Financial Knowledge and Capability Financial Knowledge and Capability of Consumersof Consumers

W. Fred van Raaij, Tilburg UniversityW. Fred van Raaij, Tilburg UniversityGerrit Antonides, Wageningen UniversityGerrit Antonides, Wageningen University

I. Manon de Groot, Tilburg UniversityI. Manon de Groot, Tilburg University

Rome: LUISS Guido Carli, September 5, 2008Rome: LUISS Guido Carli, September 5, 2008

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Research design

CentiQCentiQ Platform, initiated by the Dutch Departement of Finance.

SurveyRepresentative sample of n=4280 consumers, Fall 2007.

Representative for Dutch consumers of age 18+ on gender, age, education, ethnicity, and internet usage.

Objective To assess the level and deficiencies of the financial capability of

Dutch people. Compare FSA research in the U.K.

How?Self-report of consumers about their financial behaviour,

knowledge, and financial capability.

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Research model Financial Capability

Socio-demographiccharacteristics

Motivations

Financial knowledge and perceptions

Financialbehaviour:1. Making ends meet2. Overview3. Saving

Financial Capability

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Knowledge of financial products

Consumers report to have insufficient knowledge of:• Financial products (38%). • Pension plans (47%).• Shares, options, and bonds (47-53%).

Complex/risky financial products• 39% of consumers own bonds, shares, options, and/or mutual

funds.

Low involvement• Low level of knowledge, but only 20% of respondents have the

need to improve their financial knowledge.

Problem• Discrepancy between consumer involvement and the

importance of (complex) financial products in present life.

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Consulting information sources

Which information sources did you consult for financial information the last two years? Multiple responses possible (n=4249).

Relatives, friends, acquaintances 43% + –Bank, insurance company, pension fund 27 – +Intermediary, adviser 24 – +Internet site of financial service provider 20Offers, proposals of financial service providers 18Leaflets, brochures 12TV programs, such as Kassa and Radar 12Comparative, independent internetsites 11Newspapers, magazines 9Consumer organizations 6Government, such as Postbus 51 6 Product information leaflet 6Employer, personnel department 5Product conditions 5TV commercials 1

Consulted

Reliable

Expert

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Pension knowledge

Insufficient knowledge

• 47% of respondents report to have insufficient knowledge of pension plans.

• Most respondents, in particular women and young people, have only a global idea about their pension income. In the group of >35 years, only 50% has a global idea.

• Most people read the pension overview they receive only superficially before they put it away in their files.

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Pension knowledge

Information problem

• The intermediary is the most frequently consulted information source for pensions and annuities. The employer is also consulted for the employee pension plan, and the bank for annuities.

• Respondents report that especially for annuities and pension plans it is difficult to find reliable and relevant information. Information is too much, too complex, and there are doubts about the reliability and independence of the information sources.

• Consumers prefer certainty but say that they do not trust intermediaries and financial advisors.

• 55% of respondents agree with the statement ‘I do not trust intermediaries very much’.

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Early retirement

Do you want to retire earlier than 65? Only asked to non-retired people.

Age 18-35 36-60 61+_______________________________________________________________

Men (n=1704) Yes (n=518) 28.8 69.5 1.7Don’t know (n=922) 47.8 51.8 0.3No (n=264) 28.0 64.4 7.6

Women (n=1802) Yes (n=374) 33.4 60.2 6.4Don’t know (n=1021) 45.3 52.8 1.9No (n=407) 18.2 54.4 27.8

_______________________________________________________________

Horizontal percentagesMen say more frequently ‘yes’ than women.‘Don’t know’ is relatively high at age 18-35.High frequency of women saying ‘no’ are of age 61+.

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Early retirement

Pension plans

• 30% of men and 21% of women want to stop working at an earlier age than 65. Men, more frequently than women, make arrangements to stop working at an earlier age. Especially women and young people do not make these arrangements.

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How do you realize your early retirement? 1

How do you realize your early retirement? Only asked to people with an early-retirement wish. Multiple responses possible.

