Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-23T23:47:31.937Z Has data issue: false hasContentIssue false
  • English
  • Français

Pension plan participant choice: Evidence on defined benefit and defined contribution preferences*

Published online by Cambridge University Press:  07 June 2013

PAUL GERRANS  and
GORDON L. CLARK
PAUL GERRANS
Affiliation:
UWA Business School, The University of Western Australia (e-mail: [email protected])
GORDON L. CLARK
Affiliation:
Smith School of Enterprise and the Environment, University of Oxford, and Faculty of Business and Economics, Monash University, Melbourne (e-mail: [email protected])
Get access Rights & Permissions [Opens in a new window]

Abstract

We report analysis of voluntary switching from defined benefit (DB) to defined contribution (DC) plans in an environment best characterised as benign. Using a large Australian fund database we identify socio-demographic correlates and the macroeconomic circumstances associated with DB to DC switching. The age of participants is an important correlate of switching behaviour, suggesting a degree of risk tolerance previously not recognised in the literature. It is also noted, however, that this type of switching behaviour may involve secondary behaviour such that uncertainties of DC investment performance are managed by reference to an asset allocation formula that maps to the previous DB investment strategy.

Keywords

G23G11J32Choicerisksocio-demographic statusdefined benefitdefined contributionretirement savingssuperannuation
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 12 , Issue 4 , October 2013 , pp. 351 - 378
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

This paper was made possible by the provision of data by UniSuper. We are grateful for their continued support of this work. Thanks also to the work of Jacqui Whale in managing the database.

