Financial literacy and pension investment decisions

The call for enhanced financial literacy amongst consumers is a global phenomenon, driven by the growing complexity of financial markets and products, and government concerns about the affordability of supporting an ageing population. Worldwide, defined benefit pensions are giving way to the risk and uncertainty of defined contribution superannuation/pension funds where fund members now make choices and decisions that were once made on their behalf. An important prerequisite for informed financial decision-making is adequate financial knowledge and skills to make competent investment decisions. This paper reports the findings of an online survey of the members of a large Australian public sector-based superannuation fund and shows that although respondents generally understand basic financial matters, on average, their understanding of investments concepts, such as the relationship between risk and returns, is inadequate. These results highlight the need for education programs focusing specifically on developing fund members’ investment knowledge and skills to facilitate informed retirement savings decisions.

Assessing financial reporting comparability across institutional settings : the case of pension accounting

The drive for comparability of financial information is to enable users to distinguish similarities and differences in economic activities for an entity over time and between entities so that their resource allocation decisions are facilitated. With the increased globalisation of economic activities, the enhanced international comparability of financial statements is often used as an argument to advance the convergence of local accounting standards to international financial reporting standards (IFRS). Differences in the underlying economic substance of transactions between jurisdictions plus accounting standards allowing alternative treatments may render this expectation of increased comparability unrealistic. Motivated by observations that, as a construct, comparability is under-researched and not well understood, we develop a comparability framework that distinguishes between four types of comparability. In applying this comparability framework to pension accounting in the Australian and USA contexts, we highlight a dilemma: while regulators seek to increase the likelihood that similar events are accounted for similarly, an unintended consequence may be that preparers are forced to apply similar accounting treatment to events that are, in substance, different.

Australia's disabling income support system: Tracing the history of the disability pension from 1908 to today

This article is based on a historical-comparative policy and discourse analysis of the principles underpinning the Australian disability income support system. It determines that these principles rely on a conception of disability that sustains a system of coercion and paternalism that perpetuates disability and referred to as disablism. The article examines the construction of disability in Australian income support across four major historical epochs spanning the period 1908-2007. Contextualisation of the policy trajectory and discourses of the contemporary disability pension regime for the time period 2008-now is also provided. Two major themes were found to have interacted with the ideology of disablism. This article argues that a non-disabling provision based on social citizenship, rather than responsible or productive citizenship, counters the tendency for authoritarian and paternal approaches. [Abridged]

Case-control study of early childhood caries in Australia

The aim of this case-control study of 617 children was to investigate early childhood caries (ECC) risk indicators in a non-fluoridated region in Australia. ECC cases were recruited from childcare facilities, public hospitals and private specialist clinics to source children from different socioeconomic backgrounds. Non-ECC controls were recruited from the same childcare facilities. A multinomial logistic modelling approach was used for statistical analysis. The results showed that a large percentage of children tested positive for Streptococcus mutans if their mothers also tested positive. A common risk indicator found in ECC children from childcare facilities and public hospitals was visible plaque (OR 4.1, 95% CI 1.0-15.9, and OR 8.7, 95% CI 2.3-32.9, respectively). Compared to ECC-free controls, the risk indicators specific to childcare cases were enamel hypoplasia (OR 4.2, 95% CI 1.0-18.3), difficulty in cleaning child's teeth (OR 6.6, 95% CI 2.2-19.8), presence of S. mutans (OR 4.8, 95% CI 0.7-32.6), sweetened drinks (OR 4.0, 95% CI 1.2-13.6) and maternal anxiety (OR 5.1, 95% CI 1.1-25.0). Risk indicators specific to public hospital cases were S. mutans presence in child (OR 7.7, 95% CI 1.3-44.6) or mother (OR 8.1, 95% CI 0.9-72.4), ethnicity (OR 5.6, 95% CI 1.4-22.1), and access of mother to pension or health care card (OR 20.5, 95% CI 3.5-119.9). By contrast, a history of chronic ear infections was found to be protective for ECC in childcare children (OR 0.28, 95% CI 0.09-0.82). The biological, socioeconomic and maternal risk indicators demonstrated in the present study can be employed in models of ECC that can be usefully applied for future longitudinal studies.

