The impact of scale, complexity and service quality on the administrative costs of pension funds: A cross-country comparison

Administrative costs deserve greater research scrutiny, since they account for a very large portion of operational costs (Mitchell, 1998). However, difficulties in specifying the correct pension fund production function and the limited availability of data have hindered detailed empirical work on this topic. Moreover, so far all empirical studies on economies of scale in pension fund administration did not have quantitative data on service quality and the complexity of pension plans which could be included in the cost function. Koeleman and De Swart (2007) argue that smaller funds offer a more expensive albeit more personalized service. Besides, customers benefit when they can choose among more flexible, customized and varied services, even though these require a more sophisticated and costly administration. According to Koeleman and De Swart (2007), differences in administrative costs are due not only to scale economies, but also to higher service quality and the more complex underlying business model of smaller funds. Where Koeleman and De Swart had no data to support their view, our dataset enables us to test this hypothesis.

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