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Pension fund efficiency: the impact of scale, governance and plan design

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  • Jacob Bikker
  • Jan de Dreu

Abstract

Administrative and investment costs per participant appear to vary widely across pension funds. 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. This paper examines the impact of determinants of these costs, such as the size, governance, pension plan design and outsourcing decisions, using data on all Dutch pension funds across the 1992-2004 period, including more than 10,000 observations. We find that economies of scale dominate the strong dispersion in both administrative and investment costs across pension funds. Industry-wide pension funds are significantly more efficient than company funds and other funds. The operating costs of pension funds' defined contribution plans are lower than those of defined benefit plans. Higher shares of pensioners make funds more costly, whereas the reverse is true when relatively many participants are inactive.

Suggested Citation

  • Jacob Bikker & Jan de Dreu, 2006. "Pension fund efficiency: the impact of scale, governance and plan design," DNB Working Papers 109, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:109
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    File URL: https://www.dnb.nl/binaries/WP%20109-2006_tcm46-146766.pdf
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    References listed on IDEAS

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    1. D. K. Malhotra & Robert W. McLeod, 1997. "An Empirical Analysis Of Mutual Fund Expenses," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 175-190, June.
    2. Olivia S. Mitchell Ping-Lung, "undated". "Public Pension Plan Efficiency," Pension Research Council Working Papers 95-11, Wharton School Pension Research Council, University of Pennsylvania.
    3. Bateman,Hazel & Kingston,Geoffrey & Piggott,John, 2001. "Forced Saving," Cambridge Books, Cambridge University Press, number 9780521484718, March.
      • Bateman,Hazel & Kingston,Geoffrey & Piggott,John, 2001. "Forced Saving," Cambridge Books, Cambridge University Press, number 9780521481625, May.
    4. Lakonishok, Joseph & Shleifer, Andrei & Vishny, Robert W., 1992. "The Structure and Performance of the Money Management Industry," Scholarly Articles 10498059, Harvard University Department of Economics.
    5. Olivia S. Mitchell, 1998. "Administrative Costs in Public and Private Retirement Systems," NBER Chapters,in: Privatizing Social Security, pages 403-456 National Bureau of Economic Research, Inc.
    6. 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 175-190, Summer.
    7. 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.
    8. Jaap Bikker & Michiel van Leuvensteijn, 2005. "An Exploration into Competition and Efficiency in the Dutch Life Insurance Industry," DNB Working Papers 047, Netherlands Central Bank, Research Department.
    9. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
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    Cited by:

    1. 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.
    2. Xiaohong Huang & Ronald Mahieu, 2012. "Performance Persistence of Dutch Pension Funds," De Economist, Springer, vol. 160(1), pages 17-34, March.
    3. Helen Higgs & Andrew C. Worthington, 2010. "Economies of Scale and Scope in Australian Superannuation Funds," Discussion Papers in Finance finance:201015, Griffith University, Department of Accounting, Finance and Economics.
    4. Huang, X. & Mahieu, R.J., 2012. "Performance persistence of Dutch pension plans," Other publications TiSEM 3dba651c-bb31-443f-963c-4, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Administrative costs; investment costs; economies of scale; pension plan design; governance; defined benefits; defined contribution; outsourcing; reinsurance.;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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