Jul 28

The Role of Pension Funds in Promoting Financial and Pension Literacy among Members, Pre-pensioners, and Pensioners.

By Vincent Shimutwikeni

The significance of Financial and Pension literacy in enhancing retirement planning and overall financial decision-making cannot be overstated. It exerts a profound influence on an individual’s saving habits which could contribute to the economic growth of Namibia. According to the 2013 Financial Literacy Baseline Survey, the average Namibian above the age of 16 scored 42.75% in financial literacy, 51.18% for Financial Knowledge, and 32.26% for financial behaviour. These statistics sadly highlight the inadequate levels of financial literacy among Namibians, consequently making it challenging for them to effectively devise a viable retirement savings plan.

Retirement fund members, particularly pre-pensioners and pensioners, are inevitably faced with a multitude of decisions to navigate. Notably, those belonging to private pension funds encounter even more complex choices compared to their counterparts in public pension funds. It is imperative to note that decisions regarding one’s retirement are influenced by an individual’s levels of financial knowledge, attitudes, skills, and are also subject to psychological biases.

Overall, members with low financial literacy are at a higher risk of experiencing debt problems, tend to save less, may get entangled in high-cost mortgages, and often neglect planning for retirement, this ultimately leads to suboptimal choices. Given the potentially significant chance of committing mistakes in this domain and the multitude of variables to consider, it can be concluded that pension funds bear a paramount responsibility in addressing these challenges. There indeed exists both a moral and legal obligation for pension funds to take a more proactive role in promoting financial and pension literacy in society.

The missing ‘Members Interest’: Financial and Pension Literacy.

Pension funds and their governing bodies have a primary goal of promoting and safeguarding the interests of their members. This is achieved through various means, including but not limited to overseeing and managing the fund’s operations, making investment decisions, devising investment policies and monitoring risks, all with the ultimate aim of serving the best interests of the pension plan members and beneficiaries.

One aspect that many pension funds tend to overlook is providing financial and pension literacy to their members as part of advancing their interests. This entails equipping members with the necessary knowledge and understanding of financial matters and pension-related concepts, enabling them to make informed decisions about their retirement planning and financial well-being. Pension fund members often encounter challenges in determining the amount of money they would need to maintain their desired standard of living during retirement, leading them to underestimate their retirement income needs.

Pension funds should engage young workers, instilling in them the significance of early retirement planning and savings, as this enables them to maximize the benefits of interest compounding over time. Pre-pensioners, on the other hand, need to be well-informed about the decisions they will encounter at retirement, including when to access their pension, how to utilize any lump-sum payments, and how to select an appropriate annuity. Pension funds should implement comprehensive financial and pension literacy programs.

Legal and Moral Obligation: What others have done!

The financial landscape that consumers must navigate has undergone substantial changes, leading to increased complexity. To illustrate, some thirty-eight states in America, including Puerto Rico and the district of Columbia, were prompted to pass financial literacy legislation in the year 2021.

In Colombia, financial education is considered a fundamental right for consumers, and financial institutions bear the responsibility to actively promote and provide financial education programs, as directed by the Financial Superintendence of Colombia. By law, pension fund managers are obligated to conduct educational campaigns for their members. These campaigns must be conducted by accredited professionals who are equipped to offer comprehensive information about pay-out products, annuities, asset allocation details, and everything necessary for members to make well-informed decisions.

As a result of the 2008 pension reform in Chile, pension advisors were introduced to assist and guide individuals throughout their retirement journey. The primary responsibility of these advisors is to assist individuals evaluate the various risks associated with retirement and aid them in selecting an appropriate pension pay out option. Furthermore, the Chilean Pension Regulator offers plan members a means to have their inquiries addressed through multiple channels, including the web, a call center, and in-person consultations.

What is to be done?

The Namibia Financial Sector Strategy 2011-2021: Towards Achieving Vision 2030 was devised by Government to tackle the financial sector’s shortcomings and expressed the intention to create a policy framework for coordinating financial literacy initiatives, a process which should be accelerated. Both the Namibia Financial Sector Strategy (NFSS) and the 5th National Development Plan (NDP5) emphasize the significance of fostering financial literacy within the country.

In addition to the role pension funds ought to play as alluded to above, Namibia should consider policy review and formulation to establish a framework dedicated to promoting financial and pension literacy. This will ensure that members, Pre-pensioners, and Pensioners acquire the essential skills to make well-informed decisions during both the accumulation and pay out phases of their retirement journey, ultimately leading to sufficient income in their retirement years. This review could involve revisiting the provisions outlined in the Pension Fund Act and the role of the Namibia Financial Institutions Supervisory Authority (NAMFISA), with a specific focus on making financial education by pension funds for retirement a mandatory requirement.

Concerted efforts by pension funds, policy review and amendments should all be done with the ultimate goal of ensuring the population would be empowered to make informed financial decisions, leading to a potential reduction in old-age poverty in the long term.