Study shows super members expect more income certainty in retirement than currently getting

Super funds and their members don’t know what they want in retirement, a new study has found, if they did, collectively $145bn more would be in guaranteed income products.

Most super funds and their members don’t know what they want in retirement.

Most super funds and their members don’t know what they want in retirement. If they did, about $145bn in savings would be moved to guaranteed income products such as annuities and defined benefit pensions, according to a new study.

Launching a new digital tool to help Australian retirees and those approaching retirement better understand the level of income uncertainty they are willing to accept, Capital Preferences, a decision science researcher, said super funds are lacking this essential piece of data.

The Challenger-sponsored study analysed the income certainty preferences of over 4,000 Australians with the digital quiz and found that some 2.7 million people aged between 55 to 74 years old should have some guaranteed lifetime income in their retirement income mix.

That is up from an estimated 436,800 people currently.

The study’s results “should fundamentally change the way the industry thinks about its obligations and actions when it comes to assisting members in their retirement,” said Danielle Press, a senior adviser to Capital Partners and former ASIC commissioner.

“Members are crying out to be better understood and science offers us the ability to do that, easily,” she said.

“Despite not knowing what guaranteed income products are, (members) do have retirement income certainty preferences that are unique to them and these preferences can’t be predicted by available demographics like age, gender or super balance.”

Superannuation funds are increasingly focusing on the requirements of the retirement income covenant, which came into force in 2022 requiring funds to develop strategies to help their members in their retirement phase.

The lack of knowledge about how much income certainty retirees prefer to have over their retirement years means super funds are not be able to provide “fit-for-purpose” retirement assistance to members and meet their covenant obligations, the study says.

“We found that those income certainty preferences are highly individualised and do not correlate or link to demographic or financial data that most super funds would have readily available for their members,” Pat Spenner, head of strategy at Capital Preferences told The Weekend Australian.

“The challenge then is, if I am a super fund and I’m relying just on the data that I have about my members such as their age, and their super balance, I am going to be missing an important piece of the puzzle, which is any given member’s preferences for retirement income certainty.”

Christchurch-headquartered Capital Preferences has provided the risk-tolerance assessment tool for use in Vanguard Digital Adviser robo-adviser offering.

Based on the findings, about 49 per cent of the retirees and pre-retirees should have up to two fifths of their super in guaranteed income products, up from about 8 per cent today.

The firm will launch their “digital activity” in Australia next week and will meet with officials at the super regulator, Australian Prudential Regulation Authority (APRA), the Treasurer’s office and some super funds, to present the findings of their study.

Acknowledging their position as the largest and virtually single providers of annuities in Australia, Aaron Minney, head of Challenger’s retirement research team, said the study’s purpose transcended commercial interests. Challenger’s sponsorship of the study was driven by a desire to raise awareness of its findings, he said.

Most super funds and their members don’t know what they want in retirement.

“Given the push by the retirement income covenant for funds to do more, we thought it was an opportune time to leverage the message Capital Preferences have with their work,” Mr Minney said. “It’s a different way of understanding what people want, using gamification.”

The study segmented members based on their financial situation and their financial needs for retirement, revealing a cohort they called the “misunderstood middle” made up about 65 per cent of pre-retirees.

“This segment faces a tension between their financial needs in retirement – based on their lifestyle, legacy and income preferences – and their financial resources at the point of retirement,” the study says. It is that group that requires a deeper understanding of their preferences and are likely to benefit the most from an allocation to annuities.

Annuities, however, would not suit well resourced retirees who understand their preferences and are able to self-deliver against them. The 23 per cent of basic pensioners or the 3 per cent the study calls “basic dreamers” would also be less likely to benefit.

The current penetration of guaranteed lifetime income products is about $43bn among 55 to 74 year olds, representing 3.5 per cent of all super. According to the study, the “optimal” fraction of savings that should be put in such products is a little over 15 per cent, or $188bn.

Age, income, and super balance fell flat as predictors of preferred retirement income certainty in the study. This calls for a shift away from proposed default retirement products based on these variables. Super funds, instead, should use scientific tools to capture member preferences holistically, enabling them to create relevant and effective products for diverse needs, the study recommends.

“If you give (members) the product, most of them don’t really know what they want,” says Mr Minney. “What we’re doing with this work here, is actually asking them what they want in a different way. It’s trying to find a way for them to understand what they’re looking for.”

Originally published as Study shows super members expect more income certainty in retirement than currently getting