This updated version of the paper by the Rotman School, shows substantial positive scale economies in pension funds, with the largest plans outperforming smaller ones by 43-50 basis points per year. Between a third and one half of these gains arise from cost savings related to internal management, where costs are at least three times lower than under external management.
It also finds that most of the superior returns come from large plans’ increased allocation to alternative investments and realizing greater returns in this asset class.
And the ability to take advantages of scale depends on plan governance with better governed plans having higher scale economies.
Assistant professor of the Rotman School and co-author of the study, Lukasz Pomorski, says the annual difference in returns sounds small but is huge economically.
The difference can amount to a 13 per cent larger pension at retirement for exmployees invested in the plan for their full working lives, he says.
The findings suggest it may be beneficial to encourage the ability of larger funds to manage the assets of smaller pension plans that do not enjoy the same leverage.
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