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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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Suggested Citation

  • 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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    File URL: http://hdl.handle.net/10.1111/j.1539-6975.2011.01439.x
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    1. repec:dau:papers:123456789/13624 is not listed on IDEAS
    2. repec:eee:jimfin:v:84:y:2018:i:c:p:23-41 is not listed on IDEAS
    3. Jacob Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," DNB Working Papers 376, Netherlands Central Bank, Research Department.
    4. repec:bla:jrinsu:v:84:y:2017:i:2:p:739-769 is not listed on IDEAS
    5. 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.
    6. J.A. Bikker & T. Knaap & W.E. Romp, 2011. "Real Pension Rights as a Control Mechanism for Pension Fund Solvency," Working Papers 11-15, Utrecht School of Economics.
    7. Gosse A.G. Alserda & J.A. Bikker & Fieke (S.G.) van der Lecq, 2017. "X-efficiency and economies of scale in pension fund administration and investment," Working Papers 17-06, Utrecht School of Economics.

    More about this item

    JEL classification:

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

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