Financial Capability in Ireland An Overview

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1 Financial Capability in Ireland An Overview

2 Contents Acknowledgements 2 Foreword 3 1. Introduction The study: fieldwork and analysis Statistical techniques employed 4 2. Core objectives of the study Managing money Planning ahead Choosing financial products Staying informed about financial matters Cluster analysis 24 Conclusions 28 1

3 Acknowledgements The Financial Regulator would like to thank all those who contributed to the completion of the Financial Capability Research. We would particularly like to thank the Economic Analysis and Research Department in the Central Bank who conducted the empirical analysis underpinning this report and produced a Research Technical Paper titled Financial Capability: New Evidence for Ireland. We would also like to acknowledge the Financial Services Authority in the UK who permitted us to modify and use their Financial Capability questionnaire for the purpose of the Irish study. The Research Partnership in the UK also provided consultancy services in relation to project management while the Personal Finance Research Centre assisted with drafting the Irish Financial Capability questionnaire. 2

4 Foreword In order to best serve the interests of consumers, the Financial Regulator seeks to implement an evidence based approach to the development and evolution of consumer protection policy. In other words we try to inform our policy decisions using clear data on what consumers think and how they behave rather than making assumptions about these issues. This financial capability study, which is the first of its kind in Ireland, provides key insights into the capability of consumers in Ireland in relation to: l managing money, keeping track of spending and living within their means; l planning ahead and making provision for future events including retirement; l choosing products and making choices between similar financial offerings; and l getting help and staying informed about issues affecting their finances and on financial products and services. The results of this study will inform Ireland s approach to consumer financial education and protection policy. The results will also be useful for targeting and developing information resources to help consumers make informed decisions about their money. It should be noted that this study seeks to measure capability rather than means. The study will provide key stakeholders Government and other State agencies, consumer and community organisations, the financial services industry, interested academics and the media, with a comprehensive study on the financial capability of consumers in Ireland. In November 2008, the European Parliament s resolution on financial education for consumers stated that raising the financial literacy of consumers should be a priority for policy makers both at Member State and European level. The Parliament urged Member States to carry out regular surveys to assess current levels of financial literacy among consumers. The European Parliament s resolution also recognised that high quality financial education programmes, which are targeted and personalised, can raise financial literacy. The results of this study will enable us and our stakeholders to identify those consumers who have lower levels of financial capability and will facilitate the development of effective strategies to improve financial capability. 3

5 1. Introduction Financial capability consists of the knowledge, skills, attitudes and behaviours necessary to manage personal finances and to choose and make appropriate use of financial products. Attitudes are important, to understand the importance of keeping track of finances and avoiding such things as financial disengagement, impulsive spending and living only for today. Finally, actual behaviour in real life situations is probably the most reliable indicator of financial capability as it is not only important to have appropriate knowledge but to also put it into practice. This study has been undertaken in order to establish a baseline measure of financial capability against which future research in this area can be compared The study: fieldwork and analysis The study involved a face-to-face survey amongst a nationally representative sample of 1,529 people aged between 18 and 75 over the period October 2007 to January We appointed an independent market research agency (Ipsos MORI) to undertake the fieldwork. The detailed questionnaire used was modelled on a similar survey carried out by the UK Financial Services Authority (FSA) in We appointed the Personal Finance Research Centre (PFRC) at Bristol University to assess whether the FSA s survey on financial capability would be appropriate to use in our own study. The Economic Analysis and Research Department in the Central Bank then conducted the empirical analysis of the survey responses and produced a Research Technical Paper which is available online 1, along with the methodology report and the questionnaire Statistical techniques employed The financial capability questionnaire included both attitudinal and behavioural questions, which did not have a right or wrong answer and could not therefore be added up like a test to calculate respondents financial capability scores. A number of statistical techniques were used. Factor analysis, a statistical technique, enabled us to identify the most important questions in the survey for calculating respondents financial capability scores 2. Each respondent was given a score between for each area based on his or her responses to the questions. The score should be read as a position relative to other respondents and not a pass/fail result. 1. and 2. Financial capability scores were calculated for each respondent for the three key areas managing money which includes making ends meet and keeping track, planning ahead and staying informed. If respondents had purchased a financial product in the previous five years a score was also calculated for choosing products. 4

