IFS/Challenger white paper’s retirement advice architecture

Industry Fund Services (IFS) has collaborated with Challenger to develop a white paper on retirement advice with a key finding being the removal of complexity via the offer of simplified choices.

The white paper draws on behavioural science and canvasses the adoption of choice architecture arguing that three distinct retirement strategies can deliver on the shared needs of those entering retirement:

1. Certainty: Balances flexibility and certainty, while prioritising long-term income to give retirees confidence their money will last, for life. The research shows a 70% allocation to account-based pensions (ABPs) and 30% to lifetime income products, such as lifetime annuities, can deliver flexibility, offer the highest portfolio value for estate planning, and provide partial asset test exemption for the Age Pension assessment.
2. Balance: Designed for retirees seeking greater flexibility and access to capital, who may have less concern about income longevity. The modelling shows an 85% allocation to ABPs and 15% to lifetime income products, such as annuities, means there is still modest income certainty and Age Pension assessment benefits.
3. Flexibility: This prioritises complete flexibility with a 100% allocation to ABPs. The trade-off can be a lack of income certainty and greater longevity risk, which may impact confidence to spend and estate outcomes.

Challenger Head of Retirement Partnerships, Adrian Aardoom said the models would help to remove complexity, simplify decision making, and deliver on core retirements, while ensuring trade-offs are easily understood and considered.

“There is mounting pressure on the financial services industry to better address the needs of Australians when it comes to their retirement planning and income demands,” Mr Aardoom said.

“Through an understanding of behavioural biases, combined with Challenger’s deep expertise in retirement income, we have developed a simplified, practical framework that members can easily understand and advisers can easily embed.

“With a record number of Australians entering retirement, we have an unprecedented opportunity to help more retirees navigate their golden years with confidence – delivering income certainty without the added complexity.”

IFS executive manager of Advice Services, Adrian Gervasoni said advisers play an increasingly important role in retirement but must be aware of how biases impact the process.

“Retirement planning is about more than just financial modelling – it’s about helping retirees make confident decisions in the face of uncertainty,” Mr Gervasoni said.

“Through a diligent approach to choice architecture we can put the retiree in the driver’s seat. We want to move the conversation from product features and benefits to focus on consumer preferences, such as certainty and flexibility. Ultimately, the goal is to deliver greater confidence when entering into retirement.”

Default bias, instinctively choosing more familiar options, is another bias that often arises in retirement planning and can impact both the adviser and retiree.