How people react to pension risk
A new Life Course Centre Working Paper examines the behavioural and welfare impact of pension risk.
The study utilises a 2007 reform of the defined benefit pension system in The Netherlands that tied people’s pension benefits and contributions to their pension fund’s market performance, effectively exposing people’s retirement savings to market risk. The findings show that pension risk can deeply affect people’s decisions, and that reforms that increase exposure to this risk can have important and unintended effects that can affect people’s welfare. This is especially true for pension risk born later in life.
The impact of pension risk on people’s behaviour and welfare, and the way this risk gets distributed across socioeconomic strata, should be considered when introducing new retirement schemes and considering alternatives for pension reform, the paper concludes.
“Our findings highlight a number of benefits of appropriately funded pension schemes that provide income certainty for people in their old age. There is a lot of value in pension certainty and we have shown that having more market risk on pensions can have important behavioural effects. Retirement plan designs should account for these nonnegligible risk effects, which can be quantified – as we have shown – and which could potentially be mitigated or outright eliminated by adopting well-designed pension insurance and risk-sharing schemes.”
The Working Paper is authored by Life Course Centre Research Fellow Dr Nicolás Salamanca of the Melbourne Institute: Applied Economic & Social Research at the University of Melbourne in conjunction with Professors Andries de Grip and Olaf Sleijpen of Maastricht University.
You can read the full paper, ‘How people react to pension risk’, here.