6 Cluster analysis, another statistical technique, allowed us to identify groups of people who achieved similar scoring patterns. Once the groups were identified, we were able to draw on demographic data to identify common characteristics within these groups. This enabled us to identify groups of people likely to have particularly high or low levels of financial capability in the various areas of the study. The results of this analysis can be found in the final section of this report. 5

7 2. Core objectives of the study The objectives are to: l establish a baseline measure of the financial capability of consumers in Ireland; l provide evidence for the development of strategies to improve financial capability; l inform consumer protection policy in relation to financial services; and l raise awareness of the need for improved financial education in Ireland. The survey results will also aid the work of the National Steering Group for Financial Education. This group, established by the Financial Regulator and chaired by the Consumer Director, brings together senior representatives from relevant Government departments, the financial services industry, the education sector and those involved in the delivery of assistance and financial education in the community. Its role is to act as an overarching body in order to oversee and co-ordinate financial education in Ireland in accordance with best international practice. 6

8 2.1. Managing money (making ends meet and keeping track of finances) A financially capable person could be expected to keep track of their finances, manage their money well on a daily basis and to plan their finances to pay expenses which arise regularly, such as monthly or annual bills e.g. car tax, house insurance and utility bills. To assess consumers ability to manage money, respondents were asked a number of questions in relation to: l financial product ownership; l preferred payment methods; l the ability to pay both irregular and unanticipated bills; l whether they often run out of money and have plans to deal with this shortfall; l loans and savings; l the use of current accounts and credit cards; and l the degree to which respondents checked credit card statements, account balances and kept a record of spending. Three statements were also included which sought to capture respondents attitudes as to whether they felt they were impulsive, were more of a saver than a spender and how organised they were in relation to money management Strongest indicators of managing money The financial capability questionnaire included many questions, which sought to measure respondents ability to manage money. The detailed analysis showed that the following questions or attributes emerged as key in determining financial capability: Frequency of checking their balance before withdrawing cash If used current account facilities Extent to which disagrees that they are impulsive and buy things even when they cannot afford them Extent to which agrees that they are more of a saver than a spender If has been in financial difficulties in the last five years Knowledge of money in their account for day-to-day spending Managing money If current account is usually overdrawn Extent to which agrees that they are very organised when it comes to managing money If checks credit card statements If runs out of money at the end of the week/month If keeps up with bills and financial commitments 7

9 Key findings Making ends meet Our findings indicate that respondents seemed to be doing quite well at making ends meet. Those who scored poorly on keeping track generally scored well on making ends meet suggesting that keeping a close track on finances, using the techniques measured in the study, is not a pre-requisite for making ends meet. Keeping up with bills and commitments l 60 per cent report keeping up with all bills and commitments without any difficulties. l Around 37 per cent report some degree of difficulty. Looking more closely at this group, 28 per cent said that they struggled from time-to-time while 7 per cent found it a constant struggle. 2 per cent responded that they were falling behind and having real difficulties with keeping up with bills and commitments. l Those who reported to have difficulties in keeping up with bills and commitments were more likely to be lone parents with dependent children and those on lower incomes. l 13 per cent of respondents said they had experienced financial difficulties in the previous five years. Of which, the year age group were struggling the most with 36 per cent having experienced financial difficulties in the previous five years. Level of borrowing and savings l 28 per cent of respondents had no savings while 60 per cent had no borrowings per cent owed at least three times their monthly income or one quarter of their annual income in nonmortgage debt. Keeping track of finances The picture with regard to keeping track is less positive with many low scores recorded. It should be noted that the low scores in keeping track could be partly attributed to the fact that almost 2 in 10 respondents do not hold a current account and the questions in this area encompass behaviour in relation to the use of current accounts such as checking balances and statements etc. Food and day-to-day expenditure l A sizeable proportion of respondents seemed to take a quite casual attitude to keeping track of their finances with 68 per cent not keeping records of expenditure on food and day-to-day activities. Monitoring cash withdrawals l 52 per cent did not keep any record of cash withdrawals from their current account, with 35 per cent keeping their withdrawal receipts. Reviewing credit card statements l 45 per cent of respondents with credit cards check receipts and spending against their credit card statement. 38 per cent check the entries and balances indicating some degree of keeping track of credit card purchases. 3. This figure excludes mortgage debt. 8

