Economies of Scale and Mergers: A Study of Icelandic Pension Funds

Ásdís Karen Friðbjörnsdóttir

Student thesis: Master thesis


The objective of this thesis is to explore economies of scale, mergers and the number of pension funds in the Icelandic system. The analysis was conducted using data based on quantitative and qualitative approaches. The total number of pension funds analyzed was 25, seven through the process of interviewing representatives and a comparison of various pension funds. This study examines the impact of scale on costs and real return, the merger motives and advantages and the opportunity to reduce the number of funds. The analysis will be followed by a comparison between pension funds in Denmark, Norway and Finland. The findings show that economies of scale are achieved by the giants, which are the largest funds, in both cost and real return. Yet, the small funds seem to outperform large and medium sized funds in regard to real returns, which suggests that the small funds use advantages of their external management through larger financial institutions or larger funds. Most of the merger motives were to seek economies of scale and it seems as if the large amalgamated funds would be better able to cope with the changes that could possibly occur in the pension system or in the financial markets. The results also suggest that some funds that merge with another fund and are very cost efficient before the mergers are not only seeking cost benefits but seek other advantages of scale, which are defined in this study. Consolidation among smaller and medium-sized pension funds do increase cost efficiency and a larger size helps the merged fund to meet funding requirements and as well operations requirements. There is no doubt that the Icelandic pension system can be more efficient than it is today. There are many opportunities for further consolidation and it is safe to assume that in order to provide the promised pension benefits and be an efficient unit there is a need, especially, for the small and medium sized funds to merge in the nearest future.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2017
Number of pages106