7.5 Financial education
How financial literacy affects savings levels
New Zealanders tend to either take too little risk or too much risk when saving. Some put long-term money into bank deposits, and are therefore likely to receive lower long-term returns than if they invested in, say, diversified local and international shares or property – particularly if they use lower-fee investment options. At the other extreme, many people have invested in poorly run finance companies or heavily geared property – or in the 1980s geared shares – and ended up losing much of their savings. A lack of understanding of diversification has led to heavy losses for people who have invested in one or a few shares or other securities.
If people were more financially literate, they would be able to assess the appropriate risk level for their situation and personality, and invest accordingly. With less underperformance on the one hand, and fewer irretrievable losses on the other hand, New Zealanders' total savings would increase. People's welfare – and attitudes to saving and investing – would also be improved. Similarly, higher financial literacy would lead to better debt management and faster loan repayment, which would also help to boost savings totals.
The SWG is particularly concerned that, despite steps in the right direction, many school children are still not studying financial literacy. Educating children and young people not only ensures a more financially literate adult population in future, but these young people sometimes, in turn, educate their families. We would like to see speedy action in this area.
The current situation
New Zealand does not have a formal government policy on financial education as yet, nor a government department responsible for financial education policy or delivery. However, many agencies, including the Retirement Commission, Reserve Bank, Securities Commission, Ministry of Economic Development, Ministry of Social Development, Inland Revenue, Consumer Affairs and the Ministry of Education, are involved in financial literacy programmes.
Arguably, that's too many agencies. Partly because of this, Commerce Minister Simon Power has asked Ministry of Economic Development officials to do a stock-take on how financial literacy services are delivered in New Zealand. That stock-take is in progress. It will include consideration of the roles of the Retirement Commission and the new Financial Markets Authority in promoting financial literacy.
It is clear the Retirement Commission, in particular, is doing a good job at educating people about everyday financial literacy, but more effective coordination among the agencies might allow for greater leverage from the Government's efforts. In addition, more could be done on education about investing and people's ability to compare investment products. The Ministry of Economic Development is working on improving disclosure about investment products, which will help the latter.
Meanwhile, the National Strategy for Financial Literacy has created a five-year action plan that will be reviewed every six months and updated every five years. The focus of the strategy is on:
- Developing the quality of financial education.
- Extending its delivery.
- Sharing what works.
- Working together.
Financial literacy and KiwiSaver
Regardless of whether KiwiSaver is boosting savings directly, it seems to be helping financial literacy. This in turn should lead to more saving in “under-saving” households, and to better financial management generally. Some of the ways KiwiSaver is boosting financial literacy are:
- Skin in the game. Before KiwiSaver, a large majority of New Zealanders – particularly young adults – had no financial assets beyond bank deposits. Now 51% of households have at least one KiwiSaver member, according to Inland Revenue’s KiwiSaver Evaluation for July 2009-June 2010. This means many more households have at least some financial assets. Holding those assets must make people take more interest in learning about bonds, shares etc. – especially as their holdings get bigger.
- Getting their act together. The evaluation says the scheme has “increased the value [people] place on financial planning.” It also says 38% of KiwiSavers with a mortgage or other debt when they joined have maintained their debt repayment, 21% increased their repayment and only 10% stopped or reduced their repayment. This is contrary to what might be expected. It suggests a psychological effect: people may feel more in control of their finances after joining KiwiSaver and therefore put more effort into other financial issues.
- Childhood habits. About 25-30% of New Zealand children have joined KiwiSaver. More than half their parents said they enrolled their children to teach them long-term saving habits and help them save for future goals like home ownership. This must boost the financial literacy of at least some of the children and parents.
However, we can do better. About 40% of KiwiSaver members don't know what sort of fund (conservative or growth etc) they are invested in, and 15% can't name their provider.
There are also numerous problems with information about KiwiSaver, particularly about fees and performance.
