Since 2007, the number of Dutch pension funds has declined by about a third as more and more predominantly small, corporate pension funds disappear. The total is predicted to drop to 100 by 2014.

Dubbed the consolidation trend, the decline has, for the past decade, been taken somewhat for granted. The trend has been encouraged by respected pension thinkers and also by the pension supervisor.

But as the pace of the decline has picked up, second thoughts have set in. Large, professionally managed financial institutions, in general, haven't fared particularly well in the credit crisis. More to the point, the larger pension funds have not necessarily delivered the best value in terms of pension result per euro contributed. On top of that, there is the suspicion that some players, including the supervisor, might have their own interests at heart. Conspiracy theories run rampant.

Summing up the rumours, pension experts Cees Blokzijl and Dick Slob mention that it is easier to supervise a handy hot 100 than a motley crew of 500 pension funds, and that supervisory agents supposedly get paid more as the pension funds they supervise are larger, which might be an incentive to encourage a trend towards fewer - but larger - pension funds. On the other hand, they note that some trustees are unwilling to vacate their board seats.

So what is the optimum size for a pension fund? Would plan participants and pensioners really be better off with a pensions system consisting of just a hundred or so large schemes?

IPE's Dutch sister publication IPNederland analysed the investment returns, funding ratios and management costs of nearly 200 Dutch pension funds over a three-year period to try and determine whether bigger is really better.

Surprisingly, our research shows that the largest funds - over €20bn - underperform smaller peers both in terms of average coverage ratio and average return. The smallest pension funds (assets less than €150m) generally outperform (much) larger funds on various criteria. According to our research, the optimum size lies in a range of €5bn-10bn. Although this category achieved the highest scores, in the overall ranking the category of smallest funds achieved an honourable second place - a finding that should give policymakers pause in the race to achieve economies of scale.

This story first appeared in the March issue of IPE magazine.