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I s T HERE AN O PTIMAL P ENSION F UND S IZE ? A S CALE ‐E CONOMY A NALYSIS OF A DMINISTRATIVE C OSTS
Author(s) -
Bikker Jacob A.
Publication year - 2017
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12103
Subject(s) - economies of scale , pension , monotonic function , function (biology) , economics , microeconomics , finance , mathematics , microbiology and biotechnology , biology , mathematical analysis
A BSTRACT 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.