Men (n=517) Women (n=374)

_____________________________________________________________________

Saving 28% 26%Investing 13% 9%Insurance 27% 17%Agreement with employer 22% 18%Agreement with pension fund 22% 21%No measures taken 24% 29%Other 2% 2%_____________________________________________________________________

Men take more measures than women.Saving and insurance most frequently taken measures.

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How do you realize your early retirement? 2

How do you realize your early retirement? Only asked to people with an early-retirement wish. Multiple responses possible.

Men (n=517) Women (n=374)18-35 36-60 61+ 18-35 36-60 61+

_____________________________________________________________________

Saving 19.9 79.5 0.7 39.6 58.3 2.1Investing 17.4 82.6 0.0 33.3 63.6 3.0Insurance 18.8 80.4 0.7 25.4 68.3 6.3Agreement employer 16.2 82.0 1.8 26.9 68.7 4.5Agr. pension fund 13.3 83.2 2.5 25.3 70.9 3.8No measures taken 52.0 46.4 1.6 44.4 52.3 3.7Other 72.7 27.3 0.0 44.4 55.6 0.0_____________________________________________________________________

Horizontal percentagesMost measures are taken at age 36-60.Women take measures earlier than men.Many people at age 18-35 have no measures taken.

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Knowledge of pension income (men)

Do you know your pension income? (1704 men)

Age Pension wish No Hardly Globally Rather Precisely_______________________________________________precisely_______________

18-35 Yes 38.9 18.1 36.2 6.7 0.0 Don’t know 41.9 24.0 27.4 6.1 0.7 No 27.0 23.0 39.2 10.8 0.0

36-60 Yes 12.0 14.5 49.3 18.7 5.6 Don’t know 15.7 17.2 49.7 14.9 2.5 No 18.9 18.3 39.1 18.9 4.7

61+ Yes 12.5 0.0 62.5 25.0 0.0 Don’t know 0.0 25.0 25.0 25.0 25.0 No 10.5 5.3 31.6 21.1 31.6____________________________________________________________________

Most men have a global knowledge of their pension income.Knowledge increases with age, and with an early-retirement wish.For age 61+, people without an early-retirement wish have better pension income knowledge than people with an early-retirement wish.

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Knowledge of pension income (women)

Do you know your pension income? (1801 women)

Age Pension wish No Hardly Globally Rather Precisely_______________________________________________precisely_______________

18-35 Yes 26.6 24.2 42.7 6.5 0.0 Don’t know 42.1 26.8 25.9 3.7 1.5 No 39.2 21.6 31.1 2.7 5.4

36-60 Yes 13.8 14.2 48.9 15.6 7.1 Don’t know 18.6 23.0 44.5 11.1 2.8 No 27.7 16.8 35.0 15.5 5.0

61+ Yes 16.6 4.0 24.0 24.0 32.0 Don’t know 26.3 5.3 21.1 5.3 42.1 No 18.6 1.8 15.9 20.4 43.4____________________________________________________________________

Most women have a global knowledge of their pension income.Knowledge increases with age, and with an early-retirement wish.For age 61+, people without an early-retirement wish have better pension income knowledge than people with an early-retirement wish, and women better than men.

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Reading the pension overview (men)

Do you read your pension overview? (1704 men)

Age Pension wish Never Thrown Put in Globally Precisely received away my files read read

____________________________________________________________________

18-35 Yes 19.5 1.3 12.1 59.1 8.1 Don’t know 23.8 2.3 17.7 50.1 6.1 No 20.5 4.1 13.7 56.2 5.5

36-60 Yes 4.2 1.1 10.0 58.1 26.7 Don’t know 6.5 1.3 10.0 64.3 18.0 No 14.1 0.6 12.4 52.4 20.6

61+ Yes 11.1 0.0 0.0 55.6 33.3 Don’t know 0.0 0.0 25.0 50.0 25.0 No 15.8 0.0 0.0 42.1 42.1____________________________________________________________________

Most men read their pension overview only globally.With older age, the pension overview is read more precisely.With a pension wish, at age 36-60, the pension overview is read more carefully.

