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How individuals react to defined benefit pension risk

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Listed:
  • Salamanca, N.

    (General Economics 2 (Macro))

  • de Grip, A.

    (Research Centre for Educ and Labour Mark)

  • Sleijpen, O.C.H.M.

    (General Economics 2 (Macro))

Abstract

We develop a measure of (hybrid) defined benefit (DB) pension risk and show how this pension risk affects individual portfolio decisions. We find that people in riskier DB plans are, on average, not only less likely to hold equity but also hold a smaller share of their wealth in equity. This relation is stronger for people who are better informed about their pension plan risk, and for retirees. We also check whether pension risk is related to retirement decisions but find no evidence to support this hypothesis. Our main results are robust to a number of model specifications and alternative explanations. Our findings suggest that properly funded DB pension plans can increase participants’ welfare by allowing them to seek higher returns in their individual portfolios while at the same time relieving less sophisticated participants from the decisions required by a defined contribution plan.

Suggested Citation

  • Salamanca, N. & de Grip, A. & Sleijpen, O.C.H.M., 2013. "How individuals react to defined benefit pension risk," Research Memorandum 046, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2013046
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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