US study finds income the most compelling savings story

Age-specific projections of how additional super contributions translate into retirement income are more likely to compel people to save for retirement, according to a US study.

Boston College's Centre for Retirement Research segmented a sample group of 17,000 people into four groups and gave one group age-specific projections of how additional contributions would increase their retirement income.

General information on contributions and age-specific projections of how hypothetical contributions would translate into additional balances only minimally improved savings.

However, the ‘income treatment' had a statistically significant effect on the likelihood workers would make contributions and the amount of their contributions, the study found.

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The income group saved only an average $85 per year more than the control group. However, when considering only the individuals within the control group that changed their savings habits, balances were increased by an average of $1,150 more per year than the control group.

Speaking at the Association of Superannuation Funds of Australia (ASFA) last year, JP Morgan Retirement Plan Services' US managing director and head of product services, Donn Hess, said retirement projections were the number one thing that drove consistent action and engagement from super fund members.

Hess said when funds shared retirement projections, people were 19 per cent more likely to have income replacement at 90 per cent or more.

However, JP Morgan executive director of senior superannuation relationships, Seamus Collins, said the US pension system was well ahead of Australia in terms of communications.

"There seems to be more willingness in the US to actively tinker with communications structures to get outcomes and ... that's perceived as the critical interface for the member — the structure of the communications and the ability of that structure, even where you pitch things on the page and the order of items," he said.

Australia focused on lump sums and was only just now coming around to annuity products and longevity risk, according to Collins.

"The issue is if you factor in longevity risk by converting that lump sum to an annuity, people are often quite startled," he said.

"They look at their lifestyle and way of living and realise the annuity has to price in risk that they might live up to 40 years — and that's why the call to action is so effective."

Although RG299 gave trustees the ability to provide retirement projections, the boundaries were quite tight and open to interpretation.

Collins said many super funds would be hesitant to forecast returns.

"That income is purely speculative, based on a lot of assumptions on market performance in the future," he said.

"I suspect that's where funds might be a little uncomfortable forecasting that kind of number."