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
JF - Journal of Banking and Finance
SN - 0378-4266
IS - April
ER -