X-Efficiency and Economies of Scale in Pension Fund Administration and Investment

49 Pages Posted: 20 Mar 2017

See all articles by Gosse Alserda

Gosse Alserda

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Fieke van der Lecq

Vrije Universiteit Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2017

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.

Keywords: Efficiency, operating costs, cost elasticity, stochastic cost frontier analysis, optimal scale

JEL Classification: G23, L1

Suggested Citation

Alserda, Gosse and Bikker, Jacob Antoon and van der Lecq, Fieke, X-Efficiency and Economies of Scale in Pension Fund Administration and Investment (February 23, 2017). De Nederlandsche Bank Working Paper No. 547. Available at SSRN: https://ssrn.com/abstract=2937708 or http://dx.doi.org/10.2139/ssrn.2937708

Gosse Alserda

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Jacob Antoon Bikker (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Fieke Van der Lecq

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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