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INTRODUCTION
Australia's superannuation system (comprising a compulsory employer-funded superannuation (retirement income) system supplemented by a narrowly focused (age, means and income tested) public pension) continues to grow apace with superannuation savings forecast to increase from US$1.1 trillion (90 per cent of GDP) today to $6.1 trillion (130 per cent of GDP) by 2035. The profile and structure of the superannuation industry has also changed rapidly, with consolidation projected to cause the number of large funds to fall from 447 today (4734 in 1996) to 74 in 2035, with the largest fund to increase from $41.5 billion today to $350 billion in 2035. 1 However, accompanying these dramatic changes has been disquiet about several limitations of the present system in terms of efficiency (that it operates in the most cost-effective manner and in the best interests of members) and operations (that returns to members are maximised, including through minimising costs).
Reporting in June 2010, the Review of the Governance, Efficiency, Structure and Operation of Australia's Superannuation System (Cooper Review) made a large number of recommendations. These include the substantial benefits for members of increased scale in the superannuation industry and the desirability of the Australian Prudential Regulation Authority (APRA) in overseeing and promoting the efficiency of the superannuation system. They also include the proposed role of SuperStream (a package of measures aimed at reforming back-office operations in terms of the increased use of technology, uniform data standards, tax file identification and straight-through processing of transactions) and MySuper (a simple product designed for the majority of members) in lowering overall costs.
Clearly, a major focus in these and future developments has been and will be the level of investment and operating (administration) costs, particularly their interaction with the scale (the size of production) and scope (the diversity of production) of superannuation funds. Unfortunately, and outside the Cooper Review's partial evidence, there is relatively little work on the role of economies of scale and scope in improving the level of cost efficiency in superannuation funds. In fact, just three studies broadly relate to the objective of this article to estimate economies of scale and scope in Australian superannuation funds.
First, Ang and Wuh Lin2 employ cost functions to estimate economies of scale and scope, but for...