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 language | English |
|---|---|
| Pages (from-to) | 206-225 |
| Number of pages | 20 |
| Journal | Journal of Banking and Finance |
| Volume | 101 |
| DOIs | |
| Publication status | Published - Apr 2019 |
Keywords
- Asset allocation
- Composite score
- Pension fund
- Risk preference elicitation
Cite this
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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 journal › Article › Research › peer-review
TY - JOUR
T1 - Individual pension risk preference elicitation and collective asset allocation with heterogeneity
AU - Alserda, Gosse A.G.
AU - Dellaert, Benedict G.C.
AU - Swinkels, Laurens
AU - van der Lecq, Fieke S.G.
PY - 2019/4
Y1 - 2019/4
N2 - 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.
AB - 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.
KW - Asset allocation
KW - Composite score
KW - Pension fund
KW - Risk preference elicitation
UR - http://www.scopus.com/inward/record.url?scp=85062145428&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2019.02.014
DO - 10.1016/j.jbankfin.2019.02.014
M3 - Article
VL - 101
SP - 206
EP - 225
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
ER -