10 Attitudes towards money management l When asked to rate the level of agreement with the statement I am very organised when it comes to managing my money day-to-day 80 per cent agreed strongly or tended to agree with the statement. However, this appears to contrast with earlier findings on keeping track where many respondents reported a more casual approach Distribution of scores for making ends meet The average score for making ends meet was 75. The graph shows that most people are making ends meet with a significant proportion achieving very high scores. Less than half of one per cent attained a score below 20 while 47 per cent scored in excess of 80. Figure 2.1a. Distribution scores for making ends meet % Percentage of People Less Capable More Capable % Percentage of People

11 Variables affecting the factor scores for making ends meet Those who report finding it harder to make ends meet tend to be in younger age groups, students, unemployed people and those not in couples, including lone parents with dependent children. Age l The ability to make ends meet correlates with increasing age. The under-40s don t perform as well as their elders. Those in their 20s perform least well of all age groups, while the over-70s are especially capable. Education l The level of education a respondent had was not a strong indicator of whether they scored well in making ends meet. Income l Although the analysis found some correlation between income and making ends meet, many people, regardless of their level of income, achieved high scores in this area. There was very little variation between the highest and lowest average score by income decile. Therefore, it is clear that the ability to manage money is more important than the level of income. Family type l Single adults, lone parents with dependent children, couples with dependent children and the other family type group tended not to score as high as couples with no dependent children in this area. Region l People in Dublin, when compared to the rest of the country, experienced greater difficulties in making ends meet. Housing type l Individuals who found it harder to make ends meet are more likely to be renting from a local authority and scored lower on average compared to owner-occupiers with a mortgage. Other variables l Using a current account for day-to-day money management had less of an impact on scores for making ends meet than keeping track Distribution of scores for keeping track of finances The average score for keeping track of finances is 46. The levels of capability are quite concentrated in the centre of the distribution. However, quite a large proportion of respondents had low scores for keeping track while few scored very highly. A total of 16 per cent scored below 20 and just 2 per cent attained a score in excess of 80. It should be noted that, in keeping track, those respondents that did not have a current account scored just 14 compared with 53 for those who did, indicating that this affected the scores. However, as mentioned previously, keeping track of finances was not a pre-requisite for scoring well in making ends meet. 10

12 Less Capable More Capable Figure 2.1b. Score for keeping track of finances % Percentage of People Less Capable More Capable Variables affecting the factor scores for keeping track of finances Those who tended to score lowest in keeping track were more likely to be in older age groups, the unemployed, those renting from the local authority, single adults, those with a lower level of educational attainment (primary/lower secondary school) and those on lower incomes. % 10 Age l The regression results for keeping track show those respondents in the oldest age-group (70+) scored lowest but as mentioned earlier, this is likely to be connected to lower levels of current 8 account ownership among this group. Education l Those 6 with primary education or lower secondary level as their highest level of educational attainment, scored lower in keeping track than those with a higher level of educational attainment. Percentage of People 4 Income l Those on lower incomes tend to score lower relative to those on higher incomes. But levels of current account ownership may be a factor here also. 2 Family type l There is no clear or strong relationship between family type and keeping track of money Less Capable More Capable 11

13 Housing type l Those who tended to score highest were owner-occupiers with a mortgage or buying from a local authority. Those renting a home from a private landlord, renting from a local authority/ voluntary body, owner-occupiers having bought through a local authority affordable scheme or, in particular, occupying free of rent tended not to score well in keeping track. Other variables l People who were looking after the home/family, or those who were unemployed or unable to work due to illness had lower scores compared to those working full or part-time. l The analysis also showed that respondents score for keeping track increased as their involvement with money management and the number of active product purchases rose. 12

14 2.2. Planning ahead A financially capable person could be expected to plan ahead for future expenses and obligations and make provisions for unforeseen financial events. This section of the questionnaire focused on: l the extent to which people are prepared to cope with unexpected and expected drops in income; l the extent to which people are prepared to cope with anticipated and unanticipated and major expenses; and l retirement planning. This section of the questionnaire also examined how a subset of respondents had coped financially following an unexpected drop in income in the past. Two attitude statements were included to determine attitudes towards living for today and whether respondents were prepared to cut back on their current lifestyle in order to provide for the future Strongest indicators of planning ahead The questionnaire included many questions, which sought to measure respondents behaviour and ability to plan ahead. The detailed analysis showed that the following questions or attributes emerged as key in determining financial capability: If they hold some form of protection insurance If they have met a past unexpected expense/ would meet future unexpected expense How long they would be able to make ends meet if their income dropped unexpectedly Planning ahead If sufficient provision has been made to cope with unexpected drop in income If provision has been made for their retirement 13

