Scale Economies in Pension Fund Investments : A Dissection of Investment Costs Across Asset Classes

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 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. A pension fund that has 10 times more assets under management, has on average 7.67 basis points lower annual investment costs. These economies of scale are solely driven by management costs. Robustness checks show that this key finding does not vary over different pension fund sizes. Economies of scale do, however, 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