Individual Pension Risk Preference Elicitation and Collective Asset Allocation With Heterogeneity

46 Pages Posted: 10 Mar 2019

See all articles by Gosse Alserda

Gosse Alserda

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Benedict G. C. Dellaert

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Fieke van der Lecq

Vrije Universiteit Amsterdam

Date Written: February 18, 2019

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 7,894 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.

Keywords: Risk Preference Elicitation, Composite Score, Pension Fund, Asset Allocation

JEL Classification: D14, G11, G23

Suggested Citation

Alserda, Gosse and Dellaert, Benedict G. C. and Swinkels, Laurens and van der Lecq, Fieke, Individual Pension Risk Preference Elicitation and Collective Asset Allocation With Heterogeneity (February 18, 2019). Available at SSRN: https://ssrn.com/abstract=2894891

Gosse Alserda

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Benedict G. C. Dellaert

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Fieke Van der Lecq

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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