Project With Jean-Fran莽ois B茅gin & Barbara Sanders
Modelling Economies of Scale in Pension Funds
Plan mergers have significantly reshaped the pension landscape in several European countries over the past decade and are now emerging as a possible trend in Canada as well. One obvious result of a pension plan merger is a larger fund size, which may lead to economies of scale in pension administration and investment. Empirical studies show that small-sized funds tend to have larger costs and vice-versa (Bikker and de Dreu, 2009) and that larger funds have more negotiation power in investment and can spread their fixed costs across a larger number of members (Bikker et al., 2012). On the other hand, larger plans may be prone to higher costs. For example, the fund may be too large in relation to the number of high-quality investment opportunities available, which negatively impacts returns. Nonetheless, most studies conclude that the advantages of larger size outweigh the disadvantages (Bikker and de Dreu, 2009; Dyck and Pomorski, 2011).
Following these stylized facts, this USRA project (May 2019 to August 2019) aims to put forward a model for administrative and investments costs in pension plans. Specifically, the student will be responsible for:
- Familiarizing themselves with the current literature on economies of scale.
- Developing a mathematical model.
- Writing code to implement the model.
- Documenting all work.
This summer project is part of a larger research program on pension mergers. The model developed by the student will be an integral piece of a framework used to quantify the welfare impact of bringing together different pension plans.