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6 Conclusion

KiwiSaver funds have grown rapidly since 2007 and are forecast to become a significant asset in household balance sheets. With this rapid growth, we see a need for policy makers to fully understand the dynamics of the market and asset allocation trends. This review has established such an evidence base. The Treasury together with Inland Revenue and MBIE, the partner agencies responsible for KiwiSaver, intend to use these insights to test and inform ongoing policy, for example in relation to advice on the next round of appointments of default providers.

We find that the provider market is becoming more concentrated. Overall, the scheme appears to be working in an economically efficient and competitive manner. Theory and limited evidence in New Zealand suggests that economies of scale play a role in the success of providers. Regression analysis indicates that larger funds attract greater inflow of new funds. Standard measures of competitiveness do not lead to current concerns about competition and we observe that fee levels have fallen moderately, albeit not nearly to the low levels of highly developed markets such as the U.S. New entrants can and have entered the market and those with a pre-existing profile have attracted customers with success suggesting barriers to entry are not of major concern. The scheme operates in a manner which does not currently undermine adequate retirement income outcomes with some risk that optimum outcomes will be undermined if contestability diminishes.

There will continue to be a need for policy makers to monitor the market to ensure some of the trends - such as the growing dominance of major banks - do not reduce the competition between providers. In time, we should expect to see the benefits of the very clear economies of scale in funds management accrue to KiwiSaver members in the form of lower fees and higher net returns. In addition, financial literacy/capability in terms of awareness of fee levels and the links between risk and return will be critical to enforcing market discipline on providers and for the market model to deliver better consumer outcomes. Government policy should continue to be directed at improving this.

KiwiSaver represents a change in the composition of household balance sheets regardless of whether saving is additional. Overall, the portfolio of assets in KiwiSaver is heavily weighted toward income assets (56% to 44%), in contrast with other comparable superannuation and savings vehicles in New Zealand and overseas and this has implications for future retirement incomes. This is partly a result of Government choices. The home bias of KiwiSaver is decreasing as portfolios grow and growth in overseas assets greatly exceeds growth in domestic assets. Both of these facts have implications for retirement income adequacy and reducing idiosyncratic risks. Managed fund or institutional ownership of NZX companies has moderately risen since the inception of KiwiSaver, however, the impact of KiwiSaver ownership on local public equity markets has been muted. The short lifespan of the scheme means significant change has not been observed, however, forecast growth to $70 billion by 2020 suggests that change is likely.

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