References

Agnew, J., Balduzzi, P. and Sundén, A. (2003) Portfolio choice and trading in a large 401(k) plan. American Economic Review, 93(1): 193–215.CrossRefGoogle Scholar
Ameriks, J., Caplin, A., Laufer, S. and van Nieuwerburgh, S. (2011) The joy of giving or assisted living? Using strategic surveys to separate public care aversion from bequest motives. Journal of Finance, 66: 519–561.CrossRefGoogle Scholar
Australian Bureau of Statistics (2011) Labour Price Index, Cat No. 6345.0. Available online at http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6345.0Mar%202011?OpenDocument.Google Scholar
Barber, B. M. and Odean, T. (2001) Boys will be boys: Gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1): 261–292.Google Scholar
Baron, J. (2008) Thinking and Deciding. 4th Edn. Cambridge, MA: Cambridge University Press.Google Scholar
Benartzi, S. and Thaler, R. (2007) Heuristics and biases in retirement savings behavior. Journal of Economic Perspectives, 21(3): 81–104.Google Scholar
Beshears, J., Choi, J. J., Laibson, D. and Madrian, B. C. (2008) The importance of default options for retirement savings outcomes: evidence from the United States. In Kay, S. J. and Sinha, T. (eds), Lessons from pension reform in the Americas. New York: Oxford University Press, pp. 59–87.Google Scholar
Brown, J. R. and Weisbenner, S. J. (2007) Why Do Individuals Choose Defined Contribution Plans? RRC Paper No. NB07-01. Cambridge, MA: National Bureau of Economic Research. Available online at http://www.nber.org/programs/ag/rrc/NB07-01%20Brown,%20Weisbenner%20FINAL.pdf.CrossRefGoogle Scholar
Burger, C. and Clark, G. L. (2011) The German model of risk distribution in supplementary occupational pensions. Journal of Risk, 13: 93–122.Google Scholar
Calvet, L. E., Campbell, J. Y. and Sodini, P. (2009) Fight or flight? Portfolio rebalancing by individual investors. Quarterly Journal of Economics, 124: 301–348.Google Scholar
Carlsson, E., Erlandzon, K. and Gustavsson, J. (2008) A tale of two systems: winners and losers when moving from defined benefit to defined contribution pensions. School of Business, Economics and Law, Goteborg University.Google Scholar
Charness, G. and Gneezy, U. (2012) Strong evidence for gender differences in risk taking. Journal of Economic Behavior and Organization, 83(1): 50–58.CrossRefGoogle Scholar
Choi, J. J., Laibson, D., Madrian, B. C. and Metrick, A. (2009) Reinforcement learning and savings behavior. Journal of Finance, 64(6): 2515–2534.CrossRefGoogle ScholarPubMed
Clark, G. L. and Monk, A. H. B. (2007) The ‘crisis’ in defined benefit corporate pension liabilities. Part I: scope of the problem; Part II: current solutions and future prospects. Pensions: An International Journal, 12(1):43–54;12(2): 68–81.CrossRefGoogle Scholar
Clark, G. L. and Strauss, K. (2008) Individual pension-related risk propensities: the effects of socio-demographic characteristics and a spousal pension entitlement on risk attitudes. Ageing and Society, 28, 847–874.Google Scholar
Clark, G. L. and Urwin, R. (2011) DC pension fund best-practice design and governance. Benefits Quarterly, 27(4): 36–49.Google Scholar
Clark, G. L., Caerlewy-Smith, E. and Marshall, J. C. (2009) Solutions to the asset allocation problem by informed respondents: the significance of the size-of-bet and the 1/n heuristic. Risk Management and Insurance Review, 12: 251–271.CrossRefGoogle Scholar
Clark, G. L., Strauss, K. and Knox-Hayes, J. (2012) Saving for Retirement. Oxford: Oxford University Press.Google Scholar
Clark, R. L. (2009) How will the stock market crash affect the choice of pension plans? National Tax Journal, 62(3): 477–496.CrossRefGoogle Scholar
Clark, R. L., Ghent, L. S. and McDermed, A. A. (2006) Pension plan choice among university faculty. Southern Economic Journal, 72(3): 560–577.Google Scholar
Cocco, J. F. and Lopes, P. (2011) Defined benefit or defined contribution? A study of pension choices. Journal of Risk and Insurance, 78(4): 931–960.CrossRefGoogle Scholar
Engelberg, J. E. and Parsons, C. A. (2011) The causal impact of media in financial markets. Journal of Finance, 66: 67–97.CrossRefGoogle Scholar
Faff, R., Hallahan, T. and McKenzie, M. (2011) Women and risk tolerance in an aging world. International Journal of Accounting and Information Management, 19(2): 100–117.CrossRefGoogle Scholar
Gabaix, X. and Laibson, D. (2006) Shrouded attributes, consumer myopia, and information suppression in competitive markets. Quarterly Journal of Economics, 113: 505–540.Google Scholar
Gerrans, P. and Clark-Murphy, M. (2004) Gender differences in retirement savings decisions. Journal of Pension Economics and Finance, 3(2): 145–164.Google Scholar
Gerrans, P., Gardner, D., Speelman, C. and Clark-Murphy, M. (2006) An investigation of home bias in superannuation investment choices. Economic Papers, 25(1): 17–31.Google Scholar
