Top Research Award to Russ Wermers’ Paper Exploring the Role of Economies-of-Scale in Pension Management

A paper coauthored by Smith’s Russell Wermers is selected for the top prize in the International Centre for Pension Management (ICPM) 2023 Research Awards.

The paper, “Scale Economies, Bargaining Power, and Investment Performance: Evidence from Pension Plans,” reveals a strong role for economic scale in pension plan investments: large plans have stronger bargaining power over their external managers in negotiating fees as well as access to better-performing funds, relative to small plans, according to the authors.

The work topped 100-plus entries for the award in terms of ICPM’s criteria for “innovation, practical applicability and research excellence…with implications for fund management, engagement of plan participants, pension design, governance, long-term investing, risk management, ESG issues, and other investment-related topics.”

Wermers is the Paul J. Cinquegrana ’63 Endowed Chair in Finance and Director of the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business. His co-authors are Tjeerd de Vries, S. Yanki Kalfa and Allan Timmermann from the University of California, San Diego.

They used a proprietary database to explore the relationship between the structure and size of defined benefit pension plans and their choice of active vs. passive management, internal vs. external management and allocation to public vs. private markets. They found” “a strong role for economic scale in pension plan investments: large plans have stronger bargaining power over their external managers in negotiating fees as well as access to better-performing funds, relative to small plans. Large plans, hence, pay significantly lower fees.

Wermers and his co-authors will present their work on Jan. 30, 2024, as a part of an ICPM webinar series.