Financial education and consumer protection

Pensions and Financial Education


When making investment decisions, workers need to consider not only investment risks and returns but also uncertainty regarding their life expectancy. Defined contribution plans often require employees to choose between a range of retirement products at retirement, some of which provide regular payments until death (annuities), while others involve gradual drawdown of the accumulated balance. In addition, investment and retirement products tend to vary in the type of commissions that are charged by providers. Many countries that have introduced mandatory defined contribution plans (especially in Latin America and Eastern Europe) have not introduced individual choice of investment and have strictly restricted choice of retirement product and commission/fee structures. There is also a group of Nordic European countries that although relying on defined contribution arrangements, have risk-sharing mechanisms that spread out investment and longevity risks over generations and that involve little if any individual choice. In contrast with these two models, personal pension plans in OECD countries such as the UK or the US tend to offer a high degree of freedom over all the key aspects of the plan (investment in the accumulation phase, retirement product, commission structure).  And even when choice of investment is limited, employees still need further education on essential features of pension plans, including on the need to provide an adequate level of contributions.

Financial education can contribute to the well-being of workers in retirement by providing them with the information and skills to make wise investment choices with both their pension plans and any individual savings plans. Financial education can provide workers with both basic financial information such as the trade-off between risk and return and the value of compound interest and more specific information about the advantages and disadvantages of particular types of investments. It can also provide workers with information so that they can make informed choices about financial advisors.

In their responses to the OECD survey on financial education, many of the countries mentioned the importance of providing workers with information about their pensions and how to invest their savings for retirement. Not unexpectedly, the countries citing the importance of financial education in the area of pensions are those that are either experiencing an increase in the number of workers covered by defined contribution pension plans or are changing their state supported pension system so that part of it is funded, thus requiring that workers make choices about how to invest their pension contributions. In these cases it is very important that workers be aware of the necessity of making sound investment decisions and that they be provided with the information that will enable them to do so. A number of countries mentioned the importance of complete disclosure on financial products and services.

These issues are being addressed within the framework of the Financial Education Project .


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