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Operating costs of pension funds: the impact of scale, governance, and plan design

Published online by Cambridge University Press:  16 November 2007

JACOB A. BIKKER  and
JAN DE DREU
JACOB A. BIKKER*
Affiliation:
De Nederlandsche Bank
JAN DE DREU*
Affiliation:
De Nederlandsche Bank
*
*De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, NL-1000 AB Amsterdam, The Netherlands (tel: +31 20 524 2352, fax: +31 20 524 1885, e-mail: [email protected]).
**ABN AMRO, Group Risk Management, Gustav Mahlerlaan 10, 1082 PP Amsterdam, The Netherlands (tel: +31 20 629 5225, e-mail: [email protected]). This paper was written while the author worked at De Nederlandsche Bank.
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Abstract

Administrative and investment costs per participant appear to vary widely across pension funds. These costs are important because they reduce the rate of return on the investments of pension funds and consequently raise the cost of retirement security. This article examines the impact of determinants of these costs, such as the size, governance, pension plan design and outsourcing decisions, using data on all Dutch pension funds across the 1992–2004 period, including more than 10,000 observations. We find that economies of scale dominate the strong dispersion in both administrative and investment costs across pension funds. Industry-wide pension funds are significantly more efficient than company funds and other funds. The operating costs of pension funds' defined contribution plans are lower than those of defined benefit plans. Higher shares of pensioners make funds more costly, whereas the reverse is true when relatively many participants are inactive.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 1 , January 2009 , pp. 63 - 89
Copyright
Copyright © 2007 Cambridge University Press

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