As an industry we generally tell people what their retirement will look like on average; this is known as deterministic modelling. Typically, we provide little information around the range of retirement outcomes which may be experienced, known as stochastic modelling.

Deterministic modelling is used widely across the superannuation and wealth management industry, through the software that underpins the advice process to the tools attached to platforms and superannuation fund web portals and everything in between. Stochastic modelling is not.

Effectively we tell people what to expect but we haven’t coached them for what may occur. We leave consumers unaware and uneducated. This is all fine when markets are performing well, but what happens during the tough times? Most likely, people will experience a worse retirement than the one communicated to them. But it goes further than that: people don’t know the size of the impairment to their retirement plans, and they will likely have reduced confidence in any updated guidance provided to them. Hardly the platform to spend with confidence in retirement.

It would be understandable if people felt that they have lost control of their retirement. Can anyone blame people for feeling anxious in such a situation? No wonder panic-led decisions are made in areas such as switching.

As an industry we are part of the problem.

Where’s the guidance?

Advice and guidance are both failing when it comes to communicating the range of possible retirement outcomes.

Guidance is the collection of general information and interactive tools provided to consumers. Examples include retirement income estimates provided on annual super statements, and interactive projection tools.

This is a collective industry problem. Even ASIC’s moneysmart retirement planner, which is better than most retirement calculators provided by super funds, provides deterministic guidance.

A brief explanation of deterministic & stochastic modelling

Consider a single male homeowner who is about to retire aged 67 with a superannuation balance of $500,000. This example already accounts for the age pension.

The flaws of deterministic guidance have been known for many years. Some firms have been looking to implement better advice and guidance solutions, but it is hard to name with certainty any group which has implemented better practices.