UNSW's Hazel Bateman

Australian retirees are interpreting minimum pension drawdown rates as proxy financial advice from the government and holding back on spending more of their savings, according to a recent study out of the University of New South Wales (UNSW).

The October 2019 study, ‘Spending from regulated retirement drawdowns: the role of implied endorsement’, found that 30 per cent of retirees were influenced by the “implied endorsement nudge” of a mandated minimum pension drawdown rule.

“While regulated drawdowns compel regular withdrawal of pension wealth there is no requirement that these withdrawals be spent,” the study stated. “However, we suggest that the regulated nature of the drawdowns could provide strong guidance via implied endorsement for how much to spend, and retirement spending trajectories may follow the regulated drawdowns as per the stickiness of defaults.”

According to UNSW’s Professor Hazel Bateman, one of the paper’s authors, the finding contributes to the broader issue of retirees’ reluctance to spend their savings.

“In the early years of retirement, the minimum amounts are four, five and six per cent of assets and the assets are still building,” she says. “People aren’t spending even though we have well designed policies to encourage them to do so. They’re spending slower than we think they should and even building assets in retirement.”

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Bateman says the results also support the view that financial advice is crucial in retirement.

“My take on this is [that] you need complementary advice from your super fund or the financial advice industry to help people work out for themselves what they need to draw down,” Bateman says. “What the government suggests isn’t going to apply to everyone.”

Bateman – who is a world-renowned expert on retirement and was recently appointed as the inaugural president of the International Pension Research Association – notes that those with fewer financial resources and “low pension capability” were more likely to be influenced by the implied endorsement nudge and had a greater need for financial advice.

“I’m a big person for having scalable advice that doesn’t cost a fortune,” she says. “There’s room for advice – short of a financial plan – that could be done.”

Government knows best

The study compared Australia and the Netherlands, who were ranked as third and first respectively in Mercer’s 2019 Global Pensions Index. The Mercer study compares 37 retirement systems that cover almost two thirds of the world’s retirement systems.

Australians are more prone to being influenced by implied endorsement from the government than the Dutch, who were more likely to be influenced if the ‘nudge’ came from a peer recommendation, the study found.

That is, “Government knows best” is a stronger prompt for Australians when it comes to household spending, while the Dutch were more influenced by the peer effect, or the notion that “this is what most people do”.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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