Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs
AbstractThis paper investigates scale economies and the optimal scale of pension funds, estimating different cost functions with varying assumptions about the shape of the underlying average cost function: Ushaped versus monotonically declining. Using unique data for Dutch pension funds over 1992-2009, we find that unused scale economies for both administrative and investment activities are indeed large and concave, that is, huge for small pension funds and decreasing with pension fund size. For administrative activities, we observe a clear optimal scale of around 40 thousand participants during 1992-2000 (pointing to a U shaped average cost function), which increases sharply in subsequent years to size above the largest pension fund, pointing to monotonically decreasing average costs. As regards investment costs we observe an optimal scale for total assets of around € 690 million and larger, without a clear shift over time and without diseconomies of scale for larger funds. The results are very sensitive to the correct functional form of the cost model. Consolidation among especially smaller and medium-sized pension funds would increase cost efficiency.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 376.
Date of creation: Apr 2013
Date of revision:
Pension funds; unit-costs function; administrative costs; investment costs; economies of scale; pension plan design; governance; defined benefits; defined contribution; outsourcing; reinsurance;
Other versions of this item:
- Jacob 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.
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-05-22 (Economics of Ageing)
- NEP-ALL-2013-05-22 (All new papers)
- NEP-EFF-2013-05-22 (Efficiency & Productivity)
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