Individual pension risk preference elicitation and collective asset allocation with heterogeneity

Gosse A.G. Alserda, Benedict G.C. Dellaert, Laurens Swinkels, Fieke S.G. van der Lecq

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Collectively organized pension plans must increasingly demonstrate that the risk preferences of their members are adequately reflected in the plans’ asset allocations. However, whether funds should elicit individual members’ risk preferences to achieve this goal, or whether they can rely on other indicators, such as socio-demographics, remains unclear. To address this question, we apply a tailored augmented lottery choice method to elicit individual pension income risk preferences from 7894 members from five different pension plans. The results show that member risk preferences are strongly heterogeneous and can only partially be predicted from individual and plan characteristics. Differences in risk preference imply different optimal asset allocations. We find large welfare losses for heterogeneous members in pension plans with their current asset allocation because these allocations are safer than implied by members’ preferences. We provide a framework for pension plans to gauge the need to elicit risk preferences among their members.

Original languageEnglish
Pages (from-to)206-225
Number of pages20
JournalJournal of Banking and Finance
Volume101
DOIs
Publication statusPublished - Apr 2019

Keywords

  • Asset allocation
  • Composite score
  • Pension fund
  • Risk preference elicitation

Cite this

Alserda, Gosse A.G. ; Dellaert, Benedict G.C. ; Swinkels, Laurens ; van der Lecq, Fieke S.G. / Individual pension risk preference elicitation and collective asset allocation with heterogeneity. In: Journal of Banking and Finance. 2019 ; Vol. 101. pp. 206-225.
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Individual pension risk preference elicitation and collective asset allocation with heterogeneity. / Alserda, Gosse A.G.; Dellaert, Benedict G.C.; Swinkels, Laurens; van der Lecq, Fieke S.G.

In: Journal of Banking and Finance, Vol. 101, 04.2019, p. 206-225.

Research output: Contribution to journalArticleResearchpeer-review

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AU - Dellaert, Benedict G.C.

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