The Role of Pension Funds in Promoting Financial Literacy

The significance of financial and pension literacy in enhancing retirement planning and overall financial decision-making cannot be overstated.

Not only can it have a profound influence on an individual’s saving habits, it can contribute to Namibia’s economic growth.

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.

Sadly, this highlights inadequate levels of financial literacy among Namibians, and makes it challenging for them to effectively devise a viable retirement savings plan.

Retirement fund members, particularly pre-pensioners and pensioners, inevitably have to navigate a multitude of decisions.

And, notably, members of private pension funds face more complex choices compared to their counterparts in public pension funds.

Importantly, decisions on retirement are influenced by an individual’s level of financial knowledge, attitudes, skills, and are also subject to psychological biases.

Overall, people 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.

Ultimately, this leads to suboptimal choices.

Given the significant chance of making mistakes and the multitude of variables to consider, pension funds bear a paramount responsibility in addressing these challenges.

Indeed, they have both a moral and legal obligation to be more proactive in promoting financial and pension literacy.

OBLIGATIONS

A primary goal of pension funds and their governing bodies is promoting and safeguarding the interests of their members.

This includes 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 pension plan members and beneficiaries.

However, some pension funds overlook financial and pension literacy as part of advancing members’ interests.

This entails equipping people with the knowledge and understanding of financial matters and pension-related concepts needed to make informed decisions about their retirement planning and financial well-being.

People often encounter challenges in determining how much money they will need to maintain their desired standard of living during retirement.

As a result, they underestimate their retirement income needs.

Pension funds should engage young workers and instil in them the importance of early retirement planning and savings – this enables them to maximise the benefits of interest compounding over time.

On the other hand, pre-pensioners need to be well-informed about the decisions they will encounter at retirement.

This includes when to access their pension, how to utilise any lump sum payments, and how to select an appropriate annuity.
Pension funds should implement comprehensive financial and pension literacy programmes.

WHAT CAN BE DONE?

The financial landscape consumers must navigate has undergone substantial changes, leading to increased complexity.

In the United States, some 38 states, including Puerto Rico and the district of Columbia, were prompted to pass financial literacy legislation in 2021.

In Colombia, financial education is considered a fundamental consumer right, and financial institutions bear the responsibility for promoting and providing financial education programmes.

By law, pension fund managers are obligated to conduct educational campaigns for their members.

These campaigns must be conducted by accredited professionals equipped to offer comprehensive information about pay-out products, annuities, asset allocation details and everything necessary for members to make well-informed decisions.

Following pension reforms in Chile in 2008, pension advisers were introduced to assist and guide individuals throughout their retirement journey.

Further, the Chilean pension regulator offers people the means to have their enquiries addressed through multiple channels, including the web, a call centre and in-person consultations.

WHAT CAN WE DO?

The Namibia Financial Sector Strategy (NFSS) 2011-2021: Towards Achieving Vision 2030 was devised by the government to tackle the financial sector’s shortcomings.

It expressed the intention to create a policy framework for coordinating financial literacy initiatives, a process which should be accelerated.
Both the NFSS and the 5th National Development Plan (NDP5) emphasise the significance of fostering financial literacy.

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 people acquire the essential skills to make well-informed decisions, ultimately leading to sufficient income in their retirement years.

A review could involve revisiting provisions outlined in the Pension Fund Act and the role of the Namibia Financial Institutions Supervisory Authority (Namfisa), with a focus on making financial education on retirement by pension funds mandatory.

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

• Vincent Shimutwikeni, BJuris and LL.B, is a legal compliance officer.