15 Key findings The findings in relation to planning ahead give some cause for concern. The majority of people in Ireland do not appear to be planning ahead sufficiently with those under 40 achieving particularly low scores, compared to those over 40. As a result, they risk running into financial difficulties if their income is reduced or they are faced with a large unexpected expense. The impact of financial setbacks l Unexpected financial setbacks have been quite common. 25 per cent said that either themselves or their partners had experienced a large and unexpected drop in income 4 in the previous three years. 16 per cent had experienced a large unexpected expense 5. l However, most people are not planning for the unexpected with 59 per cent having made no provision for dealing with a drop in income lasting three months or more. l 40 per cent would have to borrow to deal with an unexpected expense 5 while 8.5 per cent said they would cut back on their budget. l 67 per cent anticipated a major expense. However, 60 per cent of these had said they had not made any provision for this cost. Providing for retirement l Over half of the pre-retired had no idea what the current value of the minimum State pension was. When told the approximate pension amount, 66 per cent of respondents think that the State pension will not provide them with the standard of living they hoped for in retirement. l Despite this, only 32 per cent of respondents who had not yet retired had an occupational or personal pension that they were paying into at the time of the survey. l A further 12 per cent had a pension that they had paid into in the past and had stopped. Inertia and affordability appear to play a part when it comes to people not planning for their retirement l One-third of those with no provision for retirement stated that they never thought of it or had not got around to it. l Almost 25 per cent said they were unable to afford to pay into a pension. Of those who had reached retirement age: l 53 per cent had no personal pension; l 40 per cent had an occupational pension; l 3.5 per cent had a PRSA (Personal Retirement Savings Account) 6 ; l 6 per cent had another type of personal pension; and l 1 per cent of respondents were still working, even though they had already reached retirement age. Living for today l 43 per cent agree strongly or tend to agree with the statement, I tend to live for today and let tomorrow take care of itself and of those, 60 per cent did not want to cut back on their current lifestyle in order to provide for the future. 4. Drop in income for a period of three months or more. 5. Equivalent to one month s income. 6. Less than one percent had both an occupational pension and a PRSA (Personal Retirement Savings Account). 14

16 Pe Distribution of 25 scores 30 for planning ahead Less Capable More Capable The average score for planning ahead is 53. The levels of capability in this area are quite widely distributed among respondents with sizeable proportions achieving both low and high scores. While a number of people are clearly making efforts to plan ahead, there are as many who do not. 11 per cent attained a score below 20 and 13 per cent scored in excess of 80. Figure 2.2. Distribution of scores for planning ahead % 10 8 Percentage of People Less Capable More Capable Variables affecting the factor scores for planning ahead The groups who had lower scores in planning ahead are more likely to be under 40, those with less than upper % secondary education, students or the unemployed, those with lower incomes, as well as those 15 renting from a local authority or who are occupying their home free of rent. Age l Capability scores in planning ahead improve markedly with age. There is a clear and steep scale: 12 the under-40s are less capable at planning ahead than the over-40s. Education l Respondents 9 with primary or lower secondary as their highest level of educational attainment tended to score lower at planning ahead than respondents having a primary or postgraduate degree or professional qualification. Percentage of People

17 Income l People with higher incomes are more likely to score higher at planning ahead than those on a lower income. However, low scores for those on the lowest incomes may indicate affordability rather than capability issues. Family type l Couples with no dependent children scored higher than single adults and the other family type group. Region l Respondents in the Dublin region tended to score lower than those in other parts of Ireland. Housing type l Respondents who were buying their own home with a mortgage or from a local authority were more likely to score better at planning ahead compared to those renting, occupying free of rent, the other tenure category and those buying their house through a local authority affordable scheme. Other significant variables l Women scored, on average, lower than men in planning ahead. l If an employer provided benefits at work such as medical or income insurance, and if a respondent used a current account for day-to-day money management, they were more likely to have higher scores at planning ahead. 16

