Welfare effects due to collective investments based on heterogeneous preferences

In the new Dutch pension agreement, pension funds and insurance companies have to elicit the risk preferences and risk capacity of their participants and to adjust (collective) investment strategies accordingly. Risk preferences can be quite different: Some might prefer to increase the chance of indexation while others prefer to avoid a cut in pensions at all cost. This variety in risk preferences can be modelled by allowing for utility functions with different shapes.

A considerable amount of recent research in the Netspar network and beyond has studied the question of how participants’ risk preferences and capacity can be measured. The focus of the proposed project is on the next step, given the heterogeneity in risk preferences and characteristics (e.g. risk capacity) how should a pension provider invest on behalf of the participants? The project subsequently quantifies the welfare effects of not providing tailor-made strategies for all participants.

The goal of this research project is to investigate adequate collective strategies under heterogeneity in risk preferences and assess the welfare effects.