The unbearable lightness of financial literacy
Benjie Fraser wonders whether the call to improve financial literacy among savers is simply a red herring.
A recent report about pensions by a leading insurance association identified that what makes most difference to people's retirement income is how much they save and for how long. 'Obvious' stuff, but well put. Individual financial literacy is one of the goals. The report goes on to say that consumers and manufacturers - in other words, both demand and supply - must pull together. An outcome will be an initiative to build industry standards for the development of defined contribution (DC) schemes. This will start, rightly, with a discussion on critical areas related to default funds.
The magic words - default funds. In reality, haven't many of the more advanced European markets already moved to make this not only a safe harbour but the only harbour - one that is sophisticated in content and most likely to be able to deliver on its promise? Denmark being a case in point.
Will financial literacy therefore remain for most people an insurmountable language with which to attempt to enjoy their retirement?
And should we instead look at ways to make the DC promise a mandatory default fund with know-how, focused on building the right platform to give members the right flight path to the happy-ever-after based on age alone criteria? Having established this easy-to-use platform backed by the appropriate guarantees would enable it to function as not only a retirement fund but also a multi-purpose savings fund that allows withdrawals to be made to finance housing, education and medical expenses. Singapore and Malaysia already have this.
There are huge opportunities to develop the DC technology we are seeing in the US here in the UK, to give people a greater opportunity to be involved in their funds during the different stages on the journey they make in life.
The technology relates to lifestyle funds - investing in riskier and theoretically higher-returning assets in the early stages of pensions saving, and gradually switching into safe asset classes closer to retirement.
Already popular in the DC market, they are expected to make up the lion's share of default arrangements once auto-enrolment is in operation. In the next 3-5 years, it is technology that is going to enable switches between asset classes and strategies based on members' age and risk profile. At a simple stroke, a need for literacy goes away.
Benjie Fraser is global pensions executive at JP Morgan's Worldwide Securities Services business