Is THEREAN OPTIMAL PENSION FUND SIZE? A SCALE‐ECONOMY ANALYSISOF ADMINISTRATIVE COSTS

Abstract

This article 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: U‐shaped versus monotonically declining. Using unique data for Dutch pension funds over 1992–2009, we find that unused scale economies for both administrative activities are indeed large and concave, that is, huge for small pension funds and decreasing with pension fund size. We observe a clear optimal scale of around 40,000 participants during 1992–2000 (pointing to a U‐shaped average cost function), which increases in subsequent years to size above the largest pension fund, pointing to monotonically decreasing average costs. These model‐based outcomes are roughly in line with the results of a survivorship analysis.

Economias de escala nas entidades fechadas de previdência complementar brasileiras: existe um tamanho ótimo?

“…Os dois principais serviços ofertados pelas EFPC são a gestão previdenciária e a gestão dos ativos (investimentos). De forma geral, os estudos econométricos realizados utilizam duas proxies para representar esses serviços em seus modelos, isto é, a quantidade de participantes e o volume total de ativos financeiros de uma EFPC, respectivamente (Bikker, 2017).…”

Does ownership moderate the effects of size on pension funds’ efficiency and investment performance?

“…Total assets determine pension funds' size (Bikker, 2015). Pension funds with higher total assets tend to commit large-scale investments that will affect investment costs (costs incurred during investment activities).…”

“…Meanwhile, small pension funds invest externally through external investment intermediaries that increase investment costs and reduce investment returns. Besides investment costs, large pension funds' investment portfolios are dominated by risky assets that incur higher risk management costs (Bikker, 2015).…”

Sponsor Bias in Pension Fund Administrative Expenses: The Brazilian Experience

“…If there are economies of scale, merging pension funds may be beneficial to participants. Consequently it is interesting to find out if there is an optimal pension fund size, as in Bikker (2017). The other goal related to pension fund administrative expenses is concerned with the factors that drive them, as in Bikker, Steenbeek and Torracchi (2012), that investigate the effect of plan characteristics.…”

“…There is freedom to move individual accounts from one institution to another (portability). Thus, administrative expenses are less relevant, because participants do not necessarily benefit from low expenses and they can more easily avoid high expenses (Bikker, Steenbeek, & Torracchi, 2012;Bikker, 2017).…”