Pension profile preferences: the influence of trust and expected expenses

Abstract

This paper studies the influence of people's expectations about expenses during retirement and trust in pension funds on preferences for different pension arrangements. We find that although most workers prefer a flat-rate annuity, many workers want to deviate from it. The most popular option is a high/low, annuity-based profile, followed by a partial lump sum payment. One of the underlying reasons for preferring a more flexible pattern is an expected shift in expenditure during retirement. Our regressions reveal that workers who expect declining expenses during retirement are more likely to opt for a high/low annuity-based pension and/or a lump sum payment at retirement than workers who expect stable expenses. Furthermore, we find that workers and pensioners who do not trust their pension fund are more likely to prefer a lump sum over annuity-based arrangements than workers and pensioners with a high degree of trust.

Trust in financial institutions: A survey

“…Whereas Hansen (2012), Hansen (2014), Van der Cruijsen et al. (2021), Van der Cruijsen and Jonker (2019) and Courbage and Nicolas (2021) find a significant and positive relationship between financial literacy and trust, Ampudia and Palligkinis (2018) report that financial literacy is negatively related to broad‐scope and narrow‐scope trust, but the effect is only significant in case of broad‐scope trust. This may reflect their measurement of financial literacy.…”

“…(2018) show that people with greater trust in the pension fund and the pension system take up less lump sum. In line with this finding, based on survey data on the preferences of Dutch consumers, Van der Cruijsen and Jonker (2019) find that people who do not trust their pension fund are more likely to favor a lump sum over annuity‐based arrangements. Van Dalen et al.…”

“…Especially with respect to traits such as integrity and benevolence pension funds score better, so fewer people view pension funds as dishonest or think that they are focused on the organization's interest and not on the customer's interest. For pensioners and workers, the likelihood of trusting their pension fund is much lower in case they perceive that their pension fund had financial problems in recent years (Van der Cruijsen & Jonker, 2019). These authors also report that cutting pension benefits lowers trust.…”

“…In contrast, Fungáčová and Weill (2018) find that daily access to information does not seem to matter for trust in Chinese banks, regardless of the information source (television, internet or newspaper). Van der Cruijsen and Jonker (2019) show that the gathering of information on pensions has a positive effect on workers’ trust in pension funds.…”

Trust and Distrust in Pension Providers in Times of Decline and Reform: Analysis of Survey Data 2004–2021

“…For instance, Van der Cruijsen and Jonker ( 2019 ) show how workers and pensioners who do not trust their pension fund are more likely to prefer a lump sum over annuity-based arrangements. And to cite another example pointed out by Van Dalen et al ( 2022 ), the new pension system will make pension benefits more uncertain. They show a clear association between the dislike of participants for uncertain outcomes and their intended take-up rate of the lump-sum option.…”