Gerrans, P., Clark-Murphy, M. and Speelman, C. (2010) Asset allocation and age effects in retirement savings choices. Accounting and Finance, 50(2): 301–319.CrossRefGoogle Scholar
Goetzmann, W. N. and Kumar, A. (2008) Equity portfolio diversification. Review of Finance, 12(3): 433–463.Google Scholar
Hurley, S. L. (2008) The shared circuits model: how control, mirroring, and simulation can enable imitation, deliberation and mindreading. Behavioural and Brain Sciences, 31: 1–22.Google Scholar
Kahneman, D. and Tversky, A. (1979) Prospect theory: an analysis of decision under risk. Econometrica, 47: 263–292.Google Scholar
Lachance, M. E., Mitchell, O. and Smetters, K. (2003) Guaranteeing defined contribution pensions: the option to buy back a defined benefit promise. Journal of Risk Insurance, 70(1): 1–16.Google Scholar
Liebman, J. B. and Luttmer, E. F. P. (2010) Would people behave differently if they better understood Social security? Evidence from a field experiment. Working Paper. Cambridge, MA: John F. Kennedy School of Government, Harvard University.Google Scholar
Mackenzie, G. A. S. (2010) The Decline of the Traditional Pension: A Comparative Study of Threats to Retirement Security. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Madrian, B. C. and Shea, D. F. (2001) The power of suggestion: Inertia in 401(k) participation and savings behaviour. Quarterly Journal of Economics, 116(4): 1149–1187.Google Scholar
Milevsky, M. A. and Promislow, S. D. (2004) Florida's pension election: from DB to DC and back. Journal of Risk and Insurance, 71(3): 381–404.CrossRefGoogle Scholar
Mitchell, O. (2011) Managing risks in defined contribution plans: What does the future hold? Insurance and Risk Management Working Paper IRM WP2011-05. The Wharton School, University of Pennsylvania.Google Scholar
Munnell, A. H. (2006) Employer-sponsored plans: the shift from defined benefit to defined contribution. In Clark, G. L., Munnell, A. H. and Orszag, J. M. (eds), The Oxford Handbook of Pensions and Retirement Income, Oxford: Oxford University Press, pp. 359–380.Google Scholar
Munnell, A. H., Aubry, J-P., Hurwitz, J. and Quinby, L. (2011) ‘A Role for Defined Contribution Plans in the Public Sector’. Center for Retirement Research at Boston College, Brief 16.Google Scholar
Neelakantan, U. (2010) Estimation and impact of gender differences in risk tolerance. Economic Inquiry, 48(1): 228–233.Google Scholar
Olleman, M. and Boivie, I. (2011) ‘Decisions, decisions: retirement plan choices for public employees and employers’. National Institute on Retirement Security.Google Scholar
Palme, M., Sundén, A. E. and Söderlind, P. (2007) How do individual accounts work in the Swedish pension system? Journal of the European Economic Association Papers and Proceedings, 5(2-3): 636–646.CrossRefGoogle Scholar
Roy, A. D. (1952) Safety first and the holding of financial assets. Econometrica, 20: 431–449.Google Scholar
Sapienza, P., Zingales, L. and Maestripieri, D. (2009) Gender differences in financial risk aversion and career choices are affected by testosterone. Proceedingsof the National Academy of Sciences of the United States of America, 106(36): 15268–15273.Google Scholar
Sharpe, W. F. (2007) Investors and Markets. Princeton: Princeton University Press.Google Scholar
Shum, P. and Faig, M. (2006) What explains household stock holdings? Journal of Banking and Finance, 30(9): 2579–2597.Google Scholar
Small, K. A. and Hsiao, C. (1985) Multinomial Logit specification tests. International Economic Review, 26(3): 619–627.Google Scholar
Superannuation Scheme for Australian Universities. (1998 a) Advancing your options. UniSuper Ltd., Melbourne.Google Scholar
Superannuation Scheme for Australian Universities. (1998 b) Investing for the Future. UniSuper Ltd., Melbourne.Google Scholar
Teece, D. (2000) Managing Intellectual Capital. Oxford: Oxford University Press.Google Scholar
Tetlock, P. C. (2007) Giving content to investor sentiment: the role of the media in the stock market. Journal of Finance, 62: 1139–1168.CrossRefGoogle Scholar
Thaler, R. and Sunstein, C. (2008) Nudge – Improving Decisions about Health, Wealth and Happiness. New Haven, CT: Yale University Press.Google Scholar
UniSuper (2013) Fact Sheet: Choosing a style of super that suits you. UniSuper Ltd., Melbourne.Google Scholar
UniSuper (2010) Submission to the Super System Review Phase 3: Structure. Available online at http://www.unisuper.com.au/download.cfm?oid=4562DD61-5056-BE7A-AC265A8983E61DCA.Google Scholar
Wisniewski, T. P. and Lambe, B. J. (2010) The Role of Media in the Credit Crunch: the Case of the Banking Sector. Available online at SSRN: http://ssrn.com/abstract=1696105.Google Scholar
Supplementary material: File

Clark Supplementary Material

Appendix

Download Clark Supplementary Material(File)
File 517.1 KB