18 2.3. Choosing financial products A financially capable person would be expected to choose financial products that are suitable to their needs and/or to seek out appropriate information and advice where necessary. The questionnaire measured respondents ability to: l research, review and assess different financial products available in the marketplace; l compare the costs, risks and benefits of similar financial products; and l keep informed of terms and conditions relating to financial products. Also examined were: l respondents knowledge of available information on financial products and advice resources; and l whether respondents received professional advice about financial planning in the last five years. All respondents were asked whether they had purchased a financial product 7 in the previous five years. Some of the questions relating to choosing financial products then focused specifically on the 47 per cent of respondents who had purchased a financial product in the previous five years Strongest indicators of choosing financial products The financial capability questionnaire included questions to measure respondents ability to choose financial products. The detailed analysis showed that the following questions or attributes emerged as key in determining financial capability: What the main source of information is for choosing financial products If any information is collected Choosing financial products If checks whether advisor is authorised How they choose financial products Why they chose a particular product If and who read terms and conditions 7. Current account, credit card, mortgage, savings account, An Post savings account, credit union (loan and deposit accounts), personal investment plan, unit trust or investment trust, guaranteed equity/bond tracker, other investment bond, gilts, stocks, shares, personal pension. 8. We asked people about a maximum of two products within the last five years. If more than two had been purchased, people were asked about the two complex product types from a hierarchy of investments, mortgages, payment or income protection, credit cards, unsecured credit, general insurance, savings account and current accounts. 17

19 Key findings People do remarkably little shopping around for financial products meaning they may not be actually seeking good value or important product features. Often people buy products based on advice from (non-professional) friends or family. There is a link between the numbers of products held and the scores, indicating that people learn from experience and exposure to financial products and services. There is also a link between lower scores in this area and housing tenure (controlling for other factors), which indicates a cultural or societal effect. Participation in the market l The results of the study show that significant transactions in financial products are quite infrequent, with 53 per cent of respondents not having purchased a new product/service or switched provider at all in the past five years. Shopping around l Respondents often renewed existing policies and products without shopping around or considering the alternatives. Only one in five respondents undertook an active search (comparing products etc.) or consulted best-buy tables (press or internet) or engaged a financial advisor or broker. Sources used when purchasing products l Respondents frequently did not seek information from independent sources when buying financial products. Many respondents relied on or prioritised the (non-professional) advice of family and friends when making important decisions regarding financial products. Reading the terms and conditions l 20 per cent of people do not read the terms and conditions while 33 per cent only read these briefly, prior to purchasing financial products. Product ownership l In relation to product ownership, almost 82 per cent of respondents held a current account either in their own name or jointly, 37 per cent had a credit card, and 45 per cent had a credit union (deposit) account. l The survey showed that people learned from experience and tend to make more competent decisions as they gain more experience in buying financial products. Inertia after purchase l There seemed to be considerable inertia in the market for financial products. Once people bought a product they tended to stick with it. Analysis shows that many respondents held insurance products for a long period of time even though many general insurance (such as home and motor insurance) renewals tended to happen annually. More people appeared to switch motor insurance than any other kind. l There are also some signs that a minority of people bought unnecessary products, for example, some single adults with no dependents had life insurance while some non-earners had purchased income protection. 18

20 10 8 Price insensitivity 6 Despite the significant costs and future interest repayments associated with taking out a mortgage: l One-third of those that had taken out a new mortgage recently had not shopped around for the best value or did not check the best buy recommendations online or in the press. l 4It is also notable that the vast majority of respondents with a mortgage were unaware of the interest rate applied to their mortgage, and one third could not even guess. Percentage of People Distribution of scores for choosing financial products The average score for choosing products is 50 and this only includes the 47 per cent of respondents that have purchased a financial product in the last five years. This is in contrast to all the other scores for financial capability, which are derived from all survey respondents. Less Capable More Capable It is clear from the graph below that the levels of capability in this area are concentrated in the middle of the distribution. Only 6 per cent attained a score below 20 and another 6 per cent scored in excess of 80. Figure 2.3. Distribution of scores for choosing financial products % Percentage of People Less Capable More Capable % ple

21 Variables affecting the factor scores for choosing financial products People have clearly learned from experience in choosing financial products: the number of different types of financial products people have bought is by the far the best indicator of how well they choose. Education l Education was significant in choosing financial products. Those with the highest level of educational attainment tended to achieve the highest scores. Income l The data results show that people with higher incomes tend to score better than those who have lower levels of income. Housing type l Owner-occupiers with a mortgage scored highest while renters and those living in local authority housing were more likely to score below average, even controlling for other factors. Region l There was a regional variation in people s ability to choose appropriate products but no evidence of a distinctive Dublin effect. 20