Governance in the Australian superannuation industry

In the Superannuation/Pension industry ordinary investors entrust their retirement savings to the trustees of the superannuation plan. Investors rely on the trustees to ensure ethical business and risk management practices are implemented to protect their retirement savings. Governance practices ensure the monitoring of ethical risk management (Drennan, 2004). The Australian superannuation industry presents a unique scenario. Legislation requires employers to contribute a minimum of 9% of the employees wage to retirement savings. However, there are no legislated governance standards, although there are standards of recommended governance practices. In this paper, we examine the level of voluntary adoption of governance practices by the trustees of Australian public sector and industry superannuation funds. We also assess whether superannuation governance practices are associated with performance and volatility/riskiness of returns. Survey results show that the majority of superannuation plans adopt recommended governance practices supporting the concept of ethical management of the member’s retirement savings. The examination of governance principles that impact returns and risk show that board size and regular review of conflicts are positively associated with return. Superannuation plans with higher volatility in returns meet more frequently.

Framework for assessing financial literacy and superannuation investment choice decisions

There is a worldwide trend towards rapidly growing defined contribution pension funds in terms of assets and membership, and the choices available to individuals. This has shifted the decisionmaking responsibility to fund members for managing the investment of their retirement savings. This change has given rise to a phenomenon where most superannuation fund members are responsible for either actively choosing or passively relying on their funds’ default investment options. Prior research identifies that deficiencies in financial literacy is one of the causes of inertia in financial decision-making and findings from international and Australian studies show that financial illiteracy is wide-spread. Given the potential significant economic and social consequences of poor financial decision-making in superannuation matters, this paper proposes a framework by which the various demographic, social and contextual factors that influence fund members’ financial literacy and its association with investment choice decisions are explored. Enhanced theoretical and empirical understanding of the factors that are associated with active/passive investment choice decisions would enable development of well-targeted financial education programs.

Prescriptions for reform of Australia's superannuation tax concessions

The highly controversial and often politicised issue of Australia’s retirement savings regime featured prominently throughout the two day Federal Government’s October 2011 Tax Forum. Calls for reform of this regime are by no means new. Reform debate over the years has focused on each of the three separate pillars: the age pension, compulsory superannuation, and voluntary saving, as well as the interaction of those three elements. However, recently there has been a significant shift away from reliance on the age pension, with its associated risks falling to the government, to a defined contributions scheme where the associated risks fall to the individual taxpayer. Consequently, Australia’s superannuation regime is predominantly subject to current debate, and, as such, the subject of this article. This article considers the history of Australia’s retirement savings regime, along with a framework for evaluating the superannuation tax concessions. It then discusses the recommendations of the Australian Future Tax System (AFTS) Review Panel and ensuing debate at the Tax Forum. Finally, it suggests two proposals to achieve the objectives of the AFTS Review in relation to retirement, those objectives being a system which is broad and adequate, acceptable to individuals, robust, simple and approachable, and finally sustainable. The first, whilst potentially requiring some tinkering’, is relatively simple and a blue print has already been provided to the Federal Government – the adoption of Recommendations 18 and 19 of the AFTS Review. The second is one of management. Superannuation concessions are fundamentally categorised as tax expenditures and the management of these tax expenditures, not just the reporting, should be undertaken.

The determinants of hiring older workers in Britain revisited: an analysis using WERS 2004

This article reexamines the role of specific human capital and back loading of compensation as deterrents to hiring older workers. We utilize the framework initially suggested by Hutchens (1986) and more recently implemented by Daniel and Heywood (2007). This approach identifies the extent to which firms hire older workers at a rate less than full replacement would imply. Using the 2004 British Workplace Employment Relations Survey, we examine whether a more favourable climate including a much tighter UK labour market combined with the abandonment of defined benefit pension schemes has increased the tendency to hire older workers. We also examine the impact of private health insurance.

Dynamic lifecycle strategies for target date retirement funds

Target date retirement funds have gained favor with retirement plan investors in recent years. Typically, these funds initially have a high allocation to stocks but move towards less volatile assets, such as bonds and cash, as the target retirement date approaches. Empirical research has generally found that a switch to low-risk assets prior to retirement can reduce the risk of confronting the most extreme negative outcomes. This article questions the rationale for lifecycle switching based solely on age or target retirement date as is the prevalent practice among target date funds. The authors argue that a dynamic switching strategy, which takes into consideration achieved investment returns, will produce superior returns for most investors compared to conventional lifecycle switching. In this article, the authors put forward a dynamic lifecycle switching strategy that is conditional on the attainment of the plan member's wealth accumulation objective at every stage of switching.