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Reading the pension overview (women)

Do you read your pension overview? (1802 women)

Age Pension wish Never Thrown Put in Globally Precisely received away my files read read

____________________________________________________________________

18-35 Yes 12.0 1.6 16.8 59.2 10.4 Don’t know 27.0 1.1 17.5 51.4 3.0 No 24.3 1.4 20.3 47.3 6.8

36-60 Yes 7.1 1.3 5.8 63.1 22.7 Don’t know 10.8 0.4 21.6 64.6 11.7 No 20.0 0.5 13.6 44.5 21.4

61+ Yes 4.2 0.0 4.2 54.2 37.5 Don’t know 33.3 5.6 0.0 33.3 27.8 No 15.8 0.0 0.0 42.1 42.1____________________________________________________________________

Most women read their pension overview only globally.With older age, the pension overview is read more precisely.With a pension wish, at age 36-60, the pension overview is read more carefully.

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Pension knowledge

There is a positive relationship between

• Reading the pension overview carefully,

• Having knowledge of pension income, and

• Making early-retirement arrangements.

• This is true for all age groups, and for men and women.

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Synopsis 1

• Many respondents report to have insufficient knowledge of financial products. Their actual knowledge (quiz) is not very high either.

• Financial products have become more complex.• 47% of respondents report insufficient pension knowledge, in

particular women and young people.• The intermediary/adviser is an important information source,

but not trusted.• Product information is not read carefully, and evaluated to be

too difficult.• Financial management is a crucial factor for a sound financial

behaviour.• Life events affect financial performance.• Long-term effects are often not taken into account.• Markets are not homogeneous but segmented (clustering) …

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Clustering method

Three levels:Behaviour (HIGH)

Motivation (MIDDLE)

Socio-demographics (LOW)

Forward clustering (from ‘low’ to ‘high’)Clustering on motivation (active variables); statements on behaviour (passive variables).

Backward clustering (from ‘high’ to ‘low’)Clustering on behaviour; statements on motivations and socio-demographics.

Clustering on motivation; statements on socio-demographics.

Clustering on behaviour and motivations; statements on socio-demographics.

In a combination of forward and backward clustering:Clustering on motivation (active variables); statements on behaviour and socio-demographics (passive variables).

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Forward and backward segmentation

Financialbehaviour

Financial capability

Socio-demographics

Forward

Backward

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Segments of financial capability

Based on Central Bureau of Statistics (end 2007) 12,4 million Dutch people of 18+ years

Financially carefree

Financially ambituous

Financially sound

Financially insecure

Financial seekers

Financially indifferent

Financially illiterate

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Capability and behaviour of clusters

Capability 1 2 3 4 5 6 7

Financial management + + + — — — —

Involvement/effort — + — — + — +

Knowledge fin. products + + + — — — —

Certainty + + + — — — —

Less short-term oriented + + + — + — —

Financially literate + + + — — — —

Financial behaviour

Making ends meet + + + — — — —

Saving + + — + — — —

Overview — + + — + — —

Strong / above average relative to other clusters Weak / below average relative to other clusters

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Cluster 1 - Financially carefree (1.9 mln)

Segment (15%) Relatively old people, especially men, high income, large wealth, and

less/no debt.

Characteristics

Strong financial management, making ends meet & saving, below-average overview of financial situation, low knowledge and involvement.

RiskAlmost no risk, except probably below-average overview of financial

situation.

Motive / personal goal Growth of wealth.

Pension plan• No immediate spending of money.• Control over money.• No long-term financial plan. • No pension plan.

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Cluster 2 - Financially ambitious (2.1 mln)

Segment (17%)Relatively young people with a high income, modal wealth and low

debt, actively searching for information, and willingness to take financially risky products.

Characteristics Strong financial management, and strong financial behaviour.

RiskTheir risk proneness and ambition to become rich. In an economic

recession, they may get into problems because of their risky investments.

Motive / personal goal Growth of wealth; developing financial knowledge; protection against

unexpected financial losses.

Pension plan• Pension plan.

• Prefer spending now.

• Lack of control of debt and credit card.

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Cluster 3 - Financially sound (1.7 mln)

Segment (14%) Relatively many women, age 55+, modal income and wealth.

Characteristics

Strong financial management, making ends meet & having overview, below-average saving, low involvement.

RiskIncome decline or unexpected large expenditures, because of lack of

financial buffer.

