Scale Economies, Bargaining Power, and Investment Performance: Evidence from Pension Plans

104 Pages Posted: 30 Nov 2023

See all articles by Tjeerd de Vries

Tjeerd de Vries

University of California, San Diego (UCSD) - Department of Economics

S. Yanki Kalfa

University of California, San Diego (UCSD) - Rady School of Management

Allan Timmermann

University of California, San Diego (UCSD) - Rady School of Management

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: November 15, 2023

Abstract

We explore the relation between the size of a defined benefit pension plan and its choice of active vs. passive management, internal vs. external management, and public vs. private markets. We find positive scale economies in pension plan investments; large plans have stronger bargaining power over their external managers in negotiating fees as well as having access to higher (pre-fee)-performing funds, relative to small plans. Using matching estimators, we find that internal management is associated with significantly lower costs than external management, reinforcing the enhanced bargaining power of large pension plans that have fixed-cost advantages in setting up internal management.

Keywords: Pension plans, active versus passive management, internal versus external asset management, power law, economies of scale, asset allocation, private versus public asset classes, investment performance

Suggested Citation

de Vries, Tjeerd and Kalfa, Sarp Yanki and Timmermann, Allan and Wermers, Russell R., Scale Economies, Bargaining Power, and Investment Performance: Evidence from Pension Plans (November 15, 2023). Available at SSRN: https://ssrn.com/abstract=4633444 or http://dx.doi.org/10.2139/ssrn.4633444

Tjeerd De Vries

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

Sarp Yanki Kalfa (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://yankikalfa.com

Allan Timmermann

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://terpconnect.umd.edu/~wermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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