Individual pension risk preference elicitation and collective asset allocation with heterogeneity

Fieke van der Lecq, B.G.C. Dellaert, G.A.G. Alserda, L.A.P. Swinkels

Research output: Contribution to JournalArticleAcademicpeer-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 im- ply different optimal asset allocations. We find large welfare losses for heterogeneous members in pen- sion plans with their current asset allocation because these allocations are safer than implied by mem- bers’ 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
Issue numberApril
DOIs
Publication statusPublished - 21 Feb 2019

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Pensions
Preference elicitation
Asset allocation
Risk preferences
Pension plans
Income risk
Welfare loss
Lottery
Optimal asset allocation

Keywords

  • Risk preference elicitation Composite score Pension fund Asset allocation

Cite this

van der Lecq, Fieke ; Dellaert, B.G.C. ; Alserda, G.A.G. ; Swinkels, L.A.P. / Individual pension risk preference elicitation and collective asset allocation with heterogeneity. In: Journal of Banking and Finance. 2019 ; Vol. 101, No. April. pp. 206-225.
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Individual pension risk preference elicitation and collective asset allocation with heterogeneity. / van der Lecq, Fieke; Dellaert, B.G.C.; Alserda, G.A.G.; Swinkels, L.A.P.

In: Journal of Banking and Finance, Vol. 101, No. April, 21.02.2019, p. 206-225.

Research output: Contribution to JournalArticleAcademicpeer-review

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