Financial literacy is clearly important to New Zealanders' wellbeing. It enhances people's ability to manage their finances and to save optimally.
- Encourages all agencies to work together to improve the quality, quantity and evaluation of their initiatives. It is particularly interested in education about investing as opposed to everyday money management. Some examples of topics the SWG would like to see covered are: the relationship between risk and return; diversification; compounding returns; short-term versus long-term investing; the effect of fees on returns; signs of fraud; debt management; understanding the effects of gearing; and understanding how to manage savings in retirement.
- Endorses the recommendations of the Young Enterprise Trust to:
- Create a Ministry of Education approved curriculum statement on financial literacy for years 1–13.
- Create sufficient Achievement Standards for financial education for NCEA levels 1–3.
- Ensure that these Achievement Standards are on the approved subject list for university.
- Review the recommendations of the Capital Market Development Taskforce that investment literacy concepts are incorporated into the school curriculum.
- Supports the work being done by the Ministry of Economic Development on the regulation of periodic reporting for retail KiwiSaver schemes. Both members and non-members of KiwiSaver need access to reliable, easily compared information on total fees and expenses and on returns net of all expenses and tax. Such information should be readily available on a government-run website that enables easy comparison of similar investments. It is also important that information about returns should include clear warnings that past returns are no guide to future returns.
- Suggests that the government put considerable resources into educating New Zealanders about recent and proposed changes to regulations, such as the setting up of the Financial Markets Authority, adviser regulation, disputes resolution schemes, etc. A major aim of these changes is to increase investor confidence, so it is clearly important that people understand the new institutions and services and how to use them.
Student loans and saving habits
The SWG has some concerns about the messages being sent to young people as a result of the interest-free nature of the Student Loan scheme.
Under the scheme, students pay no interest while studying. And, as long as they remain in New Zealand, they continue to pay no interest after graduation. With compulsory repayments set at 10% of every dollar earned above a threshold (currently $19,084 a year), students can take many years to repay their loans, and some may never repay them.
The Government has recently taken two steps that will encourage faster repayment of student loans:
- Excess repayment bonus. If a borrower makes voluntary repayments – above their compulsory repayments – of $500 or more in a 1 April to 31 March year, the government will reduce their loan balance by 10% of the excess repayment.
- Fees. The government has proposed a $40 annual administration fee for student loans held by Inland Revenue. The fee will be first charged from 31 March 2012, for the 2011/12 tax year. (In addition, the existing establishment fee charged by the Ministry of Social Development for each new loan account will increase from $50 to $60 from 1 January 2011. No borrower will be charged a fee from both agencies in the same year.)
Despite these developments, financially savvy people “game the system.” They might, for instance, calculate that they will still benefit from saving elsewhere and delaying voluntary loan repayments until they get to the point at which their compulsory repayments would pay the loan off in approximately three years. At that stage, they make use of the repayment bonus to repay the loan in full.
While the SWG does not support charging interest while students are studying, it is concerned that the system encourages young people to think it's fine to have a large debt – other than a mortgage. Anecdotal evidence suggests this can lead to a blasé attitude to debt, with former students unconcerned if they run up large credit card bills. Such an attitude could lead to a lifelong habit of being in high-interest debt rather than saving.
The SWG recommends that the Government considers charging low interest on student loans after a student has graduated. Young people would learn debt management skills whilst repaying those loans.
- The Advisory Group of the National Strategy for Financial Literacy is made up of: Alan Bollard (Governor, Reserve Bank), Sean Carroll, Chair (Chair, Investment Savings and Insurance Association), Diana Crossan (Retirement Commissioner), Jane Diplock (Chair, Securities Commission), Manuka Henare (Associate Dean Maori and Pacific Development/Director Mira Szászy Research Centre, University of Auckland Business School) and Karen Sewell (Secretary for Education).
- The strategy is available at www.financialliteracy.org.nz. For more information on recent developments see New Zealand Network for Financial Literacy (2011).