Have scale effects on cost margins of pension fund investment portfolios disappeared?

Investment costs of pension funds are crucial for their returns. Consolidation in the pension fund market proceeds continuously, often with cost savings as the main argument. Unused economies of scale in the pension fund investment costs, however, have declined over the years to values close to zero, except for the very small pension funds. This paper investigates investment economies of scale in the Netherlands and pays special attention to the non-linear relationship between investment costs and sizes of pension funds. Furthermore, investment cost margins are disaggregated into three cost types and into six asset categories. Performance fees are in particular paid for complex asset categories held by large pension funds. They reduce the traditional scale economy results for the entire portfolio. Cost savings by consolidation are still possible but are very limited.

Keywords: Scale economies; cost elasticity; pension funds; investment costs; efficiency; non-linear cost-size relationship
JEL codes G23; L0

Working paper no. 710