Is there an optimal pension fund size?

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  • Author: Statistics Views
  • Date: 05 July 2016

Each week, we select a recently published article and provide free access. This week's is from The Journal of Risk and Insurance and is now available from Early View, where individual articles are published prior to issue allocation.

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Is there an optimal pension fund size? A scale-economy analysis of administrative costs

Jacob A. Bikker

The Journal of Risk and Insurance, Early View

DOI: 10.1111/jori.12103

thumbnail image: Is there an optimal pension fund size?

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.

The author observes 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.

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