Media Releases

Bigger is better in pension funds, Rotman researchers find

September 12, 2011

TORONTO, ON — The health of the pen­sion sys­tem is front page news in coun­tries around the world with an ongo­ing debate on required con­tri­bu­tion rates or min­i­mum retire­ment ages.  An equal­ly rel­e­vant issue is how effi­cient­ly sav­ings invest­ed in pen­sion funds are man­aged.  A paper writ­ten by two pro­fes­sors at the Uni­ver­si­ty of Toron­to’s Rot­man School of Man­age­ment points to economies of scale in pen­sion funds as a pow­er­ful tool to increase the wealth accu­mu­lat­ed for retire­ment.

The largest pen­sion funds -– those that aver­age $37 bil­lion in assets — out­per­formed small­er plans –- an aver­age of $1 bil­lion in assets — by 45 to 50 basis points, or 0.4 per­cent each year, the study found.

The annu­al dif­fer­ence “sounds small, but it is huge eco­nom­i­cal­ly,” points out Lukasz Pomors­ki, an assis­tant pro­fes­sor of finance at the Rot­man School, who co-authored the paper with col­league Alexan­der Dyck, who is the Rot­man ICPM Pro­fes­sor in Pen­sion Man­age­ment.

The dif­fer­ence can amount to a 13 per­cent big­ger pen­sion at retire­ment for employ­ees invest­ed in the plan for their full work­ing lives. For gov­ern­ment-run pen­sion plans it can mean tax­pay­ers are less like­ly to have to make up for an unfund­ed lia­bil­i­ty.

“Large mutu­al funds typ­i­cal­ly under­per­form their small­er equiv­a­lents,” says Prof. Pomors­ki, adding one rea­son is that mutu­al funds do not have the same incen­tive to cut costs as they grow. “So we are quite sur­prised and hap­py to find this is not true for pen­sion plans.”

One thing that makes larg­er funds dif­fer­ent is their increased use of inter­nal (in-house) man­age­ment. The relat­ed costs sav­ings account for up to half of the improved per­for­mance, the study found. The oth­er half comes from larg­er pen­sion funds’ flex­i­bil­i­ty to invest more in alter­na­tives such as pri­vate equi­ty and real estate, both of which afford large plans low­er costs and high­er gross returns.

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. The results of the study also sug­gest poten­tial weak­ness­es in defined con­tri­bu­tion sav­ing schemes, for exam­ple, RRSPs.  “I would be much hap­pi­er to be able to invest in a port­fo­lio sim­i­lar to the Cana­da Pen­sion Plan Invest­ment Board than in a mutu­al fund, if only because of the sub­stan­tial­ly low­er costs,” says Prof. Pomors­ki.

The com­plete study is avail­able at:

The Rot­man School of Man­age­ment at the Uni­ver­si­ty of Toron­to is redesign­ing busi­ness edu­ca­tion for the 21st cen­tu­ry with a cur­ricu­lum based on Inte­gra­tive Think­ing. Locat­ed in the world’s most diverse city, the Rot­man School fos­ters a new way to think that enables the design of cre­ative busi­ness solu­tions. The School is cur­rent­ly rais­ing $200 mil­lion to ensure Cana­da has the world-class busi­ness school it deserves. For more infor­ma­tion, vis­it


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Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
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