The Melbourne Business School ran a study using choice-modelling techniques to analyse the consumer behaviour of more than 1,000 consumers when presented with various financial planning options for retirement.
Participants were primarily interested in annuities as they were in traditional “drawdown” options, such as account-based pensions. But they were reported to find choosing between products difficult.
Senior research fellow Teagan Altschwager commented what she found surprising was the relative size of the annuity group to the drawdown group.
“Based on industry attitudes, you might expect the annuity group to be much smaller – but in our data, it was essentially the same size,” Dr Altschwager said.
“To me, this suggests there is far greater appetite for annuities than people think and that account-based pensions may be the main product in the market simply by default or out of ignorance, rather than actual preference.”
The researchers noted that industry and government professionals have a negative view of the retirement products, because they are too complex for consumers.
But the study has found that while customers struggle to understand annuities, there would likely be much greater demand if they were presented in a simpler way.
Dr Altschwager said: “There’s a belief out there that Australians hate annuities, which is a strong word but it’s the one that gets used.”
“When we talked to financial advisers and people from super funds and government about annuities, most of them said they thought customers don’t like them or understand them, leading them to not purchase.”
When it came to comparing various annuity options, study participants seemed to be overwhelmed by choice, finding the process of deciding between specific products difficult.
“We asked people to compare two annuity products with a random selection of attributes, and then compare that choice to the option of managing their own retirement savings,” Dr Altschwager said.
“There was a huge preference for people to avoid making a choice. You might expect some avoidance, but not to this extent. Basically, respondents were putting it in the ‘too hard’ basket and avoiding the decision altogether.
“Based on our findings so far, it may be better to describe attitudes as ‘Australians don’t hate annuities, they just hate making complicated choices’.”
She added that the research has major implications for policymakers, financial planners, fund managers and others working in the financial or retirement sectors.
“Industry and government both seem committed to shifting people’s mindset from focusing on accumulating as much money as possible for later life, and instead getting them to think about how to use that money and make it last for retirement,” she said.
“Annuities are one viable option for achieving this, despite the prevailing attitude. At the very least, people should question where that attitude has come from and not take it as gospel.”
The study was run under the Melbourne Business School and Orford Foundation’s Orford Initiative, a three-year research project on the retirement system.
