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The Impact of Scale, Complexity, and Service Quality on the Administrative Costs of Pension Funds: A Cross-Country Comparison

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  • Jacob A. Bikker
  • Onno W. Steenbeek
  • Federico Torracchi

Abstract

Administrative costs per participant appear to vary widely across pension funds in different countries. These costs are important because they reduce the rate of return on the investments of pension funds, and consequently raise the cost of retirement security. Using unique data on 90 pension funds over the period 2004–2008, this paper examines the impact of scale, the complexity of pension plans, and service quality on the administrative costs of pension funds, and compares those costs across Australia, Canada, the Netherlands, and the US. We find that, except for Canada, large unused economies of scale exist. Analyses on a disaggregated level confirm economies of scale for small and medium pension funds. Even though the pension funds in the sample are among the largest in the world, further cost savings appear to be possible. Higher service quality and more complex pension plans significantly raise costs, whereas offering only one pension plan reduces costs, as does a relatively large share of deferred (or sleeping) participants. Administrative costs vary significantly across pension fund types, with differences amounting to 100%.
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  • Jacob A. Bikker & Onno W. Steenbeek & Federico Torracchi, 2012. "The Impact of Scale, Complexity, and Service Quality on the Administrative Costs of Pension Funds: A Cross-Country Comparison," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 477-514, June.
    • Handle: RePEc:bla:jrinsu:v:79:y:2012:i:2:p:477-514
    DOI: j.1539-6975.2011.01439.x
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    References listed on IDEAS

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    1. Valdes-Prieto, Salvador, 1994. "Administrative charges in pensions in Chile, Malaysia, Zambia, and the United States," Policy Research Working Paper Series 1372, The World Bank.
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    Cited by:

    1. Lučivjanská, Katarína & Lyócsa, Štefan & Radvanský, Marek & Širaňová, Mária, 2022. "Return adjusted charge ratios: What drives fees and costs of pension schemes?," Finance Research Letters, Elsevier, vol. 48(C).
    2. Hollanders, David, 2016. "Asset Management Costs and Financial Performance of Dutch Pension Funds in 2011-2014," Other publications TiSEM db6a1950-5d81-4e41-b035-f, Tilburg University, School of Economics and Management.
    3. Carlos Heitor Campani & Ian De Ridder, 2019. "Administrative costs of Dutch pension funds: the impact of fund characteristics," Economics Bulletin, AccessEcon, vol. 39(2), pages 1361-1370.
    4. J.A. Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," Working Papers 13-06, Utrecht School of Economics.
    5. Johannes W. Fedderke & Neryvia Pillay Bell, "undated". "Characteristics of the South African retirement fund industry," Working Papers 880, Economic Research Southern Africa.
    6. Siwach, Garima & Paul, Sohini & de Hoop, Thomas, 2022. "Economies of scale of large-scale international development interventions: Evidence from self-help groups in India," World Development, Elsevier, vol. 153(C).
    7. David G. McCarthy & Po‐Lin Wang, 2022. "Wait your turn: Pension incentives, workplace rules, and labor supply among Philadelphia municipal workers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(4), pages 985-1029, December.
    8. Yu Mei & Xie Haibin & Huang Xiaowei & Xu Jinhai & Ralescu Dan, 2014. "A Study on the Chinese Enterprise Annuity Replacement Rate Problem," Journal of Systems Science and Information, De Gruyter, vol. 2(1), pages 1-15, February.
    9. Gosse A.G. Alserda & Jacob A. Bikker & Fieke S.G. Van Der Lecq, 2018. "X-efficiency and economies of scale in pension fund administration and investment," Applied Economics, Taylor & Francis Journals, vol. 50(48), pages 5164-5188, October.
    10. repec:dau:papers:123456789/13624 is not listed on IDEAS
    11. Jacob A. Bikker, 2017. "Is THERE AN OPTIMAL PENSION FUND SIZE? A SCALE-ECONOMY ANALYSIS OF ADMINISTRATIVE COSTS," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 739-769, June.
    12. Boon, L.N. & Brière, M. & Rigot, S., 2018. "Regulation and pension fund risk-taking," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 23-41.
    13. Gosse A.G. Alserda & Jacob A. Bikker & Fieke S.G. Van Der Lecq, 2018. "X-efficiency and economies of scale in pension fund administration and investment," Applied Economics, Taylor & Francis Journals, vol. 50(48), pages 5164-5188, October.
    14. James R. Cummings & David Gallagher, 2016. "Effect of fund size on the performance of Australian superannuation funds," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 695-725, September.

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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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