Combining behavioural science with an understanding of quantitative finance techniques is critical for any retirement planning system.

Australia has a compulsory retirement savings system.  In the UK, behavioural nudge techniques resulted in automatic enrolment – which is becoming a poster child for financial services globally.

But are both systems pushing people to save and then leaving them stranded at retirement?

How can we help people to get the most from their savings once they retire? This article was inspired by a webinar by Dr Greg Davies of Oxford Risk in the UK.

Why Nudge or Compel People to Save?

The behavioural assumption that underpins compulsion and nudge approaches is that if we leave people to their own devices they very often can’t or won’t solve complex problems by themselves.  They will instead postpone and avoid difficult decisions.

As humans, we all get made to feel emotionally uncomfortable by complexity. This includes decisions like contributing to superannuation or choosing how much to draw down and spend from savings each year after we’ve retired.

When it comes to saving, the cost of making contributions is felt today.  The pain of actually having to engage with this horribly complex problem is today and yet the benefits are far, far off in the distance. So all around the world we see that people simply don’t engage with retirement saving.

Now the interesting thing about both compulsion and automatic enrolment is that they don’t actually engage people. Neither approach gets people to think about what is the ‘right’ solution.  In fact, they are an invitation to disengage because they convey the idea that the government’s ‘got my back’.  The government have passed some laws to encourage me into saving and someone clever has thought about this on my behalf so I don’t have to think about it.

And Then They Retire….

Unfortunately, this can perpetuate disengagement in a way that is dangerous once people suddenly retire and get access to a large pot of savings.

Suddenly, miraculously at the point of retirement, despite the system being designed to combat people being disengaged throughout most of their lives, the behavioural design principles swing 180 degrees in the opposite direction!

Suddenly everyone is miraculously supposed to be able to tackle this really complex problem — at the moment when it really matters to them financially and emotionally.

This is a major problem because retirement decisions involve high levels of complexity and uncertainty. What you typically find when people don’t know what to do is they step aside from that problem. We have a situation in retirement where we are leaving consumers with the ‘nastiest hardest problem in finance’ once they stop working.

We might be providing product options in the market, we’ve got annuities, we’ve got account-based pensions (drawdown).  But what we typically don’t do is to help people with good tools to enable those decisions, to make solving that problem easy [1].

Instead of simply nudging or compelling people while working we need to provide a safety net for people who cannot or will not solve the retirement decisions they need to make once they arrive there.

There is a particular problem with retirement product choices.  Choosing a ‘lifetime income’ product (aka annuity) means focusing on the income level you’ll get in retirement.  Whereas choosing an account-based product means focusing on investment choice.  The topics of ‘income level’ and ‘investment choice’ are often treated as problems that are entirely separate to each other.

In reality, the decisions of what is the right level of retirement risk for you to take and how much you can safely draw from your savings in retirement are inextricably linked.  What you do on one side of that fence influences what you should do on the other side of the fence.  If we treat these problems as separate, we’re not providing clarity —we’re creating a fog of confusion that makes it harder for people to find the right answers. In doing so we raise the risk of them doing nothing at all and being in a far worse situation as a result.

The Annuity Puzzle Explained

Some advisers and superannuation trustees highlight the fact consumers don’t ask for annuities to be included in the mix at retirement.  However, this perspective misses the mark.

Consumers do not have an ‘appetite’ to buy any specific retirement product until they’re taught about them or told to do so. Their participation in the system was automatic, not driven by appetite or demand.

The Behavioural Economics Team of the Australian Government found that once taught well, around half of superannuation fund members choose solutions that provide lifetime income (e.g. annuities) – trading off other objectives to do so.

It is clear that people’s appetite for guaranteed or lifetime income is very much dependent on what they are shown or told.  Any lack of demand for annuities is less about people not having an appetite for them and more about the fact people aren’t seeing them introduced or explained to them. They aren’t being shown how much guaranteed income makes sense for their situation. Even the Government’s retirement calculator, found on the ASIC MoneySmart website, omits them entirely [2].

People’s appetite to use a retirement product like annuities is induced rather than innate.  The whole point of nudges is to make people much more comfortable about their choices (or non-choices).

Because it’s induced rather than innate, annuities are not ‘bought’. Instead, it’s a case of someone needing to suggest and explain them [3].  The prevalence of account-based retirement products in Australia is potentially due to being what’s always been put in front of people – more a function of tradition and familiarity than innate customer appetite. The objectives of flexibility and liquidity could relate more to a lack of conviction than being objectives in their own right.

How to Fix Things

To really get this right, to help people in an unbiased way, we need to move to a position of helping them articulate their retirement objectives more clearly – in terms of attributes they do have an appetite for.  We need technology to capture and link client objectives (like safe spending, bequest and access to liquidity) then empower decisions and construct product solutions to fulfil those objectives [4].

In doing so, we must resist the urge to pre-define what customers want to fit the features of products we’ve historically offered. The process must be reversed—starting with people’s needs, free from any bias.

As a reference point, if we look at state pensions offered globally, including the Age Pension in Australia, the objective is clear: to deliver an income for life after their salary ceases.  People might wish that the level of their government pension was higher but there is rarely any pushback about the design of benefit:  regular payments for as long as the recipient lives.

The other reference point, current superannuation products for retirees in Australia, seems less clear about the objective and – perhaps as a result of this ambiguity – there is fierce debate about whether these account-based solutions efficiently deliver on what retirees genuinely need.

Super funds and advisers seem to often justify steering people to account-based products for the stated goals of flexibility and liquidity.  But this product type leaves consumers with concern about risk and running out – often leading to retirees underspending relative to what they were forced to save.  Almost all retirees then either do run out whilst still alive or they pass away with much of their retirement savings left unused – both unlikely goals of a retirement system.

The Australian government is concerned that the tax concessions forwarded to the superannuation system ultimate results in a massive inheritance scheme rather than a retirement income system.

Australia and the UK both need good technology that can accurately and efficiently elicit each individual’s preferences when it comes to their competing objectives for retirement. This also needs to consider their capacity for sustaining their living costs for life.

Behavioural tools might be the key to articulating each customer’s objectives – then empowering the right retirement product choice for the right customer.

Oxford Risk are working on such tools for use by advisers in the UK.

[1] Yes, there are many online retirement calculators available but these are highly criticised when it comes to empowering confident decision making: superconsumers.com.au/media-releases/serious-failures-in-super-fund-retirement-calculators/

[2] As of February 2025

[3] The benefits of lifetime annuities include:  Up to 30% higher and safer retirement income, up to $32,000 per year more Age Pension income, confidence to spend in the early years of retirement without running out, peace of mind, increased happiness, decisions made for you etc.  See section 2.2 of Simpler super: Taking the stress out of retirement

[4] This doesn’t preclude the development of ‘segments’ of retiree who have similar preference sets to each other, and hence creating a menu of product solutions.