Financial Education is a hot topic amongst working Australians. This article written by Peter Promnitz – Mercer Asia Pacific and first published on www.ceoforum.com.au discusses the reasons why improving financial literacy can have a profound effect on a person’s ability to prepare for retirement and make sound financial decisions.
As our population ages and Baby Boomers begin to retire, there is increasing pressure on government to ensure Australia can support our growing nation of retirees. One solution is to encourage individuals to fund their own retirement, which requires them to start preparing early and make sensible financial decisions along the way.
In theory, this is a good solution. But as Mercer’s recent study has shown the reality is although working Australian’s recognise they need to rely on superannuation to secure long term prosperity, they have a very limited knowledge of superannuation and other investments. They also admit to being unprepared for retirement.
This lack of basic financial knowledge and preparedness will have a profound effect on the extent to which working Australians will be able to live comfortably through their retirement. In fact Mercer’s latest research shows half of the working population expect to be less comfortable in retirement than they are now.
Combine this with the knowledge that those with lower literacy levels anticipate a greater proportion of their funding to come from the Government and the Age Pension and are less confident in making financial decisions. This applies whether they are making decisions for themselves or their employer. It is clear why financial literacy is becoming a hot topic.
In fact, the need to improve the state of financial literacy in this country has never been more pertinent. The current superannuation system makes the assumption that people are savvy enough to know how to select their own fund and investment strategy. However, only a small percentage of people are equipped for this. Recent moves by the Government to make super simpler and more attractive are certainly a step forward for working Australians, although there remains a crucial step missing. After all, what is ‘Choice’ without informed choice?
How financially literate are working Australians?
The Mercer 2006 Financial Literacy and Retirement Readiness study sought to understand the level of working Australians’ financial knowledge and preparedness for retirement. It found alarmingly low levels of financial literacy which is cause for concern.
The Mercer study sought to better understand the varying degrees of financial literacy among a random sample of 802 working Australians and uncovered the financial experiences of recent retirees following four focus groups.
The study found that only half of all respondents surveyed had given, at best, some thought to retirement, but made very little, if any, preparations for it. It is not surprising then that half expect to be less comfortable in retirement than they are now.
Mercer also found that working Australians expect super to account for 43 per cent of all retirement funding, yet they know little about their main super fund, with two in three unsure whether their super fund is a defined benefit or an accumulation style fund. The findings are concerning. The type of super fund and investment strategy has a significant bearing on the account balance at retirement and comes with certain risks. It therefore appears that nearly half the working population probably don’t know how much money they will retire with or what kind of volatility to expect along the way.
Being financially literate pays off
To describe the levels of financial literacy in Australia, Mercer identified six ‘types’ of people according to their level of knowledge through the completion of a self-test:
| Profile | % of sample | |
| Savvy Gurus | Sophisticated understanding | 3 |
| Knowledgeable Authorities | Strong understanding | 10 |
| Switched on Builders | Reasonable understanding | 23 |
| Capable Learners | Basic understanding | 30 |
| New Apprentice | Grasp of financial basics | 20 |
| Oblivious Beginner | Lack basic foundations of knowledge | 14 |
The study revealed that as financial literacy levels increase, so too does preparedness for retirement. One in three Savvy Gurus have given a lot of thought to retirement and have made many preparations, compared to only five per cent of Oblivious Beginners saying the same.
Correspondingly, as financial literacy levels decline, anticipation of a lifestyle in retirement that is far less comfortable than now increases. Over one in four Oblivious Beginners anticipate a lifestyle being a lot less comfortable in retirement, while only a handful of Savvy Gurus and Knowledgeable Authorities expect the same level of discomfort in retirement.
Even more critical, however, is that among Oblivious Beginners, the Age Pension is anticipated to comprise around 21 per cent of their overall retirement funding. For more financially literate counterparts, government pensions are expected to comprise far less.
The study also found that financially literate employees were more confident in making financial decisions on behalf of their employer. Ninety per cent of Savvy Gurus and 65 per cent of Knowledgeable Authorities were very or somewhat comfortable in making financial decisions for their employer as opposed to Oblivious Beginners.
Whose responsibility is it to improve financial literacy?
In light of the above findings, do employers then have an equal responsibility to contribute to a financially literate society? Will they receive a return on investment by doing so?
The answer is yes. Firstly, the respondents in the study believed that employers do bear some responsibility for improving the state of our financial literacy levels. Nearly half (45%) of working Australians surveyed by Mercer believe their employer has at least some responsibility to provide them with information to help them plan for retirement, in addition to efforts by the individual and the government.
Secondly, as previously mentioned more financially literate employees were more confident in making financial decisions on behalf of their employer. These types of decisions may include reducing business operating expenses, growing sales, setting prices for goods and services and preparing annual budgets, so there is a clear benefit for employers to assemble a more financially literate workforce.
Furthermore as the population ages and the retirement age rises, the lines between full time work and retirement will increasingly blur. It is expected that employers will play a larger role in helping their older employees ‘transition to retirement’. Therefore, ensuring employees understand the conditions for accessing superannuation benefits will be of considerable importance to employers.
Employees with higher levels of financial literacy will be able to work more closely and flexibly with employers to develop transition to retirement strategies and therefore stay in the workforce longer. Moreover, it may also help position an organisation as a workplace of choice in an increasingly competitive and shallower labour market.
Employers are an important conduit for information, and can easily and cost effectively provide access to education services. Providing seminars or workshops, or setting aside a few hours a month for staff training, can go a long way in helping employees better understand their finances.
Additionally, workplace education seminars have the potential to leave people feeling more confident and engaged in managing their own superannuation as well as feeling better about making financial decisions, another added benefit for employers.
While Australians rate their own knowledge poorly, the truth is they want to be smarter and want to take professional advice. People want to be able to make better financial decisions, as Mercer’s study shows the majority of Australians desire to improve their financial knowledge. Currently most rate their superannuation knowledge as 4 out of 10, but would like to boost this to 7 out of 10.
For employers an opportunity exists to fulfil a duty of care and benefit through engaging employees on financial matters. Organisations do have a captive audience at their finger tips, therefore efforts made to improve financial literacy levels within the workplace will not be wasted and will contribute to the community’s overall financial well being and enhance a company’s own success now and in the future.
