Mission & Vision


Mission and Vision: Our Financial Literacy Approach

 

Our approach to financial literacy is as follows:

1) It is a global phenomenon. Every country is experiencing changes in financial markets, in pension systems and in financial regulation. It is important to take a global approach and study the evidence as well as learn from the experiences of various countries.

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2) We need to know what works. It is critically important to assess the effectiveness of financial literacy programs so as to be able to channel funds to the programs that show the best results.

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3) We need creativity and ingenuity in the approach to financial literacy. It is challenging to affect not only financial knowledge but also behavior. However, a lot can be learned from the experience in other fields. Moreover, technology and social media offer opportunities that were not available in the past. As a result, we have assembled a diverse group, which includes researchers with expertise in different fields. Moreover, the group includes not only academics but also practitioners working in central banks, Treasury departments, and regulatory agencies. We are also partnering with the private sector to be able to leverage resources. 

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Why is this important?

In the last few decades, financial markets around the world have become increasingly accessible to the ‘small investor’ as new products and financial services have come on the market. Nonetheless, many of these products are complex and difficult to understand, especially for financially unsophisticated investors. At the same time, changes in the pension landscape are encouraging increased reliance on the individual. Prior to the 1980s, individuals in many countries relied mainly on Social Security and employer-sponsored defined benefit (DB) type pension plans. Today, by contrast, individuals are increasingly turning to defined contribution (DC) type plans to help finance their retirement years. The transition to the DC retirement saving model has the advantage of permitting more worker flexibility and labor mobility than in the past, yet it imposes on employees a greater responsibility to save, invest, and decumulate retirement wealth sensibly. Furthermore, the spread of DC plans means that workers today are directly and immediately exposed to financial market risks, a reality that was less evident in the old DB system.

 

How people borrow money and manage their liabilities has also undergone major change. Prior to the current financial crisis, consumer credit had expanded rapidly, as had mortgage borrowing. And consumers who borrowed via credit cards or subprime mortgages were in the historically unusual position of being in charge of deciding how much they could afford to borrow. Alternative financial services, such as payday lending, have also become widespread in many countries.

 

But how well-equipped are today’s savers and investors to make complex financial decisions in the face of often high-cost and high-risk financial instruments? What is their level of financial literacy and who knows the most and the least? What are the consequences and costs of financial illiteracy? And what are the most effective programs to promote financial literacy and informed financial decision-making? These are the questions that will be addressed by the research teams participating in the Financial Literacy Programme.