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Default Options Safeguard Retirement Savings: Research


A University of New South Wales research initiative believes default superannuation and retirement options could prove beneficial in combating poor financial decision-making brought about by cognitive decline.

Fresh insights from the ARC Centre for Excellence in Population Ageing Research (CEPAR), in partnership with Neuroscience Research Australia (NeuRA), show that even mild cognitive limitations, such as changes in processing speed or acquisition of new information, can have significant impacts on how Australians make financial decisions.

The research suggests there may be benefit in restricting individuals' decisions to some degree, as it can help prevent negative outcomes. As such, CEPAR and NeuRA believe carefully designed default options can be of assistance.

"As the population ages and more people face cognitive limitations, we need to consider whether the choice architecture of superannuation can cope," CEPAR chief investigator at UNSW Business School, Professor Hazel Bateman said.

The report states: "Defaults may be a good alternative to address poor decision-making, provided the default is well designed."

With framework development for Comprehensive Income Products for Retirement ongoing, the research suggests that consideration of the impact of cognitive decline on the Australian population is required in the design of default retirement options.

CEPAR and NeuRA estimate that about 8% of all Australians aged in their 60s are experiencing mild cognitive impairment, though may never develop dementia.

"Australians nearing retirement score higher in tests of financial literacy than younger people or those in other countries, but about half of them answer basic questions about inflation, interest rates, and diversification incorrectly," Bateman said.

Research previously undertaken in the United States analysing Prescription Drug Insurance Plan choices made by consumers demonstrates the vast majority of consumers make 'confused' choices. They place too much importance on the upfront insurance premiums and fail to rationally calculate how much they will pay over time.

The findings showed individuals living with Alzheimer's disease or depressions were even more likely to be 'confused'.

"These findings suggest that there may be benefit in restricting individuals' decisions to some degree, as it may minimise sub-optimal choices," CEPAR and NeuRA's report reads.

However, the research does emphasise that having such restrictions in place may have unintended negative consequences.

While Australia's super system exemplifies a positive 'restriction' since it includes mandatory participation and a minimum contribution, retirement savers are still required to make many complex decisions pre-retirement, such as which super fund to join, their investment option, the level of voluntary contributions, drawdown strategy, and the financial advice they seek.

Further investigation concluded that the "default settings of superannuation plans are 'sticky' and therefore have a large influence on the decisions made by savers, leading to both optimal and sub-optimal outcomes."

"On the whole, the need to allow individuals their financial freedom, while also mitigating their often 'confused' decision-making, is something that has yet to be reconciled in the literature and in policy," the report reads.

By Jamie Williamson

Financial Standard

11 April 2018

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