Motive / personal goal Protection against financial losses; building and maintaining a

financial buffer and plan for the future.

Pension plan• No immediate spending of money.

• Control over money.

• No pension plan.

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Cluster 4 - Financially insecure (2 mln)

Segment (16%) Relatively many of age 25-54, living together with/without children,

modal education, income and wealth.

CharacteristicsAbove-average saving; poor financial management; making ends

meet, and overview.

RiskUncertainty about information and their own decisions. Support of

decision making and reliable information is important.

Motive / personal goalUncertainty reduction; protection against unexpected financial losses;

financial buffer and plan for the future.

Pension plan• Pension plan.

• Short-term plan.

• Lack of control of debt and credit card.

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Cluster 5 - Financial seekers (2.2 mln)

Segment (18%) Relatively many women (60%), young people (age 25-35) and low

education, modal income, often no wealth, 17% ethnic minority.

Characteristics Weak financial management; making ends meet & saving; good

overview.

RiskTheir uncertainty, regret and worry that they don’t have correct

information. They are active, involved and motivated. Correct information at the right time is important for them.

Motive / personal goalIncrease certainty in decision making; knowledge of financial

products, taxes & financial processes; wealth management.

Pension plan• Short-term plan.• Pension plan.• Lack of control of debt and credit card.

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Cluster 6 - Financially indifferent (1.9 mln)

Segment (15%) Overrepresentation of women (60%), age 35-44, modal income,

relatively large debt, households with children, 12% ethnic minority.

Characteristics Poor financial management, making ends meet & saving, very poor

overview.

RiskLow on knowledge and relevant information. They don’t know what

they don’t know. They did not learn how to manage money.

Motive / personal goalLow awareness of problem. Create awareness of financial problems.

Pension plan• Lack of control of debt and credit card.

• No pension plan.

• Immediate spending of money.

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Cluster 7 - Financially illiterate (0.6 mln)

Segment (5%) Relatively many young people, low education, low income, small/no

wealth, relatively large debt, 19% ethnic minority (small cluster).

Characteristics Very poor financial management and financial behaviour.

RiskLack of knowledge, certainty and financial activities. They did not learn

how to handle money. They don’t know what they don’t know. Good advise is crucial for them.

Motive / personal goalSeek access to this group in order (to teach them) to manage their

finances. It is not too late; this segment is relatively young and still has a long future.

Pension plan• Lack of control of debt and credit card.• No pension plan.• No immediate spending of money.

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Long-term financial plan

‘I have a long-term financial plan’ (1=not applicable, 4=strongly applicable)

Clusters1. Financially carefree 1.92 a2. Financially ambitious 2.12 b3. Financially sound 1.95 4. Financially insecure 2.11 b5. Financial seekers 2.06 6. Financially indifferent 2.03 7. Financially illiterate 2.04

Cluster 1 reports less than clusters 2 and 4 to have a long-term financial plan.

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Short-term financial plan

‘I have a short-term financial plan’ (1=not applicable, 4=strongly applicable)LT = long-term orientation

Clusterslow LT high LT

1. Financially carefree 2.04 a 1.97 a 2.102. Financially ambitious 2.22 b 2.24 b 2.22 b3. Financially sound 2.05 1.97 a 2.144. Financially insecure 2.23 b 2.18 2.27 b5. Financial seekers 2.17 2.17 2.156. Financially indifferent 2.10 2.10 2.137. Financially illiterate 2.29 2.53 b 1.89 a

Cluster 1 reports less than clusters 2 and 4 to have a short-term financial plan.

Interaction with long-term orientation, especially for cluster 7.

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Short-term financial plan

Long-term orientation

Low LT orientation

High LT orientation

Long-term orientation

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Immediate spending without planning

‘I spend my money immediately without planning for the future’ (1=not applicable, 4=strongly applicable)

LT = Long-term orientation

Clusterslow LT high LT

1. Financially carefree 2.00 a 1.98 a 2.022. Financially ambitious 2.18 b 2.19 2.173. Financially sound 2.08 1.97 a 2.154. Financially insecure 2.20 b 2.21 2.195. Financial seekers 2.14 2.22 2.066. Financially indifferent 2.17 b 2.17 2.177. Financially illiterate 2.18 2.80 b 2.09

Total 2.22 c 2.11 d

Clusters 2, 4 and 6 report more immediate spending than cluster 1.Low LT reports more immediate spending than high LT, in particular for

cluster 7.

