versus financial education
Given that the vast majority of non-public sector workers now have defined contribution pensions, which require a certain level of financial knowledge and engagement, there is a risk that the UK is storing up a heap of trouble for the future. (Only 12% of private sector employees had a defined benefit pension in 2020, according to the IFS.)
We need to effect a change, but there’s not necessarily a need to pump in huge amounts of money
Jonathan Cribb, associate director at the IFS and co-author of its pensions report, is keen to point out that the UK compares reasonably well with other wealthy nations when it comes to basic financial competence. “However, a higher level of financial literacy for retirement savings is more important in the UK than many other countries because we are more reliant on private pensions,” he says.
“And while automatic enrolment nudges people into pensions, it’s true that, particularly for medium and higher earners, to get a similar standard of living in retirement to that in working age life, you need to make active decisions to save.”
A major contributing factor in making such active decisions is having that basic level of financial literacy, says Sarah Porretta, an executive director at MaPS with responsibility for money, pensions and debt policy as well as the UK Strategy for Financial Wellbeing. “We need to be much more savvy consumers.”
This should start with better education in schools, says Catherine Winter, managing director of schools programmes and community outreach at the London Institute of Banking & Finance, which recently published a report revealing that 85% of 17- and 18-year-olds want to learn more about money in school.
She is deeply concerned about the current standard and coverage of financial education in the UK. “We’re not in a great place,” she says. “What we’ve got is economic education. But financial education is not economic education – it’s about becoming a critical thinker and understanding how the system works so you can ask the right questions and make the right decisions.”
Understanding the role of banks in financial education
Winter believes financial education should be made a compulsory part of the national curriculum for both primary and secondary pupils (it is currently only taught in PSHE lessons in secondary schools and coverage is “piecemeal”, largely due to a lack of time and training among teaching staff). And the financial services industry has a crucial role to play, she argues, both as a source of funding for better quality teaching in schools and in providing better support to adults.
This is a view supported by the Lord Mayor of London, Nicholas Lyons. In a recent speech calling on the UK’s financial services industry to do more, he encouraged firms to consider “how they can ensure everyone in society is aware of, understands, and can access products and services to help them manage their money long term.”
This gathering sentiment, combined with the FCA’s consumer duty regulations, means the financial services industry is likely to have little choice but to up its game.
Russell Winnard, chief operating officer at Young Enterprise, a charity that specialises in business and financial education for young people, believes many organisations are already doing a reasonable job in helping to turn the tide. “The vast majority of the high street banks and building societies, for example, have got an offer that speaks towards financial literacy and capability,” he points out. “But there’s always more they can be doing.”
Nudge people into the right behaviours first and they might catch up with financial literacy afterwards
That includes, he says, playing a part in ensuring every young person receives adequate financial education, as well as the adults who have missed out. “We’ve got 24 million adults who don’t feel confident in managing their money,” he says. “We need to effect a change. But there’s not necessarily a need to pump in huge amounts of money. Instead, how can the banks work more collaboratively and not always think about the pound of flesh that is theirs?”
Winter is calling for a more strategic and better-coordinated approach. “I would love to see a long-term strategy, with the banks involved and wanting an understanding of what their role is – which, probably, is to contribute financially,” she says.
She proposes a system “a bit like the apprenticeship levy where, if your profits are over a certain amount, you pay a percentage.” This could be used, for example, to fund better financial education training for schoolteachers.
Do banks have an incentive to help?
Smarter thinking is also required, for which the financial services industry could leverage its considerable talent and expertise, argues Porretta. “There’s already great work out there, but there’s definitely more to do,” she says. “We need to design products, services and journeys that help people to make better decisions – and it’s not always just about financial literacy. You might want to nudge people into behaviours that you know are the right thing for them, and then they might catch up with financial literacy afterwards. The best example of that currently is pensions auto-enrolment.”
There is, however, a potentially darker side: a point of view that many financial businesses in the past have profited from less financially capable customers – for example, by encouraging them to take on more debt than they could reasonably afford.
“It worries me to an extent that there could be certain organisations where consumers are taken for granted, because they aren’t necessarily able to make informed choices,” says Winnard.
He points to payday lenders, prior to regulation, as an example of how things can go wrong. “I don’t think people who engaged with them were not understanding entirely what the deal was,” he says. “Instead, I think they didn’t understand just how different that was to other alternatives that they hadn’t explored, like credit unions.”
Looking at the present situation, however, he believes the industry has moved on. “I think there’s a danger, but I’m not sure there are many financial services organisations now that would want to prey on individuals not financially capable,” he says. “The business model would be hugely risky.”
Porretta, who is a former executive at Lloyds Banking Group, believes that a win-win of financially literate, empowered customers, boosting the fortunes of the financial industry, is achievable. “If customers are disempowered, you can make money out of them. But I think you can make money out of empowered customers in a completely different way – and a better way,” she says.
“There’s no point in criticising the companies for trying to make money. They have to provide value to shareholders, that’s what they’re there to do. But working together on a business model that enables them to make money out of things that are better for consumers is within their gift.”
