Years from now — once new laws around financial advice are passed and retirement income products are more common — super funds will simply and cheerfully “nudge” their members throughout their lives about making financial decisions.
In this ideal world of the future, this could extend from when the member gets their first pay cheque to well into the final days of their lives as they manage their retirement income.
Believed to be a product of the relatively new field of behavioural economics, nudging is about encouraging, suggesting or prompting people to do things without involving any compulsion.
Financial Services Minister Stephen Jones raised the topic when he announced the federal government’s proposed changes to financial advice laws last week, outlining his vision of the role of super funds in the advice sector in the future.
“We will create a specific permission within the current general advice framework to allow superannuation funds to prompt or ‘nudge’ members,” he said in a speech at Parliament House in Canberra.
“This will allow funds to be proactive and encourage members to think about their financial situation.
“And to seek advice at important decision-points that they might otherwise have missed.”
In the ideal world of nudging, super funds would send out personalised messages to their members at important life stages.
“A person at the age of 55 might be shown their projected balance and retirement income, to get them to consider seeking advice on whether their contributions strategy will meet their retirement objectives,” Jones said.
“A person at preservation age might be informed about the benefits of switching to the tax-free pension phase, or how their drawdown phase might look.”
In Jones’ world of nudge, millions of members could “receive helpful messages with relevant and timely information (which) will ensure that the expanded advice services of funds are accessible to all members, not just the most engaged.”
Thaler & Sunstein
The theory of nudging was given a boost back in 2008 by University of Chicago economist and Nobel Laureate, Richard Thaler, and Harvard Law School Professor, Cass Sunstein, with the publication of their book, Nudge: Improving Decisions about Health, Wealth, and Happiness.
The two academics defined a “nudge” as “any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.”
“To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.”
Former Prime Minister Malcolm Turnbull had a strong interest in behavioural economics, setting up a division in the Department of Prime Minister and Cabinet in 2015, bringing out Sunstein to help its launch.
That division was modelled on other “nudge units” set up by former US President Barack Obama, with Sunstein as its head, and former British Prime Minister David Cameron.
Commonwealth Bank chief executive Matt Comyn has also had a long time interest in behavioural economics, dating back from the days when he ran the bank’s retail bank, using its theories to help shape many CBA products.
Mercer senior partner and superannuation specialist, David Knox, says he has long been in favour of using “nudges” or what he calls “soft compulsion” in the super fund sector.
Like Jones, he sees this becoming increasingly relevant as the sector strengthens its role in the retirement income market and is given more freedom to provide advice to members.
“A super fund could approach a member and say we have two or three (retirement product) options which we might think would be appropriate for you knowing you have a balance of $x.”
In the past, he said, it would have been difficult for funds as they had no idea of a member’s other connections – such as household members, home ownership and outstanding debt.
Power of information
But if Jones’ proposed new advice laws are passed – which they potentially could be sometime in 2024- and funds are allowed to consider the broader financial picture of their members, as well as more sophisticated use of digital products for advice, new doors for nudging will open.
“With the development of retirement products and the scope for financial advice, super funds may be able to use more information about your household,” Knox tells Investment Magazine.
“They could email a member and say ‘you have $500,000 and a partner with $250,000. This is the best bundle of products for you’.”
“It is not compulsion, but it gives them a choice.”
Knox is a strong proponent of the need to shift the retirement side of superannuation from the idea of a lump sum to having retirees encouraged- or even required to – use their superannuation to buy income based products.
He argues that, over the long term, Australia should follow the lead of some Scandinavian countries by requiring retirees to convert or invest their superannuation savings into retirement income products rather than allowing them to take all the money out in a lump sum.
He argues that the introduction of compulsion is not out of the question over time in Australia – even if the member has to convert their super on retirement -or part of it- to a retirement income product as short as five years’ time.
The superannuation sector is now taking a deeper look at what could happen in retirement with the release of a discussion paper on the retirement phase by Treasurer Jim Chalmers in early December.
Knox is one of the many thoughtful people in the sector working on submissions which are due on February 9.
(As one super executive noted to this writer recently, when he heard of the call for submissions on the discussion paper was announced he realised it was serious as the time allowed was not two weeks, but two months.)
As Knox points out, the move to more super fund involvement in retirement products and the advice around them needs to be based on the starting premise that the situation facing every Australian as they retire is very different.
He argues that retirees and those approaching retirement should be offered a suite of products of options which can take into account their specific situation.
He says many people approaching retirement don’t want to pay the thousands of dollars for comprehensive advice.
“Nudges by super funds will be the way to go,” he says.
Nudges, he says, can be used to prompt a member’s thinking in a process which can also involve digital advice or even face to face meetings with advisers.
The Treasury discussion paper specifically asks for feedback on the idea of super funds and nudging.
One of its questions is “How might funds utilise guidance, nudges, defaults, and other actions to assist members into better solutions for their retirement income? What are the barriers to funds being more active in these ways?”
The Treasury paper suggests that super funds could use nudging to give members an idea of how their balances might look on retirement and potentially encourage them “towards settings that better suit their circumstances.”
It also sees nudging important in encouraging members to draw down their superannuation savings in retirement.
The paper notes that some super funds “are considering ways to nudge members towards more suitable drawdown profiles. For example, the APRA and ASIC joint thematic review found that one licensee was considering development of different ‘default solutions’ for different sub‑classes of members, where cohorts were based on estimated financial need and superannuation balance.”
A super fund having a broad suite of products and flexible options is one thing, but unless it can communicate to members in personally tailored ways needed to handle their retirement phase, the products might not be taken up.
The push to enable and encourage nudging is all part of the Chalmers-Jones plan to have super funds more engaged with their members.
Just how much each member wants to be nudged by their fund is one thing. But as the sector moves towards the brave new world of offering more retirement products, backed up by more personalised advice – all turbocharged by digitisation and artificial intelligence- nudging will be part of the super fund future.