22 2.4. Staying informed about financial matters It seems reasonable to expect that a financially capable person would keep up-to-date with economic and financial developments and would also know when and how to complain if problems arise. Therefore, a financially capable consumer would ideally have the confidence and knowledge to communicate and negotiate with financial services firms. To assess consumers ability to keep informed about financial matters, respondents were asked: l if and how frequently they monitor economic or financial indicators 9 ; l what economic or financial indicators they monitor; and l the information sources they use to keep up-to-date with financial matters. We also asked respondents if they had encountered problems or made complaints to a financial services provider in the past. Two attitude statements were also included to gauge respondents attitudes to receiving financial advice Strongest indicators of staying informed about financial matters The financial capability questionnaire included many questions, which sought to measure respondents behaviour and ability to stay informed. The detailed analysis showed that the following questions or attributes emerged as key in determining financial capability: Importance attached to keeping up-to-date on financial matters Number of economic or financial indicators monitored Frequency of monitoring of economic or financial indicators Staying informed about financial matters Knows whether specific savings and investments are affected by the stock market 9. Interest rates; inflation; housing market; taxation; state pension, benefits and tax credits; the job market; the stock market; and best buys in financial products. 21

23 Key findings In general people reported that they think it is important to keep up with developments that may affect their personal finances. However, this is not always translated into expected behaviour and this may be connected to people s ability to spend the necessary time on staying informed. In addition, while people used the popular media to stay informed this did not include specialist finance/business pages or programmes. Clearly many people prefer more informal sources of information. Attitudes to keeping informed l 62 per cent of people agree that it is very or quite important to keep up to date with financial matters. Although, 16 per cent say they do not. Economic or financial indicators watched l 78 per cent of people keep up with at least one economic or financial indicator. l The most commonly monitored indicators are: changes in the housing market (39 per cent of respondents) and changes in interest rates (37 per cent). l Only 6 per cent keep up with published best buys in financial products. Sources of information The mainstream media were clear leaders for sources of financial information. l Newspapers with 63 per cent (excluding financial pages) are the most popular source of information. l Also popular are TV or radio programmes at 57 per cent (excluding specialist personal finance programmes). l 19 per cent rely on specialist financial programmes on TV or radio. l 14 per cent keep up-to-date by reading financial press. l Only 13 per cent use the Internet as their main source of information. Frequency of monitoring l 43 per cent of respondents monitored indicators at least once a week. l A similar proportion of 41 per cent did not monitor economic or financial indicators or did so less than once a month. Making complaints to financial institutions l 46 per cent of people feel they know their rights in relation to making a complaint to a financial services firm, while 27 per cent said that they had no idea. l Just 10 per cent of respondents confirmed that they had reason to make a complaint regarding a financial product or service in the previous five years and the vast majority proceeded to make a complaint. Of these, 54 per cent had their complaint resolved to their satisfaction. Awareness of risk l Respondents were asked to identify from a list of 10 saving and investment product types, those that were affected by stock market performance (8 out of the 10 were so affected). Only 3 per cent correctly identified all Distribution of scores for staying informed about financial matters The average score for staying informed is 39. The levels of capability in this area are concentrated in the middle of the distribution but quite a substantial proportion had very low scores. A total of 24 per cent scored below 20 while just 4 per cent scored in excess of

24 Figure 2.4. Distribution of scores for staying informed about financial matters % 10 8 Percentage of People Less Capable More Capable Variables affecting the factor scores for staying informed The groups that are most likely to achieve low scores in staying informed are the under-40s, those with less than upper secondary education, those on lower incomes and single adults. Age l Capability in staying informed in financial matters showed that the younger age groups generally perform less well than their elders. Education l There was a strong correlation between the education level achieved by respondents and scores related to staying informed. Those with primary or lower secondary level of education scored lower than average scores in staying informed. Income l Those with higher incomes tended to perform better in staying informed, than those who had a lower level of income. Family type l Single adults scored relatively lower than couples with no dependent children while couples with dependent children scored higher. Housing type l Those renting from a local authority or voluntary body scored lower than those who were owneroccupiers. Other significant variables l Women scored, on average, lower than men at staying informed. l If a respondent used a current account for day-to-day money management, they were more likely to score higher at staying informed. l Interestingly, the unemployed scored relatively higher than those at work full or part-time, perhaps due to having more time available or having a greater need to access media such as newspapers while engaged in job-search. Those engaged in home/family duties also scored higher than those working full or part-time. 23

