The longer we live, the harder it is to plan a comfortable retirement. As medical innovation stretches the human lifespan to its limit, the financial services industry must rise to the challenge of continually adjusting to an ageing population.
Retirement planning and communicating the importance of properly preparing for your future is at the forefront of meeting this challenge.
Fortunately, the industry has been quick to respond. Life expectancy calculators, of which a number have been produced over the past several years, are an apt example of this innovation at work.
Such calculators have been developed in the hope that they could provide people with a tangible link between retirement planning and the possible length of their lifespan.
However, according to a recent study by Stirling Management School, these calculators may not be having the impact that many of us in the industry would hope for.
The study, which involved more than 2,000 participants, found that people were less likely to buy an annuity after using official life expectancy calculators, instead taking a cash lump sum.
While 73% of people in a control group in the study opted to buy an annuity, that figure dropped to 65% when they used a life expectancy calculator first.
People tend to underestimate their longevity. So you’d expect a calculator to highlight this, and armed with that information they’d then give increased consideration to securing a regular income in retirement. However, it appears that people were deciding against this when using the calculator.
This unexpected behaviour could be explained by an economic branch of thinking called ‘terror management theory’.
The theory tries to explain a type of ‘‘defensive human thinking and behaviour that stems from an awareness and fear of death”. In this instance, when confronted with their possible lifespan, the participants thus made a decision that went against conventional economics. The results are hugely concerning.
As with much of retirement planning, people with less money will be impacted significantly more than people with plenty. Even so, securing an income throughout retirement remains an important consideration.
Fewer savings and potential income sources mean a lower capacity for loss. In addition, those with less money to spare often view financial advice as prohibitively expensive, and so are unable to get the support they may desperately need.
There’s no doubt that an 8% decrease in annuity take-up after using the calculator is significant – especially as the findings so drastically contradict the tool’s original intention (to highlight the need for a long-lasting, reliable income source).
Life expectancy calculators should be playing a constructive role in the retirement planning process, so any deviation from that objective should trigger a degree of introspection among us all.
As an industry, we need to be careful that we don’t provide educational tools from an ivory tower.
What we may perceive to be helpful or useful may actually be having an adverse effect on a customer’s understanding of an issue or product. The results of this study highlight the importance of customer testing, and demonstrate why, sometimes their interpretation of (or reaction to) a new technology can be very different to those of us that work within the industry.
If we want to provide a truly helpful service we must ensure that there are no behavioural biases at play. At Legal & General, we have adapted our own approach to reflect these factors, and now include an iterative customer testing process on any new customer-facing material. This includes our website, quote calculators and other educational materials.
Technology has an important part to play in ensuring customers have a realistic view of how long they may live, especially given how many people underestimate their expected lifespan.
The right tools, when used appropriately, can also ensure that no single factor is relied upon too heavily. For example, lots of customers tend to focus on family medical history as being the most important indicator of lifespan, when education and socio-economic status can be much more revealing.
As a sector, we have a responsibility to take care of our customers and to ensure that they are always put in the best position possible before making a decision. Technology, and the tools, apps and gadgets that come with it, continues to offer up exciting ways to enhance that process. But occasionally we need to take stock. We need to ask ourselves: ‘‘Does this genuinely help the customer?”
Part of this process will stem from better education. Better education for people, and an education which focuses on outcomes.
That way, we can be confident that they understand how the decisions they make will affect their retirement, as well as what pathways are available to them to reach those goals and aspirations.
Emma Byron is managing director at Legal & General Retail Retirement Income