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Executive Summary

Kiwisaver has grown at a rapid rate since its introduction and makes up a growing share of household financial assets. This review sets out to make observations about the competitiveness and efficiency of the market for fund managers in addition to documenting the asset allocation and performance of the scheme as a whole. This report will form an analytical basis for future policy advice on KiwiSaver settings and the fund manager market.

KiwiSaver's investment performance is important as it represents a growing share of households' wealth and retirement income outcomes depend on an efficient fund management system. Regardless of whether or not KiwiSaver has increased aggregate savings, it has resulted in a change in household balance sheet composition with an allocation to portfolio investments which will only grow over time. This will have implications for capital formation in the economy. We forecast that the assets under management (AUM) will grow rapidly to around $70 billion by 2020.

We address the productive efficiency of the fund manager market through a number of different approaches. Overall, the market appears to be competitive, however, with a growing level of concentration. Concentration per se is not concerning as economies of scale exist in funds management which should, in theory, lead to cost reductions and efficiency gains. Financial capability of KiwiSaver members will be critical to ensuring the benefits of such economies of scale are captured by consumers. Certain trends, such as a growing significance of large banks, could detract from this and should be monitored to ensure that contestability in the market exists. Fee levels appear to be in the upper half of comparator countries and well above the extremely low fees available in some markets.

In aggregate, the returns to members have not outperformed benchmarks chosen by us and are mixed compared to the investment performance of the Crown financial institutions. The portfolio of assets in KiwiSaver is heavily weighted toward income assets relative to growth assets (56% income to 44% growth), in contrast with other comparable superannuation and savings vehicles in New Zealand and overseas which could lead to less than optimal future retirement incomes. Home bias of KiwiSaver assets is decreasing with disproportionate growth in allocations to overseas assets which has benefits for risk management reasons.

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