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X-efficiency and economies of scale in pension fund administration and investment

Author

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  • Gosse Alserda
  • Jaap Bikker
  • Fieke van der Lecq

Abstract

Pension funds' operating costs come at the cost of benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within size classes. This paper discusses scale inefficiency and X-inefficiency using various approaches and models, based on a unique supervisory data set, which distinguishes between administrative and investment costs. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits.

Suggested Citation

  • Gosse Alserda & Jaap Bikker & Fieke van der Lecq, 2017. "X-efficiency and economies of scale in pension fund administration and investment," DNB Working Papers 547, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:547
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    Cited by:

    1. Alserda, G.A.G. & Steenbeek, O.W. & van der Lecq, S.G., 2017. "The Occurrence and Impact of Pension Fund Discontinuity," ERIM Report Series Research in Management ERS-2017-008-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

    More about this item

    Keywords

    Efficiency; operating costs; cost elasticity; stochastic cost frontier analysis; optimal scale;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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