nr 025 - Risk-Return Preferences in the Pension Domain: are People Able to Choose?
- DNB Working Papers
-
Date 6 January 2005
In this paper we investigate pension preferences and the effect of
individual freedom of choice on risk taking in the context of
pension arrangements based on a representative survey of about 1000
Dutch citizens. The attitude towards pension schemes and portfolio
choices is explained by individual characteristics. Our main
conclusions are the following. Risk aversion is domain dependent
and highest in the pension domain. The vast majority of respondents
is in favour of compulsory saving for retirement and favours a
defined benefit pension system. If offered a combined defined
benefit/defined contribution system, the majority of the
respondents would like to have a guaranteed pension income of 70%
or more of their net labour income. Self-assessed risk tolerance
and financial expertise are important explanatory variables of
pension system attitude. Respondents are on average conservative in
their investment policy. If given investor autonomy, they are
willing to change the composition of their retirement savings
portfolio in response to their personal financial situation,
general economic conditions, and expectations of financial markets.
Respondents may be inconsistent in their preferences. Especially
respondents who have chosen a relatively safe portfolio (less
stock, more bonds) appear to prefer the retirement income streams
of the median investment portfolio to their own portfolio choice.
Finally, the average respondent considers himself financially
unsophisticated, but is not very eager to take control of
retirement savings investment when offered the possibility to
increase expertise. Key words: behavioural finance, risk tolerance,
pension preferences, defined contribution schemes, freedom of
choice, portfolio investment JEL Codes: D12, D80, G11, J26