Ch 23: Contract Design

Question 1

Give an example of a customer who is likely prepared to accept risk and another that is very risk averse in the context of making savings through a pension plan.

Answer 1

A risk-seeking customer might have the following characteristics:
> young (long time to retirement to correct any adverse experience)
> no dependants
> pension benefits available from other sources (state or employer)
> other wealth (e.g. equity in a large home)

A risk-averse customer might have the following characteristics:
> close to retirement
> family to support
> limited or no other sources of pension
> limited wealth