[ Last Updated 26 August 2009 ]
Short Description
New Zealanders’ savings practices, including their limited direct investment in capital market products, suggest that they do not understand these products well.
Summary of Financial Literacy in New Zealand1
New Zealanders' savings practices, including their limited direct investment in capital market products, suggest that they do not understand these products well. The Capital Market Development Taskforce asked Alison O'Connell to look at financial literacy in New Zealand and the ways that it can be improved. The report sets financial education in New Zealand in an international context, summarises what is known about the effectiveness of financial education, and identifies possible gaps in the range of financial literacy initiatives on offer.
Raising the financial literacy of the population means improving the skills and abilities that help individuals make well-informed decisions about managing their money throughout life. The report found that New Zealand is a world leader in the delivery of financial education in terms of organisation, cost-effectiveness and mode of delivery. However, there are areas for improvement, particularly in education about investing. In related areas, New Zealand does not do well compared to other countries with regard to product disclosure and the availability of tools to aid comparison of these products.
Financial Education in New Zealand
New Zealand is active in financial literacy, with a well-supported National Strategy for Financial Literacy led by the Retirement Commission. The Strategy sets a framework for the direction of New Zealand's financial literacy initiatives and comprises three work areas: reaching people, extending delivery and sharing what works.
There are many financial literacy initiatives and providers in New Zealand, with the most recent stocktake finding around 55 programmes from over 30 providers.2 The programmes vary greatly, and range in scale from public courses attended by hundreds of people a year to websites or other media that may be seen by millions. A number of government-funded agencies provide some form of financial education, although the Retirement Commission is the only one to have the goal of improving financial literacy at the heart of its mission.
Information and Education about Investing in Capital Markets in New Zealand
Financial literacy initiatives tend to be aimed at people thought to have a low level of understanding who need help with everyday financial management, particularly issues around budgeting and debt. Financial education about capital market investment tends to be focussed around retirement savings products, for example KiwiSaver in New Zealand.
However, there is some information available by which to learn more about investing directly in capital markets in New Zealand. The Sorted and Securities Commission websites both provide this and have also worked together to develop a booklet on investing in the Sorted series. Currently however, there is a low demand for this type of information. In 2008 only a small proportion of the total traffic to the Sorted website was to investment-related pages. Numbers peaked when these services were advertised on television, which illustrates the potential power of specific marketing campaigns. It may therefore be beneficial to stimulate demand for investment education services by undertaking another such campaign.
It is also important to consider the investment education opportunities that could be created by the effective use of disclosure documents. The requirements for disclosure documents are being considered within the current regulatory reviews, and so it will be important that the financial education of investors is kept in mind. For example, disclosure documents could link to financial education resources.
Comparisons with Other Countries
The scale of commitment to financial education in New Zealand compares well to that in other countries. There is no apparent over-provision, or significant gaps in types of non-school financial education, although other countries commit more to financial literacy in schools. New Zealand is bringing financial education into the schools curriculum, but this will still not go as far as in a number of other countries. Financial literacy in schools could be promoted more strongly or made mandatory.
The recorded usage of New Zealand's non-school financial literacy initiatives is higher than in any other country compared, and this appears to have been achieved cost-effectively. Investing tends to be a relatively small part of financial literacy initiatives in all countries, and in general the available education material in New Zealand appears no less informative than elsewhere. However, compared to other countries, there is very little available information on product comparisons, and this is not facilitated by standardised disclosure documents. International comparisons also suggest that New Zealand could explore more telephone or face-to-face ways of giving financial information and education.
In all countries, the main method of reaching people with financial information is a website. The content of these websites is very similar, but Sorted's content has a comparatively wide range and depth of subjects and more variety in forms of presentation. Sorted has relatively little information on scam warnings and consumer rights, but this information is provided by the Ministry of Consumer Affairs and the Securities Commission. Sorted also has less on product comparisons and, unlike the UK, does not have a current events section.
Levels of Financial Literacy in New Zealand
New Zealand is one of the few countries to have completed a survey of financial literacy levels in the population. There are differences in the way financial literacy is measured between countries, and there are inherent limitations in all of the surveys that have been used. That noted, the surveys appear to indicate that New Zealanders' general financial literacy is no worse than that of other populations. Specifically with respect to investment, most New Zealanders appear to understand the basic concepts of risk, return and diversification, and appreciate that investing is a way to achieve financial goals. However, this does not seem to translate into believing that investing in shares will deliver good enough returns over the long term.
Does Financial Education Increase Financial Literacy?
It is often assumed that more financial education leads to higher levels of financial literacy. In fact, there has been very little rigorous, meaningful evaluation of the impact of financial education programmes. However, despite the lack of clear proof that financial education works, it has support and is likely to continue to be an important part of the policy mix in most countries.
Influences and Possible Future Directions
In addition to the proposals already mentioned, the report notes that the current financial crisis is likely to have influenced views on investment and money management. This may have some impact on the demand for financial education and on which financial literacy skills are the most important. It is suggested that topical content could be included to address consumer concerns that have arisen as a result of the crisis.
The report also raises the possibility of improving the delivery of financial information and education by utilising the latest insights from behavioural economics, psychology, social marketing theory, public health promotions, and other techniques that encourage people to understand the norms of behaviour.