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Immediate spending without planning

** * *

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Immediate spending without planning

Long-term orientation

Low LT orientation

High LT orientation

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Lack of debt control

‘I have no control of my borrowing and use of credit card’ (1=not applicable, 4=strongly applicable)

Clusters

1. Financially carefree 1.93 a2. Financially ambitious 2.25 b3. Financially sound 2.01 a4. Financially insecure 2.14 b5. Financial seekers 2.096. Financially indifferent 2.06 a7. Financially illiterate 2.20

Clusters 2 and 4 report more lack of control (of debt) than clusters 1, 3 and 6.

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Making ends meet after income loss

‘If I should lose a large part of my income, I can still make ends meet’

(1=not applicable, 4=strongly applicable)

Clusterslow LT high LT

1. Financially carefree 2.02 2.00 2.032. Financially ambitious 2.15 2.15 2.163. Financially sound 2.02 1.94 2.114. Financially insecure 2.17 2.18 2.175. Financial seekers 2.07 2.00 2.146. Financially indifferent 2.13 2.15 2.117. Financially illiterate 2.54 2.93 2.14

Cluster 7 seems to overestimate its potential to make ends meet, especially the low LT part of cluster 7.

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Saving for large expenditures

‘I have difficulties to save money for large expenditures’ (1=not applicable, 4=strongly applicable)

Clusterslow LT high LT

1. Financially carefree 1.98 a 2.02 1.942. Financially ambitious 2.15 b 2.15 2.163. Financially sound 2.04 1.98 2.114. Financially insecure 2.12 2.08 2.155. Financial seekers 2.16 b 2.06 2.276. Financially indifferent 2.07 2.15 1.987. Financially illiterate 2.32 2.57 2.06

Clusters 2 and 5 report more difficulties than cluster 1 to save for large expenditures.

The LT part of cluster 7 reports difficulties to save for large expenditures.

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Pension plan

‘I have taken measures for my pension plan’ (1=not applicable, 4=strongly applicable)

Clusters

1. Financially carefree 2.02 a2. Financially ambitious 2.22 b3. Financially sound 1.98 a4. Financially insecure 2.19 b5. Financial seekers 2.12 b6. Financially indifferent 2.15 b7. Financially illiterate 2.06

Clusters 2, 4, 5 and 6 report more than clusters 1 and 3 to have taken measures for their pension plan.

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Pension plan

* ** * * *

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Government support

‘If I get into financial problems, the government will solve this for me’

(1=not applicable, 4=strongly applicable)

Clusters

1. Financially carefree 2.05 a2. Financially ambitious 2.28 b3. Financially sound 2.09 a4. Financially insecure 2.12 5. Financial seekers 2.10 a6. Financially indifferent 2.16 7. Financially illiterate 2.11

Cluster 2 reports more than clusters 1, 3 and 5 to rely on the government to solve their financial problems.

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Government support

** * *

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Prefer spending now over pension saving

‘If I could chose, I rather have more money now than saving for my pension’

(1=not applicable, 4=strongly applicable)

Clusters

1. Financially carefree 2.10 2. Financially ambitious 2.19 a3. Financially sound 1.99 b4. Financially insecure 2.11 5. Financial seekers 2.05 6. Financially indifferent 2.06 7. Financially illiterate 1.98

Cluster 2 prefers more than cluster 3 to spend money now rather than to save for their pension.

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Prefer spending now over pension saving

**

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Synopsis 2

• Heterogeneity in population: Clusters differ in their financial behaviour and degree of financial literacy.

• Consumer policy should take these segments into account.• Only a minority of consumers has a long-term financial plan.• Four clusters report to have taken measures for their pension plan.• Many respondents report a lack of control of their debt and credit-card usage.• Impulsive spending in three clusters, related to a low long-term orientation.• Ambitious and seeking consumers report difficulties to save for large

expenditures.• Is a pension plan a ‘pre-commitment’ not to spend too much?