Small Dutch funds could benefit substantially from economies of scale
Written by Ilonka Oudenampsen
Small Dutch pension funds still have plenty of room to achieve substantial economies of scale, according to De Nederlandsche Bank (DNB).
New research by the regulator shows that the administration costs per member of the smallest pension funds are more than ten times higher than those of the biggest funds.
For the smallest funds, the administration costs amount to an average of €575 per member per year, compared to only €50 for the biggest pension funds.
However, there are also cost differences between pension funds of roughly the same size. DNB noted one of the reasons for this is that pension arrangements vary in complexity and service level, and with that also in administration costs. Another reason is that different pension funds and their administrators have varying levels of efficiency.
The regulator estimates that for a pension fund with around 2,500 members the unused economies of scale are 13 per cent. This means that for these funds growth of 1 per cent would create a cost increase of only 0.87 per cent.
“The economies of scale are much larger for the really small pension funds of 250 members or less. For bigger pension funds the economies of scale are reduced further and for the biggest funds there are still economies of scale but these become increasingly smaller and less certain,” DNB said.
“In general, compulsory industry pension funds are more efficient than company pension funds: on average their costs are 38 per cent lower. A possible explanation for this is that industry pension funds often have a more standardised pension arrangement. Occupational pension funds are less efficient and their costs are 53 per cent higher than those of company pension funds. Funds with defined contribution arrangements pay 12 per cent less than defined benefit funds.”