Financial Literacy Key to Bridging Pensions Adequacy Gap 

With levels of financial literacy persistently low, pension funds are looking to ESG to engage members on saving adequately for retirement. 

The picture of financial literacy in rich countries is stark. Only 18% of EU citizens display a high level of financial literacy; two-thirds (66%) of Americans can’t pass a basic financial literacy test; and, according to the OECD’s PIACC Financial Literacy test, approximately a third of individuals in the UK cannot work out how much change they should receive from a shop when buying a handful of goods.  

In the UK, financial illiteracy is also linked to the issue of pensions adequacy – not having enough pension savings to live comfortably in retirement. A Scottish Widows survey finds one third of the UK public risk falling below the threshold for a minimum retirement lifestyle.  

It poses a reputational and financial sustainability risk to the growing UK defined contribution (DC) pension sector, with a handful of UK pension funds starting to use ESG issues to engage members in an accessible way. But the issue is complex to tackle, and there is no quick fix.  

Pete Glancy, Head of Pension Policy at Scottish Widows, says: “Half of the [UK] nation don’t understand percentages. We’re not good enough at basic arithmetic. So, when you are saving for retirement, you won’t fully understand the returns above inflation you need to make to secure your spending power.”  

Glancy says it is a problem with the UK education system, where financial literacy isn’t taught in schools in England. But Leon Ward, CEO of financial education charity MyBnk, argues that while schools are the natural vehicle to access young people, time pressures and the need for reskilling teachers makes a wholesale change very difficult in practice.  

“Financial information is specialist and to just assume that getting it on the curriculum is the answer is wrong,” he says. “We would have to do a whole re-engineering of the skill set of teachers.”  

Employers, says Ward, have a duty here too. “We are funded primarily by financial services firms and some of their staff tell us, ‘I’ve not clue about my own finances’. If they work in this world, how is some random person on the street supposed to know about these things?”  

Muted DC interest in member outcomes  

A 2022 Aon survey found that 63% of DC schemes do not know the expected [financial] outcome for a typical member at retirement, and just 46% have a primary focus on providing good member outcomes – an increase from a paltry 29% in a 2020 survey.  

Responses were from schemes holding over £35 billion (US$45 billion) in assets for over half a million members across a range of sectors in the UK.  

John Foster, Partner DC Consulting at Aon, says the findings show that schemes are taking a more forward-looking approach to pensions, important for recruitment and retention of members to ensure financial sustainability. 

“Taking the long-term view on delivering adequate outcomes that enable people to retire at an appropriate time is vital from a business perspective.”  

It is also important given the financial risk that members take on in DC schemes with investments subject to stock market performance, compared with defined benefit (DB) schemes where retirement benefits are guaranteed.  

The Aon survey uses the Covid-19 period, where stock markets were volatile, to illustrate this risk. In a few days a passive equity fund might have lost as much as 20% of its value, but still meet the investment objective of tracking the index that it follows. 

From a members’ perspective, however, the fall could have a significant impact on their retirement outcome over the long-term – meaning understanding how the underlying investment performance will impact the delivery of adequate member outcomes is important.  

Jargon-free language  

Rob Hughes, Head of Customer Experience at Railpen, one of the UK’s largest pension schemes, says financial literacy is an issue it is concerned about.  

Railpen focuses on clear communication with its members and has started to educate beneficiaries on sustainability and identifying their investment preferences through its sustainable ownership report. 

In 2021, Railpen started surveying its members to establish their ESG priorities. It has found that their top three concerns are fair treatment of workers, climate change and fair pay. The pension fund’s board feel it’s vital to work closely with members, understanding their views and shaping its approach and communications around their needs.  

“It’s obviously a hot topic,” says Hughes. “It’s really important to help them understand what we’re doing in this space and more broadly we are trying to engage members in helping them take more ownership of their investment choices.” 

“The demographic of the rail industry is quite varied, from a cleaner to a train guard. For some the reading age and competency is quite low. So, we’ve tried to create content and communications that are meaningful and accessible to everybody who reads them.”  

The work is more challenging given the complexity of Railpen’s scheme, he says, which includes hybrid schemes and a mixture of DC and DB members.  

“It can be complex and scary for members.” 

Railpen has worked with an external language expert, says Hughes, to develop a new content standard and a framework for creating content and information in real time over multiple platforms including video.  

“A big barrier for the pensions industry is that it is a jargon-heavy industry,” he says, adding that there are lots of terms and phrases that are interchangeable, with different schemes having slightly different wording for the same thing. 

“We’ve created a phrasebook that says when you use the word fund, this is what it means, and this is the consistent use of that term. And in doing that, what we’ve been able to do is create some consistency so that people reading that content have that familiarity with the words to get the consistency and simplification of quite a complex subject.”  

It also works on ensuring clear branding and document styling, and making sure its communications cover people who want a ‘quick read’ and others who want detail.  

“We try to create content that is that is usable for everybody and suits their sort of individual needs,” says Hughes. 

ESG engagement  

Auto-enrollment scheme Nest is another UK pension fund that has started to communicate with its members on sustainability. Ben Ward, Senior Investment Press and Media Manager at Nest, says research shows that it can be a powerful tool for engaging with members.  

“We find that people don’t realise that they are investors,” he says. “The average member has an income of around £20,000 and they are often enrolled without knowing exactly where their money is going – the ability to engage with them on any topic is harder as we are in the background. 

“The complexity of pensions can be quite tough, but responsible investment is something where we can be more direct and some of the communications we have with our members is to explain to them about the transition in the UK and how we’re investing into renewable energy sites.” 

Ward notes that it’s not a “silver bullet for engagement” as members have to already have an underlying concern, but if there is interest it is a useful tool for engaging with them.  

Nest’s engagement activities include taking members directly to investments such as wind and solar farms in the UK.  

On pensions adequacy, Ward says the issue is a difficult one to tackle, given individuals’ unique lifestyles and choices.  

He says Nest hasn’t been advocating on adequacy, but it supports the work of others such as the Pensions and Lifetime Savings Association (PLSA).  


The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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