Advanced Search
MyIDEAS: Login

Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs

Contents:

Author Info

  • Jacob Bikker

Abstract

This 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20376_tcm47-289626.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 376.

as in new window
Length:
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:dnb:dnbwpp:376

Contact details of provider:
Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/
More information through EDIRC

Related research

Keywords: 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:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
  2. Bikker, Jacob A. & De Dreu, Jan, 2009. "Operating costs of pension funds: the impact of scale, governance, and plan design," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(01), pages 63-89, January.
  3. Jacob Bikker & Laura Spierdijk & Pieter-Jelle van der Sluis, 2010. "What factors increase the risk of incurring high market impact costs?," Applied Economics, Taylor & Francis Journals, vol. 42(3), pages 369-387.
  4. Dobronogov, Anton & Murthi, Mamta, 2005. "Administrative fees and costs of mandatory private pensions in transition economies," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(01), pages 31-55, March.
  5. Jacob A. Bikker & Laura Spierdijk & Pieter Jelle van der Sluis, 2004. "Market Impact Costs of Institutional Equity Trades," DNB Working Papers 001, Netherlands Central Bank, Research Department.
  6. J.A. Bikker & O.W. Steenbeek & F. Torracchi, 2010. "The impact of scale, complexity, and service quality on the administrative costs of pension funds: A cross-country comparison," Working Papers 10-15, Utrecht School of Economics.
  7. Malkiel, Burton G, 1995. " Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, vol. 50(2), pages 549-72, June.
  8. Bateman, Hazel & Mitchell, Olivia S., 2004. "New evidence on pension plan design and administrative expenses: the Australian experience," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(01), pages 63-76, March.
  9. Olivia S. Mitchell, 1996. "Administrative Costs in Public and Private Retirement Systems," NBER Working Papers 5734, National Bureau of Economic Research, Inc.
  10. Waldo Tapia & Juan Yermo, 2008. "Fees in Individual Account Pension Systems: A Cross-Country Comparison," OECD Working Papers on Insurance and Private Pensions 27, OECD Publishing.
  11. Jacob Bikker & Laura Spierdijk & Roy Hoevenaars & Pieter Jelle van der Sluis, 2006. "Forecasting Market Impact Costs and Identifying Expensive Trades," DNB Working Papers 095, Netherlands Central Bank, Research Department.
  12. Richard Hinz & Heinz P. Rudolph & Pablo Antolin & Juan Yermo, 2010. "Evaluating the Financial Performance of Pension Funds," World Bank Publications, The World Bank, number 2405, January.
  13. Ippolito, Richard A, 1989. "Efficiency with Costly Information: A Study of Mutual Fund Performance, 1965-1984," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 1-23, February.
  14. James,Estelle & Smalhout, James & Vittas, Dimitri, 2001. "Administrative costs and the organization of individual retirement account systems : a comparative perspective," Policy Research Working Paper Series 2554, The World Bank.
  15. Sherrill Shaffer, 1998. "Functional Forms and Declining Average Costs," Journal of Financial Services Research, Springer, vol. 14(2), pages 91-115, October.
  16. Olivia S. Mitchell & Emily S. Andrews, 1981. "Scale economies in private multi-employer pension systems," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 34(4), pages 522-530, July.
  17. Bauer, R.M.M.J. & Cremers, K.J.M. & Frehen, R.G.P., 2010. "Pension Fund Performance and Costs: Small is Beautiful," MPRA Paper 23556, University Library of Munich, Germany.
  18. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-76, August.
  19. White, Halbert, 1980. "Using Least Squares to Approximate Unknown Regression Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 149-70, February.
  20. Malhotra, D K & McLeod, Robert W, 1997. "An Empirical Analysis of Mutual Fund Expenses," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(2), pages 175-90, Summer.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:376. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.