The Paradox of Plenty: The Implications of Choice Overload in Retirement Savings?

Transcription

1 The Paradox of Plenty: The Implications of Choice Overload in Retirement Savings? Associate Professor Hazel Bateman Centre for Pensions and Superannuation UNSW, Sydney

2 Outline Choice in retirement savings Australia s experience Behavioural explanations An agenda for research

3 There is increasing choice and complexity in retirement savings over the lifecycle Contribution rate (and type of contribution)? Which fund? Which investment option (asset allocation)? Whether to change fund? Investment option? Whether (and how) to seek financial advice? When to retire?

4 omic theory assumes people behave like rational lifecycle sas ge income, consumption Wage income save 0 Retirement dissave Consumption Age

5 rational lifecycle saver has: onsistent preferences erfect knowledge and foresight he ability to undertake complex optimisation calculations ecdotal evidence indicates: uboptimal saving eluctance to make choices nertia onomic theory is failing to explain choices in retirement savin

6 hat is Australia s s experience? pillars of retirement income provision: Public Age Pension Superannuation Guarantee (mandatory) Voluntary retirement saving (superannuation, other financial assets, housing)

7 What are Australian retirement savers doing? Choice in contributions: Mandatory contributions (9% earnings) plus voluntary employer and employee contributions Govt matched contributions salary sacrifice contributions spouse and child contributions

8 hat are Australian retirement savers doing? hoice of superannuation fund: Choice of corporate fund, industry fund, public sector fund, retail fund, retirement savings account, self managed superannuation fund Around 10% pa change fund 2.5% actively change 7.5% by default

9 significant changes in fund shares 0% 0% 0% 0% 0% 0% 0% Corporate fund Industry fund Public sector fund Retail fund Small superannuatio fund

10 at are Australian retirement savers doing? hoice of investment option: menus of multi and single manager specialised and diversified investment funds 100+ choices offered by retail funds 10+ choices by non profit funds However >50% total assets in default options (80 90% for industry funds)

11 % superannuation assets in default investment strategy, % 80% 60% 40% 20% 0% Corporate Industry fund Public sector Retail fund Average al

12 hat are Australian retirement savers doing? hoice of retirement benefit: lump sum, account based pension, annuity 60% lump sum 40% income stream 95%+ account based pensions 44 life annuities sold Jan Sept 08

13 e choices can be explained by taxes and regulations

14 demic research is now focussing on behavioural lanations for retirement saving choices Contribution choices Switch to opt out from opt in increase participation in pension plan Investment choices Aggregate asset allocation determined by number and characteristics of available options Retirement benefit choices influenced by investment frame vs consumption frame

15 mographics and personal characteristics are also portant Gender and family structure women more risk averse? Age/human capital older/younger more risk averse? Financial literacy increases participation

16 r latest research in progress. Bateman, Louviere, Thorp, Islam, Satchell, An experimental survey of investment decisions for retirement savings, 2008 We use experiments to investigate the determinants of investment choice the role of standard finance theory (mean variance analysis) the impact of framing

17 f the following options are you most likely and least likely to choose when considering investm Please tick ONE BOX for most likely and ONE BOX for least likely eatures Investment options for you to consider for a $1 contribution 75% Cash 50% Cash 100% 25% Shares 50% Shares Shares 100% Cash 25% Cash 75% Shares orst case accumulation after 10yrs ed (av) accumulation after 10 est case accumulation after 10 yrs $1450 $1675 $2000 $1500 $1950 $2450 $1550 $2250 $3150 $1700 $2550 $3500 $600 $2800 $15800 ent management fee (% pa) 1.75% 1.95% 2.20% 2.40% 2.20% investment option would you be most hoose? (tick one) investment option would you be least hoose? (tick one)

18 What choices were made? March 07 October 08 Retirement savings account: (2%) (3%) 100% cash: (5%) (8%) 75% cash/25% equities: (11%) (13%) 50% cash/50% equities: (19%) (24%) 25% cash/75% equities: (30%) (27%) 100% equities: (33%) (28%)

19 verall findings Young and low income conventional mean variance investor Old and rich risk loving Behaviour influenced by age and income only Robust to financial crisis

20 esearch Agenda Retirement income policies are leading to increasing choice over the lifecycle anecdotal evidence suggests flight to defaults Research findings importance of the design of the plan and choice menu, and the frame in which the choices are presented Research agenda design choice experiments to investigate behavioural biases, particularly framing Description of investment options Representation of risk Presenting retirement income products as an investmen vs a consumption stream