Prevalence and correlates of sleep disturbance in post-menopausal Australian women : the Healthy Aging of Women (HOW) study

Background: Sleep disturbance in midlife women has been studied extensively, although less is known about sleep after menopause. This study examined the relative impact of socio-demographics, modifiable lifestyle factors, and health status on sleep disturbance in post-menopausal women from Queensland, Australia. Methods: The longitudinal Healthy Aging of Women (HOW) study examines health-related quality of life (HRQOL measured by SF-12©), chronic illness, modifiable lifestyle factors such as physical activity, alcohol consumption, smoking, and sleep disturbance (General Sleep Disturbance Scale, GSDS ≥ 43 represent poor sleep) in midlife and older women from low and high socio-economic, rural and urban areas of South-East Queensland, Australia. This paper presents cross-sectional data from the 322 women, aged 60-70 years, participating in the HOW study in 2011. Results: For women in this study, sleep disturbance was relatively common, with 23% (n = 83) reporting poor sleeping (GSDS ≥ 43). Sleep disturbance scores were strongly correlated with being unemployed or on a disability support pension (β = 18.69, P < 0.01), sedentary lifestyle (β = 23.84, P < 0.01), and lower mental (β = -0.60, P <0.01) and physical health-related quality of life scores (β = -0.32, P = 0.01), and these variables explained almost one third of variance in sleep disturbance scores (ηρ² = 29%). Conclusions: Multivariable analysis revealed that sleep disturbance was correlated with physical and mental health-related quality of life, disability, and sedentary lifestyle, but not other lifestyle and socio-demographic characteristics. It may be however, that modifiable lifestyle factors may indirectly impact on sleep by influencing health status.

Are target date funds the easy bake option?

Target date funds provide a simple, automated approach to retirement savings in defined contribution plans. The passing of the Pension Protection Act of 2006 has seen an increase in the popularity of these funds in the United States, becoming the default option for many plans. However, recent research findings have challenged the easy bake or ‘set-and-forget’ nature of target date funds. This study explores some of the critical design features of target date funds (which shifts an individual’s asset allocation from growth to defensive assets following a pre-set glidepath) against a simple balanced (or target risk) fund design. Using both time-weighted and dollar-weighted returns, our results suggest that there is more to achieving successful retirement outcomes than the investor simply selecting a proposed year of retirement. Our findings can perhaps be summarized by Einstein’s famous epithet, that in the murky world of retirement product design, everything should be made as simple as possible, but not simpler.

Are lifecycle funds appropriate as default options in participant-directed retirement plans?

The appropriateness of default investment options in participant-directed retirement plans like 401(k) has been in sharp focus given that most participants fail to nominate an investment option to direct their contributions. In United States (US), prior to the Pension Protection Act (PPA) of 2006, plan fiduciaries often selected a money market fund as the default option. Whilst this ‘low risk and low return’ investment option was considered to be a ‘safe’ choice by many fiduciaries who were fearful of litigation risk, it was heavily criticized for resulting in inadequate wealth at retirement, particularly when retirees were living much longer and facing inflation risk (see, for example, Viceira, 2008; Skinner, 2009)...

The value of tail risk hedging in defined contribution plans: What does history tell us

Hedging against tail events in equity markets has been forcefully advocated in the aftermath of recent global financial crisis. Whether this is beneficial to long horizon investors like employees enrolled in defined contribution (DC) plans, however, has been subject to criticism. We conduct historical simulation since 1928 to examine the effectiveness of active and passive tail risk hedging using out of money put options for hypothetical equity portfolios of DC plan participants with 20 years to retirement. Our findings show that the cost of tail hedging exceeds the benefits for a majority of the plan participants during the sample period. However, for a significant number of simulations, hedging result in superior outcomes relative to an unhedged position. Active tail hedging is more effective when employees confront several panic-driven periods characterized by short and sharp market swings in the equity markets over the investment horizon. Passive hedging, on the other hand, proves beneficial when they encounter an extremely rare event like the Great Depression as equity markets go into deep and prolonged decline.

Financial literacy and superannuation investment decision-making in a choice environment : an exploratory study

This thesis examines superannuation fund members' level of financial literacy and its association with investment choice decisions in the setting of the mandatory superannuation system in Australia. It also investigates a range of contextual and socio-demographic factors in explaining financial literacy and investment choice. The empirical analysis shows that while most survey respondents displayed high levels of self-rated and general financial literacy, fewer scored as well in relation to more advanced literacy regarding superannuation investment options. The findings of this study have important implications for policy-makers and the superannuation industry in educating and engaging with fund members.