Risk capacity measurement: a review of the scientific literature and application using Dutch administrative data

The new Dutch pension system requires pension providers to determine an appropriate investment risk profile for different groups of participants, depending on their ability to bear investment risk (risk capacity) and their risk preferences (risk tolerance) (Ministerie van Sociale Zaken en Werkgelegenheid, 2020). While the measurement of risk preferences is well established, there is a need for a well-established measure of risk capacity (in Dutch: risicodraagvlak) that pension funds and insurers can apply.

The topicality project aims to accurately measure risk capacity over the life cycle for different groups (gender, income position, and sector) using unique administrative data for the entire Dutch population. We first discuss the concept of risk capacity and ways to measure it according to the economics literature. Next, using the discussed methods to measure risk capacity, we document risk capacity over the lifecycle for different population groups in the Netherlands (gender, position in the income distribution, and sector). To do so, we use unique individual-level data from Statistics Netherlands, available for scientific research, including tax records on income and wealth (incl. housing) and payroll (polis) administration on hours worked and sector.