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

doi:10.1016/j.jbankfin.2019.02.014

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 Journal › Article › Academic › peer-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.

Language	English
Pages	206-225
Number of pages	20
Journal	Journal of Banking and Finance
Volume	101
Issue number	April
DOIs	10.1016/j.jbankfin.2019.02.014
Publication status	Published - 21 Feb 2019

Fingerprint

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, F., Dellaert, B. G. C., Alserda, G. A. G., & Swinkels, L. A. P. (2019). Individual pension risk preference elicitation and collective asset allocation with heterogeneity. Journal of Banking and Finance, 101(April), 206-225. https://doi.org/10.1016/j.jbankfin.2019.02.014

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.

@article{9fe2eb83f4974439a1cd0a3df0eb7559,

title = "Individual pension risk preference elicitation and collective asset allocation with heterogeneity",

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.",

keywords = "Risk preference elicitation Composite score Pension fund Asset allocation",

author = "{van der Lecq}, Fieke and B.G.C. Dellaert and G.A.G. Alserda and L.A.P. Swinkels",

year = "2019",

month = "2",

day = "21",

doi = "10.1016/j.jbankfin.2019.02.014",

language = "English",

volume = "101",

pages = "206--225",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

publisher = "Elsevier",

number = "April",

}

van der Lecq, F, Dellaert, BGC, Alserda, GAG & Swinkels, LAP 2019, 'Individual pension risk preference elicitation and collective asset allocation with heterogeneity', Journal of Banking and Finance, vol. 101, no. April, pp. 206-225. https://doi.org/10.1016/j.jbankfin.2019.02.014

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 Journal › Article › Academic › peer-review

TY - JOUR

T1 - Individual pension risk preference elicitation and collective asset allocation with heterogeneity

AU - van der Lecq, Fieke

AU - Dellaert, B.G.C.

AU - Alserda, G.A.G.

AU - Swinkels, L.A.P.

PY - 2019/2/21

Y1 - 2019/2/21

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 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.

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 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.

KW - Risk preference elicitation Composite score Pension fund Asset allocation

UR - https://www.sciencedirect.com/science/article/pii/S0378426619300469

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

T2 - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266