Risk-return preferences in the pension domain: Are people able to choose?

Abstract

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.

The effects of perceived and actual financial knowledge on regular personal savings: Case of Vietnam

“…According to van Rooij et al (2012), those with higher levels of confidence in their financial knowledge are more likely to plan and save for retirement. Furthermore, Henager & Mauldin (2015) found that perceived financial knowledge is a strong indicator of saving behaviour, which supports the findings of Allgood & Walstad (2011) and Robb & Woodyard (2011). In their research, they point out that perceived financial knowledge is essential for best practices and positive financial behaviours such as paying off credit card balances, having an emergency fund, and saving for retirement.…”

“…In their research, they point out that perceived financial knowledge is essential for best practices and positive financial behaviours such as paying off credit card balances, having an emergency fund, and saving for retirement. According to Clark & Strauss (2008) and van Rooij et al (2007van Rooij et al ( , 2011, individuals' attitudes and perception of financial risks are determinants of a variety of financial decisions. Benjamin et al (2013) and Dohmen et al(2010) also proved that knowledge and cognitive ability affect preferences such as risk aversion, an impact on financial decisions.…”

"An Empirical Study of the Relationship between Financial Literacy and Tolerance towards Financial Risk among Entrepreneurs in Bosnia and Herzegovina"

“…Possible limitation of examining relationship between FL and TFR is the presence of possible endogeneity. FL, as an endogenous variable, has already been recognized in the research of Van Rooij, Alessi, 2011, Van Rooij, Kool andPrast, 2007 and many others.…”

Factors Affecting Financial Consumers’ Private Pension Plan Decisions: A Literature Review and a Conceptual Framework Proposal

“…For instance, it is seen that individuals with high levels of financial risk tolerance prefer stocks rather than bonds and certificates of deposit in their retirement funds (Hariharan et al, 2000). Van Rooij et al (2007) investigated risk attitudes towards general matters, financial matters and pension matters and found that for the decisions regarding the pension, individuals acted in the most risk-averse manner choosing the most conservative portfolios of funds. Deaves et al (2007) reported that individuals who had greater inclination to plan are more risk tolerant and make larger pension contributions.…”