Scale economies in pension fund investments: A dissection of investment costs across asset classes

• This paper documents significant evidence of economies of scale in Dutch pension funds’ investment costs.
• A pension fund that is ten times larger in terms of assets under management has, on average, 7.67 basis points lower annual investment costs.
• The observed economies of scale in investment cost appear to be constant over size. We find no evidence for diminishing economies of scale for very large pension funds.
• Size is an important driver for economies of scale in fixed income, equity and commodities investments but not for real estate investments.
• The paper finds diseconomies of scale in performance fees for equities, private equity and hedge funds.
• High duration assets lower investment cost. Pension funds do not pay a premium for hedging liabilities with long term bonds and derivatives.

Using a unique dataset of 225 Dutch occupational pension funds with a total of 928 billion euro of assets under management, we provide a comprehensive cross-sectional analysis of the relation between investment costs and pension fund size. Our dataset is free from self-reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees. We find that a pension fund that has 10 times more assets under management on average reports 7.67 basis points lower annual investment costs. Economies of scale differ per asset class. We find significant economies of scale in fixed income, equity and commodity portfolios, but not in real estate investments, private equity and hedge funds. We also find that large pension funds pay significantly higher performance fees for equity, private equity and hedge fund investments.