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Economies of Scale and Pension Fund Plans: Evidence from South Africa

By Albert Touna Mama, Neryvia Pillay and Johannes W. Fedderke

Abstract

The focus of this paper is on the presence of economies of scale in administering pension funds. We make use of a unique dataset with extensive information on South African retirement funds from 1996 to 2006. For almost fifty years now, South Africa has operated under a system with small social security beneÂ…ts but with considerable options and freedom to long-term savers. The dataset contains aggregate information for various fund types, fund classes, as well as different benefit structures. Estimates of a translog cost function provide evidence of unused economies of scale in the industry. We also find that established funds have a substantial cost-advantage over young funds.Economies of scale; DeÂ…ned contribution; Pay as you go; Learning-by-doing; Annuitization

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