Costs and Benefits of Collective Pension Systems

pp 51-74

Operating costs of pension schemes

  • J. A. BikkerAffiliated withSupervisory Policy Division of DNB, Dutch Central Bank
  • , J. de DreuAffiliated withSupervisory Policy Division of DNB, Dutch Central Bank

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This chapter examines what type of pension scheme has the lowest operating costs. We first analyse the operating costs of Dutch pension funds, broken down by administrative and investment costs. Various cost-influencing factors are identified, including scale, pension fund type, plan type, outsourcing and reinsurance. Economies of scale are shown to be dominant in explaining differences in costs across pension schemes, leading to the conclusion that the consolidation of small pension funds could improve cost efficiency. In addition, the costs per participant of mandatory industry-wide pension funds turn out to be significantly lower than those of company pension funds. Next, the costs of pension schemes offered by pension funds and life insurers in the Netherlands are compared in an effort to distinguish between collective and private schemes. We find that the operating costs per participant of collective pension funds are many times lower than those of private schemes.