How much risk are participants willing and able to take with their pensions?

The Future Pensions Act requires pension funds to determine, for each age cohort, how much investment risk participants are both able and willing to take. For each of these age groups, with a maximum age difference of five years, funds must set an appropriate minimum and maximum level of risk. This range should be based on a risk preference survey, participant characteristics and academic insights.

At PGGM, we have conducted risk preference surveys for several pension funds, which has proven to be a complex process. Pensions can be quite abstract for many people, and questions about investment risk and outcome variation make them seem even more complicated. Yet these surveys are essential, as the level of investment risk a fund takes for each cohort largely determines how participants’ pensions will develop over time.

Engaging participants
Together with an external agency, we helped participants navigate the online surveys in a clear and accessible way. Participants watched a short video before using an interactive tool to indicate, on a scale from 0 to 10, how much risk they were willing to take with their pension savings. This allowed them to see straight away how their choice would affect their expected pension: the higher the potential pension, the wider the range of possible outcomes.

Additionally, we asked about their financial situation, such as whether they could cover their monthly expenses, had savings or any debts. By asking these questions beforehand, we gained a clearer picture of their capacity to bear risk and helped ensure they made their choices with the right context in mind.

Response rates, drop-out and adjustments
Approximately 10% of the people invited completed the risk preference survey in full. Funds with a larger proportion of older, highly educated or higher-earning participants generally had much higher response rates. Older participants in particular were more likely to take part, as they tend to be more actively involved in planning for their retirement. To ensure younger participants’ views were also properly represented, we often ran an extra recruitment round.

People with lower incomes or debts were less likely to complete the survey. This naturally affects the overall picture, as it can lead to an overrepresentation of financially resilient households. We therefore adjusted our analysis to account for this drop-out.

We also reviewed the clarity of the questions. At the end of the survey, participants were asked a control question. Anyone who chose a high risk level in the tool but answered the control question saying they did not want any risk was excluded from the final analysis. This applied to about 20% of respondents, although this percentage was higher or lower for funds with more participants on lower or higher incomes and education levels.

Key findings
Our analysis showed clear differences between cohorts and subgroups. Younger participants tend to be more willing to take on investment risk than older ones, which makes sense because they have more time to recover from any setbacks. On average, men are more likely than women to take on higher levels of risk, while higher-income groups often show a greater appetite for risk but a narrower range of what they consider acceptable. These groups usually have a clearer sense of what they want and are better able to cope with financial ups and downs.

Interestingly, many participants are comfortable with quite a broad range of risk levels. For example, someone might indicate a preference of 5 but feel at ease with anything between 2 and 8. Among funds with more higher-income and highly educated participants, this range tends to be narrower. This indifference is valuable, as it shows how firm or flexible people’s preferences really are. By taking this into account, pension funds are better able to judge which levels of risk are acceptable or unacceptable for different groups.

Continuing to learn and improve
As the ALM team, we combined the results of these surveys with participant characteristics and academic insights to create a clear proposal for each pension fund’s risk profile. Based on our advice and discussions with the regulator, the boards decided on the risk levels for each cohort.

Taking participants seriously also means continuing to improve. Pensions are already a complex topic for many people, and risk preferences can feel even more complicated. The key question remains: how well does our research reflect participants’ true preferences? Are we really measuring what people want, or just what they click at the time? Do we understand what they mean? And how do we make sure the way we present options doesn’t unintentionally influence their choices?

We will keep improving these surveys as we gain new insights and better tools. We also want to make the topic clearer, helping participants really understand what they are deciding on and helping us understand what matters most to them.