The legislative change that allows superannuation funds to nudge their members is primarily linked to reforms under the Retirement Income Covenant (RIC) and related regulations that govern how superannuation funds can interact with, and provide advice to, their members.
Superannuation trustees are required to develop and implement a strategy that aims to maximise the retirement income of their members while managing risks and providing flexibility. Legislation supports the use of nudges by encouraging funds to engage with members to help them make better retirement decisions.
There are three key areas to the reforms:
Flexibility in engagement: The reforms give superannuation funds the flexibility to engage members through various channels, including digital platforms, emails, and SMS.
Focus on outcomes: This encourages funds to adopt proactive measures, such as nudging, to guide members toward actions that improve their retirement readiness.
Support for personalised advice: The regulatory environment supports the use of digital advice tools, which often include nudging mechanisms. These tools can provide personalised, real-time advice and suggestions.
So … what is a nudge?
A good view on nudging can be found in “Nudge: Improving Decisions About Health, Wealth, and Happiness” published by Richard H. Thaler and Cass R. Sunstein during 2009.
A nudge, according to Thaler and Sunstein, is any form of choice architecture that alters people’s behaviour in a predictable way without restricting options or significantly changing their economic incentives. Nudges can be subtle prompts or interventions designed to influence members’ behaviour in a positive way, helping them make decisions that are in their best interest, particularly regarding their retirement planning.
So how and when to nudge? The answer is there are plenty of options, spanning several different areas:
Investment and insurance
Default investment strategy: Members are automatically placed in a balanced or lifecycle investment option unless they choose otherwise. This default option is selected based on general best practices for most members, helping those who might be uncertain or disengaged make a sound investment choice.
Rebalancing notifications: If a member’s investment portfolio drifts from their desired asset allocation, they receive a nudge to review and rebalance their investments.
Insurance: If a member’s income changes, they are prompted to review their levels of insurance cover.
Behavioural
Progress tracking: Members might receive visual progress trackers showing how close they are to achieving their retirement savings goals. This nudge can motivate them to stay on track or increase their contributions.
Cohorts: Showing members how their savings habits compare with peers in similar age groups or income brackets can encourage them to adopt better behaviours.
Retirement
Retirement income projections: Regularly providing members with projections of their potential retirement income can nudge them to increase their contributions or adjust their investment strategy if they’re not on track to meet their retirement goals.
Transition to retirement strategy: As members approach retirement age, they receive nudges suggesting they explore transitioning to retirement income streams, such as converting part of their superannuation balance into a pension account.
Drawdown defaults: Members may need to understand an appropriate account-based pension drawdown rate above the legislative minimum.
Date or event triggered
Periodic check-ins: Sending members periodic reminders to review their superannuation account, update personal details, nominate a beneficiary or complete a financial health check will keep them aware of their retirement planning status.
Milestone celebrations: Nudges that congratulate members on reaching savings milestones can be combined with suggesting next steps, such as adjusting their investment strategy or considering additional contributions.
Tax refund contribution: After tax time, members might be nudged to contribute part of their tax refund to their superannuation by highlighting the potential tax benefits and positive impact on their retirement savings.
Technology is required to nudge at scale
Technology will be essential in helping funds engage with members at scale. There are several key considerations to ensure compliance, effectiveness, and alignment with regulatory expectations. They include:
Effective use of data
Real-time data access will be the primary focus when looking to implement nudges. Then the question is how best to use it. Here are some examples:
Segmentation: Speaking at a recent conference, APRA Deputy Chair Margaret Cole reminded the industry that “All members, from high-net-worth individuals with independent financial advisers to low balance members who are fully disengaged with their super, need to be supported by a funds retirement income strategy”. Effective segmentation of the membership will ensure funds are targeting the right member with the right message.
Behavioural data analysis: Use of advanced analytics to understand member behaviour, preferences and risk profiles is critical for designing effective nudges.
Predictive modeling: Machine learning models can be implemented to predict when and how to nudge members most effectively, based on historical data and behavioural patterns.
Delivering the message
Communication tools: Technologies for automated communication, like chatbots and automated messaging systems, can provide timely nudges and support.
Privacy and security: Implementing strong data protection and privacy measures is essential to maintain member trust and comply with regulations when handling sensitive financial information.
The member experience
The interface: Ensuring that nudges are delivered through mobile apps or web platforms is crucial, as these are the primary channels through which members interact with their superannuation funds.
Integration with financial planning tools: Integrating nudges with broader financial planning tools can provide a more holistic approach to managing superannuation and other financial aspects.
Hybrid experience: Supporting a member to move through different channels, from online experience to phone-based interactions, will be key at the moment that matters.
The ecosystem
Seamless integration: Ensure that the nudge technologies integrate seamlessly with existing fund management systems, CRM platforms, financial advice solutions and administration systems.
APIs and data interoperability: Use APIs and ensure data interoperability between systems to maintain consistency and accuracy across platforms.
Conclusion
Nudges are not a new concept. In the UK – the Financial Conduct Authority introduced rules and guidance for firms on the stronger nudge to Pension Wise guidance. They have been part of the UK pensions landscape for some time, ensuring certain groups of people access a government advisory service before accessing their pension pots.
There is no shortage of opportunities for triggering a nudge. But funds need to make optimal use of the data they already have on their members and develop an effective technology strategy to engage them at scale. Knowing how and when to nudge, and using the most effective delivery channels, will be key. Meanwhile, individual members will need to feel the interaction with their Super is personalised and, above all, valuable.
