Context

At the time of publication, the Financial Services Authority (FSA) led the UK’s Strategy for Financial Capability. The FSA had conducted baseline research which found that many people struggled with elements of financial capability such as keeping track, choosing products and making ends meet. This study aimed to increase the understanding of what makes up financial capability by investigating the impact of life events such as unemployment or bereavement on levels of financial capability.

The study

The study comprises an analysis of data from 16 annual waves of the British Household Panel Study (BHPS) from 1991 to 2006. The BHPS is a longitudinal quantitative survey that interviews adults aged 16 and above, targeting the same respondents for re-survey every year.

There were four stages to the analysis:

1. Identify the variables in BHPS data that related to financial capability - these covered perceived financial wellbeing, saving behaviour, housing payment problems and material wellbeing. 2. Create and test an index of financial capability based on all or some of these variables. 3. Look for changes in the index within different groups in the population, and over time 4. Examine the impact of life events on financial capability using multivariate analysis.

Key findings

Some of the analysis supported previous baseline work in confirming that financial capability is complex and variable. Characteristics that are key determinants of financial capability are: age, income, housing costs and employment status. Groups that are most at risk from low financial capability are young people, unemployed people (without an employed spouse), those with high accommodation costs and those on low incomes.

Key findings from the analysis included the following:

• Individuals’ financial capability can vary considerably between one year and the next
• Life events explain only 20% of the overall variance that is observed in financial capability, but they do have a large impact.
• After controlling for income, life events such as having a baby, becoming unemployed, retiring, divorcing or separating are all associated with reductions in financial capability.
• Again after controlling for income, other factors are associated with higher financial capability such as entering work, having an employed partner, getting married or being aged over 55.

The report concludes that it is essential people can access information particularly at key life points and that interventions are targeted at those most in need.

Points to consider

• Not all of the variables that could contribute to the index of financial capability were included in each wave. Conversely, any events or variables that might have an impact but weren’t included in the BHPS could not be included in the analysis and may be affecting the outcome of the analysis. Additionally, few details are given about the methodology of the BHPS. Finally, the study doesn’t explain why the life events have the impact that they do.
• Financial capability continues to be an important and topical area and this study gives new insight into the effect of life events.
• The study is based on British data but the findings are likely to apply to other developed nations.
• This report is applicable to anyone with an interest in financial capability, such as financial services providers, government, support agencies, policy makers, regulators or educators.