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4.5 Concluding remarks

This section has examined the productive efficiency of the KiwiSaver market through a number of different approaches. Overall, we find that the KiwiSaver fund manager market appears to be operating in an efficient manner with no clear evidence of any lack of competition or contestability. Fee levels for KiwiSaver, measured with reference to the OECD’s operating expense ratio data, are in the upper third of comparator countries. KiwiSaver fees are generally lower than Australian superannuation fees; however those fees are notoriously high. Barriers to entry are not significant enough to prevent contestability. Government interventions in the default provider market have not limited competition in a noticeable manner and have lowered fees. However, it appears that consumer demand is not motivated by fee levels of funds; rather, demand appears to follow returns and larger fund size. This may change as levels of financial literacy and information rise – eg, as the FundFinder comparison tool becomes more popular. Qualitative observations on the product innovations and marketing efforts of managers, in particular the large banks, reveal that competition between firms for market share is varied, innovative and robust. There is some risk that the large banks which have grown to dominate KiwiSaver could reduce contestability since major banks in New Zealand already operate in a highly concentrated retail banking market. However, at present, bank ownership of funds is associated with lower fees. We found some evidence of high, but not excessive profits on the basis of limited, static analysis. Improved visibility of KiwiSaver provider accounts in group financial statements would make profitability analyses much easier.

The importance of economies of scale to the funds management industry and how this will affect KiwiSaver cannot be understated. As KiwiSaver funds grow in assets, we expect that fund managers will experience proportional cost savings. These savings from economies of scale should be passed on to consumers as lower fees, providing that similar levels of contestability exist as is the case at present. Over time, policy makers will have to closely monitor the passing on of the benefits of economies of scale and ensure levels of contestability remain as the KiwiSaver market is trending toward greater concentration.

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