Choices in Pension Management

The organization of pensions differs greatly across, and within, countries, and these differences affect the large number of stakeholders differently. The choices that underlie these differences tend to be very complicated, as they have to be balanced over the interests of different stakeholders over time. The first two studies of this doctoral thesis analyse heterogeneity in pension plan risk preferences. Using an augmented risk preferences elicitation method, we find strong heterogeneity in latent risk preferences. Together with institutional differences these affect the optimal asset allocation. Therefore, it is worthwhile to elicit risk preferences. The third study focuses on pension fund administration and investment costs. We show that there are large economies of scale for pension fund administrations, and modest diseconomies of scale for investment activities. Many pension funds have substantial X-inefficiencies for both administrative and investment activities. The study suggests that consolidation of pension funds may be efficiency enhancing. The fourth study investigates pension fund discontinuity events. The occurrence and impact of these events is strongly dependent on the institutional setting of pensions. Stricter regulations increase the financial stability of the pension fund, but may reduce membership support through lower replacement rates. This trade-off influences the management of pension funds. Taken together, this dissertation scrutinizes the complexity of choices in pension organization. Choices in pensions depend on the particular institutional setting of pensions and on specific pension plan member characteristics. These choices affect a great many stakeholders of pensions through different channels, both directly and indirectly

X-efficiency and economies of scale in pension fund administration and investment

Pension funds’ operating costs come at the cost of benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within size classes. This paper discusses scale inefficiency and X-inefficiency using various approaches and models, based on a unique supervisory data set, which distinguishes between administrative and investment costs. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits

The Occurrence and Impact of Pension Fund Discontinuity

Collective pension arrangements tend to yield higher risk-adjusted pension benefits than individual plans due to intergenerational risk sharing and the lack of annuity conversion risk. These benefits pose the implicit assumption that the pension fund has an infinite horizon, while we observe that many pension funds discontinue. Using case studies of six discontinued pension funds, in combination with a simulation model, this paper analyses the occurrence and impact of pension fund discontinuity. Although discontinuity tends to increase the volatility of pension benefits, median benefits in most institutional settings increase after discontinuing the fund. We find that both the occurrence and impact of discontinuity depends strongly on the institutional setting of the pension fund. Stricter regulations, such as more conservative discount rates, increase the financial stability of the pension fund; however, they may reduce membership support through lower replacement rates. This poses a trade-off in the design of the pension system

Individual pension risk preference elicitation and collective asset allocation with heterogeneity

Collectively organized pension plans must increasingly demonstrate that the risk preferences of their members are adequately reflected in the plans’ asset allocations. However, whether funds should elicit individual members’ risk preferences to achieve this goal, or whether they can rely on other indicators, such as socio-demographics, remains unclear. To address this question, we apply a tailored augmented lottery choice method to elicit individual pension income risk preferences from 7,894 members from five different pension plans. The results show that member risk preferences are strongly heterogeneous and can only partially be predicted from individual and plan characteristics. Differences in risk preference imply different optimal asset allocations. We find large welfare losses for heterogeneous members in pension plans with their current asset allocation because these allocations are safer than implied by members’ preferences. We provide a framework for pension plans to gauge the need to elicit risk preferences among their members

X-efficiency and Economies of Scale in Pension Fund Administration and Investment

Pension funds’ operating costs come at the cost of benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within size classes. This paper discusses scale inefficiency and X-inefficiency using various approaches and models, based on a unique supervisory data set, which distinguishes between administrative and investment costs. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits