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

Pension funds’ operating costs impair pension 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 pension fund size classes. This article presents new estimates of scale economies of pension funds and is the first that also measures pension fund X-inefficiency. We use a unique supervisory data set which distinguishes between administrative and investment costs and apply various approaches and models. 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

Measuring latent risk preferences: Minimizing measurement biases

The results of eliciting risk preferences are highly dependent on the elicitation method used. This raises the question of how risk preferences can be reliably elicited. Using item response theory (IRT), the results of four elicitation methods describing common latent variables identified as risk preferences are combined into a composite score. The responses of 9235 individuals to a dedicated survey indicate that the composite score is a more accurate estimation of latent risk preferences than the results of individual methods, substantially reducing measurement noise and method-specific biases. IRT improves accuracy by allowing variable weighting to be dependent on the most relevant range of each method in estimating latent risk preferences. Therefore, the composite score contains more information about latent risk preferences than the results of either factor-weighted or unweighted methods. Manipulating the specific amounts, order and starting point of the multiple price list method shows that the accuracy of this method is not impervious to framing effects. Combining simpler methods with more advanced methods, which are all framed closely to the relevant situation, yields a more accurate and more robust estimation of latent risk preferences

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 benefit

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 benefit