Soapbox: Education for the masses
“We don’t need no education. We don’t need no thought control.” Pink Floyd’s lyrics are undoubtedly moving but policy-makers have rightly ignored the message of this catchy tune. Policy-makers are increasingly intervening in UK education, and such direction has not been limited purely to the academic front. Schools now address a variety of personal and social issues, ranging from sex education to religion, but surely personal finance education (PFE) should be more prevalent in the curriculum?
Financial advice
There is an argument that PFE is not vital, as financial advice can be obtained from independent financial advisers and specialist financial press. Even if a financial services consumer is ill-informed, the market for providing information works well.
However, there are objections to this point of view. Consumers need to know the many other sources of information that exist, as the quality of financial advice cannot be judged by those who are not equipped with a basic understanding of finance. It can be useful to have an understanding of financial literature, a grounding in the terminology and knowledge of financial statistics. After all, a well-equipped consumer will be able to communicate more effectively with financial services providers and source appropriate products.
PFE also has a knock-on benefit in that consumers could assess the performance of financial service providers. For example, in the UK, the management charges for a FTSE All- Share tracker fund vary from 0.3% per annum to as much as 1% per annum. This variation in price seems too wide for a homogenous product under what appears to be a well-functioning market.
In addition, the mistakes from poor financial decision-making can be costly. The stigma of bankruptcy in the UK, in addition to the problems faced by those with loan defaults, is serious enough to encourage budgeting skills and public education about debt.
Currently, UK and US consumers save very little of their income. However, there is evidence that PFE has beneficial long-term effects on savings rates. For example, Bernheim, Garrett and Maki (1997) studied the longterm effects of PFE in the US. Between 1957 and 1985, 29 states had adopted legislation for some form of ‘consumer education’ at secondary school. In 14 states, the mandate was to be instructed in ‘personal finance’.
Bernheim et al found that exposure to financial education significantly increased personal savings rates. In addition, they revealed that a statistically significant control variable was the “frugality of parents”. That is, individuals learnt financial prudence from their parents, prompting Bernheim et al to predict that PFE would be less important for children who had frugal parents. Indeed, they found that PFE was less important in raising savings rates when parents were thought to be frugal, and that there may be cross-generational benefits of PFE for children who do not have frugal parents.
The position of PFE in the UK is also covered in a report commissioned by the Financial Services Authority (FSA) in 2006. It surveyed approximately 650 secondary schools, and found that:
>> PFE was ‘very important’ or ‘fairly important’ for 98% of secondary schools
>> 91% of secondary schools delivered some form of PFE, mostly via occasional lessons
>> There was no policy on PFE in 71% of secondary schools
>> 69% of secondary schools thought that PFE should become statutory
>> 53% of secondary schools gave a high priority to the delivery of PFE.
These statistics paint an interesting picture — while many recognised the benefits of PFE, the subject needs to be developed.
Unsurprisingly, the FSA survey also found that most PFE is taught in personal and social education, business studies and mathematics classes, mostly taught via pupils setting up mini-businesses, as part of careers advice or as part of visitors giving talks. In addition, PFE was mainly covered ‘once or twice a term’ and was taught to pupils aged 14 and over in the majority of cases.
These findings suggest that various improvements could be made in PFE. Firstly, the teaching of PFE needs to be via core subjects such as English and IT, so that all pupils are exposed to the subject. Secondly, PFE via practical skills such as setting up mini-businesses may prove futile as standardisation of learning is important.
In addition, the frequency of financial education can be increased via diversification across core subjects. Finally, resources are required. The FSA survey found that although 77% of schools reported that their teachers were ‘fairly confident’ or ‘very confident’ in teaching PFE, 60% of schools also said that they would like more support.
Everyone should have the skills to budget, save and insure in a cost-effective manner, as the costs of making erroneous financial decisions with debt are high. Similarly, there is evidence that PFE raises savings levels, and there are consequent cross-generational benefits of this type of education. Consequently, the subject needs to be given the attention that it deserves so that the barrier to obtaining financial security can fall.
Hiten Nandha is an investment analyst at Watson Wyatt. The views expressed in this article are his personal views.
Hiten Nandha
