Economies of Scale and Scope in Australian Superannuation Funds

Abstract

This paper estimates economies of scale and scope for 200 large Australian superannuation (pension) funds in 2009 using a multiple-output cost function. This is the first and currently only year that certain fund-level information provided in the superannuation annual returns to the Australian Prudential Regulation Authority (APRA) has been deemed non-confidential and made publicly available. Costs are separately defined in terms of investment expenses— including investment, custodian and asset management fees—and operating expenses—comprising management, administration, actuarial, director and trustee fees and charges. Four outputs are specified for each cost: namely, cash flow adjusted net assets, the number of investment options, the proportion of total assets in the default strategy and the five-year rate of return for investment costs, and cash flow adjusted net assets, the number of members, net contribution flows and net rollovers for operating costs. The findings indicate that ray economies of scale hold up to at least 300 percent of current mean output in both investment and operating costs, though product-specific economies of scale hold primarily for assets under management and the number of investment options at relatively high levels of output for investment costs and for rollovers at low levels of output for operating costs. In contrast, there is little evidence that global and product-specific economies of scope prevail in the sector, and this is reflected in the proclivity of many superannuation funds to contract out many aspects of their investments and operations. JEL codes: C21 ⋅ D24 ⋅ G23