25 3. Cluster analysis Cluster analysis is a statistical technique that enables us to identify clusters or groups of people who achieved similar scoring patterns in the study. Profiling the groups with low levels of financial capability will allow for the development of education and awareness strategies targeted at these groups. Financial capability scores were calculated for each respondent for the three key areas managing money (which includes making ends meet and keeping track ) planning ahead and staying informed. If respondents had purchased a financial product in the previous five years a score was also calculated for choosing products. These scores reflect an individual s relative capability in each of the key areas. Once constructed, the scores were used to identify those respondents that performed relatively well or poorly in each of the four areas of financial capability. The analysis identified seven key clusters. A brief description is outlined in Figure

26 Fig 3.1. Key cluster groups Cluster Number of weak areas 10 Per cent of sample Per cent female Average Age Per cent couples Per cent with dependent children Number of product types held Uses a current account Per cent in two highest income quintiles Per cent in two lowest income quintiles Additional general description 1.A None Higher proportion owner-occupiers, at work, high educational attainment. 1.B None Higher proportion renting from private landlord, at work, high educational attainment. 2.A 2 areas: keeping track of finances Staying informed Higher proportion own homes outright, retired, lower educational attainment than sample as a whole. 2.B 2 areas: Making ends meet Planning ahead Higher proportion of sample living rent free, at work, high educational attainment. 3.A 4 areas: Making ends meet keeping track of finances Planning ahead Choosing financial products Higher proportion of local-authority renters, substantial proportion unemployed, lower educational attainment. 3.B 4 areas: Making ends meet Planning ahead Staying informed Choosing financial products Higher proportion of renters, at work, lower educational attainment. 4.A All 5 areas: Making end meet keeping track of finances Planning ahead Staying informed Choosing financial products Higher proportion of local authority renters, low employment, high unemployment, low educational attainment. Sample Average A weak area is defined as a score that is 5 points or more below the average score for each area. 25

27 Cluster 1.A: 24.5 per cent of the population are in this group and they have no weak areas. Current account usage is nearly 100 per cent. l Typically members of this group hold the largest number of product types at an average of four and there appears to be a link between the more financial products you own and higher financial capability scores. l 60 per cent of this cluster are in the two highest income quintiles but 20.5 per cent of this group are in the two lowest quintiles being financially capable is not totally dependent on having a higher income. l A substantial proportion of this group are working full or part-time (71 per cent) compared to a sample average of 57 and a high proportion are owner-occupiers with a mortgage or have no mortgage outstanding (82 per cent). l Higher educational attainment has a strong correlation with being more financially capable. 33 per cent of this group have a primary degree/professional or postgraduate qualification compared to a sample average of 21. Cluster 1.B: 27 per cent of the population are in this group and, like cluster 1.A, they also have no weak areas but differ slightly with a higher proportion of females. Current account usage is again nearly 100 per cent. l Members hold an average of three financial products and there is a strong link with higher levels of product ownership, leading to higher scores. l 46.5 per cent in this group are in the top two income quintiles. However, 32.5 per cent are in the two lowest income quintiles. l This group are also likely to be working either full or part-time. They have, on average, a higher level of educational attainment and again, the link between education and financial capability appears to be strong. Cluster 2.A: 19.5 per cent of the population are in this cluster and have two weak areas: keeping track of finances and staying informed about financial matters. l Typically in this group members hold an average of two financial products, slightly below the sample average of 2.6. l Current account usage in this cluster is 71 per cent, lower than the population average (81.5 per cent) and this could be a reason for lower scores in keeping track of finances. l The average age of this group is 50, older than the sample average (43) and this cluster had a higher proportion of those retired than any other. l 43 per cent of this cluster are in the two lowest income quintiles, with 37 per cent in the two highest quintiles. l A higher proportion than the sample average own their home outright and this could be due to the older average age of the group. Also, this cluster has a lower educational attainment than the sample average. Cluster 2.B: 1.5 per cent of the population are in this cluster and, like 2.A, there are two weak areas: making ends meet and planning ahead. l The average age for this group is 32 and it contains the highest ratio of students of all the clusters. l Current account usage is 100 per cent. 26

