As investors, we like to believe that we make rational financial decisions. Yet most Australians are still not on track to reach a comfortable level of income in retirement. Could the way in which the superannuation industry presents information to investors be indirectly contributing to this shortfall?

In truth, our emotions and biases play a far greater role in our decision making processes – financial and otherwise – than we would like to admit.

Curiously, these biases can be heavily influenced by the way information is presented to us. Sometimes the simple framing of a decision can make a big difference.  For example, people are far more likely to register early for an event if they are threatened with a late registration penalty fee. If they are offered a discount for early registration, the response won’t be as strong.

This tells us that our inherent fear of loss far outweighs our appetite for gains. Coupled with the way we think about our savings, this bias can significantly affect our investment behaviour.

When it comes to retirement savings, investors often focus heavily on the lump sum value of their superannuation portfolio, rather than on the retirement income it will generate. Therefore, when markets become uncertain, they tend towards behaviour that aims to protect their lump sum in the short-term.

It’s fair to say that the superannuation industry has inadvertently fostered this preoccupation through the distribution of annual statements that place substantial emphasis on the investor’s current account balance and how it compares with the previous year’s balance.

However, an account balance alone is largely meaningless when it comes to understanding whether or not a person is on track to funding a comfortable retirement. In fact, many investors display an inherent ‘lump sum bias’ which causes them to overestimate the level of income that a given lump sum can be expected to produce.

In order for investors to make good financial decisions it is paramount that they be provided with accurate information about how much income their lump sum is likely to provide them in retirement. An investor focussed on long-term retirement income goals, rather than short-term lump sum fluctuations, is far more likely to make sound long-term investment decisions.

Clearly, a change is needed in the way superannuation balance information is presented to investors. With the growth in investor demand for multi-channel reporting, an opportunity exists to utilise technology to engage with investors in a more meaningful way.

Funds that offer flexible retirement income modelling tools will help their clients focus on their long-term income needs, make better investment decisions and ultimately achieve better retirement outcomes. As a result, these funds will enjoy a considerable competitive advantage over their peers.

While modelling future income streams can be complex, it doesn’t need to be technically difficult if you have access to the right technology.

With comprehensive projection tools, members can readily grasp whether or not their current superannuation strategy is capable of meeting their retirement income goals. Importantly, where a shortfall is revealed, these tools can help identify the steps they need to take to modify their strategy so that it has the best possible chance of achieving their goals.

As the superannuation system matures past $2 trillion and members become more engaged, super funds have a responsibility to provide members with more comprehensive information that helps them make better long-term decisions.
Simply by providing the right information, asking the right questions and encouraging people to frame their superannuation goals in a different and more meaningful way, superannuation funds can have a considerable impact on member behaviour. In particular, helping member’s realise that their current super arrangement cannot deliver the comfortable retirement they had envisaged is likely to prompt more positive investment behaviours and ultimately improve retirement outcomes.

About the author

David Barrett

Principal Consultant

David Barrett is a Principal Consultant for Bravura Solutions based in our Sydney office. With more than 12 years in the banking, investment, insurance and IT world, David is our resident SMSF guru. He also has many years of experience as a financial planner, both in private practice and also within the banking sector. David’s responsibilities include system design, scoping and implementation for Garradin. He works closely with our private wealth clients to develop solutions that increase their operational efficiency and improve their productivity.

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