New Dutch Pension Agreement Explained (Part 8): Risk Preference

Pension Agreement Risk

In the summer of 2020, an agreement was reached on a far-reaching review of the Dutch pension system. This pension agreement has significant consequences for how participants accrue pension and how contributions are invested. In this series, we discuss the pension agreement and the implications for investment strategy (in Dutch). The risk attitude of participants should be the foundation of the investment policy in the new pension schemes. In the eight article of our series we look at the concept of risk attitude, and analyze how we can apply it to the investment policy.

We start the article by discussing the two elements of risk attitude, being risk aversion and risk capacity. Together they describe how much risk participants are willing and able to take.


Then, we discuss how the risk attitude can be measured and what conditions a good elicitation method should meet. For this, we use the FRAME framework that is proposed by researchers of the Dutch Authority for the Financial Markets.


Finally we discuss in four steps how we can determine the optimal investment policy given the risk attitude. For this we can use both the measures of risk attitude from pension legislation as well as the certainty equivalent. The latter summarizes the risk and expected outcome of pension income in one number.

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