28 l 39 per cent of this group are in the top two income quintiles and 33 per cent are in the lowest two income quintiles. l Due to the younger demographic profile, a higher proportion of this group are living rent free (possibly at home while attending college). Cluster 3.A: 8 per cent of the population are in this cluster, and there are four weak areas: making ends meet, keeping track of finances, planning ahead and choosing financial products. l The level of current account usage (48 per cent) is well below the population average (81.5 per cent) and this could be a reason for low scores in keeping track of finances. l 18 per cent of the top two income quintiles are in this cluster, with 69 per cent in the two lowest income quintiles. l People in this cluster are less likely to be working full or part-time and are more likely to be unemployed, students, looking after home/family or unable to work due to permanent illness/ disability. Cluster 3.B: 8 per cent of the population are in this group and, like 3.A, there are four weak areas: making ends meet, planning ahead, staying informed and choosing financial products. l Current account usage is nearly 100 per cent. l Women make up 62 per cent of this cluster. The average age is 31 which is the youngest average age of any cluster and only 1 per cent are retired. l Only 28 per cent were in couples (compared to a sample average of 45.5 per cent) and a slightly higher than average proportion had dependent children. l 42 per cent are in the two lowest income quintiles with 27 per cent in the two highest income quintiles. l 75 per cent of this cluster has upper secondary level as their highest level of educational attainment. l A substantial proportion of this group work full or part-time (66 per cent) and 12 per cent of the cluster are students. This cluster contains those more likely to rent from a local authority or voluntary body, a private landlord or occupy free of rent. Cluster 4.A: 11.5 per cent of the population are in this cluster and are weak in all five areas: making ends meet, keeping track of finances, planning ahead, staying informed and choosing financial products. l There is a lower proportion of couples with 31 per cent (compared to a 45.5 per cent sample average) and less with dependent children (22 per cent) than the population average. l Respondents in this group hold an average of just one financial product type and current account usage is 32 per cent compared to a sample average of 81.5 per cent. l 72.5 per cent of this cluster are in the lowest two income quintiles and 10.5 per cent of this group are in the top two income quintiles. l Low educational attainment is evident with 66 per cent having only primary/lower secondary as their highest level. l Only 28 per cent are working full or part-time compared to a sample average of 57 per cent, with 17 per cent unemployed and an additional 24 per cent looking after home/family. The proportion of local authority renters is twice the sample average. 27

29 Conclusions In the current economic environment where consumers have to take increasing personal responsibility for looking after and planning their own financial affairs it is important that they are equipped with the necessary skills to do this effectively. The results of the financial capability study clearly show that people are generally good at managing their money but improvement is desirable in the areas of planning ahead, choosing financial products and staying informed. While the data was collected before the current economic problems started to bite it is important to remember that the study seeks to measure capability rather than the situation at a point in time. It should be recognised that capability does not change dramatically, even when an individual s personal circumstances may have worsened. With people currently paying more attention to financial issues it may be that scores for keeping track and for staying informed are higher now than when measured but that those who appeared to be at risk in the planning ahead area may now be in financial difficulty. In nearly all cases, doing well in one area is associated with doing well in other areas, especially in relation to planning ahead and making ends meet, choosing products and staying informed. The findings also point to the importance of financial inclusion in that ownership of financial products was linked to higher scores in some areas of the study. However, low scores for some may be an indicator of lack of means rather than low capability. There are both benefits and costs in providing for the future and engaging with financial products and services. Certain scores may reflect the fact that for some, decisions have to be made between paying for yesterday, providing for today and planning for tomorrow. In terms of the overall performance, just over half the population had no weak areas while around one fifth had two weak areas. A total of 16 per cent had four weak areas while just over one-tenth performed weakly in all the areas. The fact that half the sample had no weak areas is reassuring but the substantial proportion with a weak performance in many or all areas gives cause for concern. 28

30 PO Box No 9138 College Green, Dublin 2, Ireland T Consumer help-line lo call Register of Financial Service Providers help-line lo call F Information Centre: 6-8 College Green, Dublin 2 Irish Financial Services Regulatory Authority.

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