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The Kiwisaver Scheme Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets Andreas Heuser, Jack Kwok, Daniel Snethlage and Dillon Watts September 2015 Erratum September 2015: A previous version of this paper included incorrect information on the returns to the Government Superannuation Fund (page 62) and included an inaccurate statement about the investment horizon and mandate of that fund (page 68). These have now been corrected. Erratum June 2016: A previous version of this paper contained text in the Executive Summary (page 1) which did not accurately reflect the data presented on international fee comparisons (page 46). © Crown Copyright This work is licensed under the Creative Commons Attribution 4.0 International licence. In essence, you are free to copy, distribute and adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit https://creativecommons.org/licenses/by/4.0/ Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes any provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms. ISBN: 978-0-908337-06-4 (Online) The Treasury URL at September 2015 for this document is http://www.treasury.govt.nz/publications/research-policy/tp/kiwisaver The PURL for this document is http://purl.oclc.org/nzt/p-1791 Contents Executive Summary ................................................................................................................. 1 1 Background and Motivation ............................................................................................... 2 1.1 The KiwiSaver Scheme .............................................................................................. 2 1.2 Motivation of this Review ............................................................................................ 3 1.2.1 Providing an evidence base to test the primary objectives ............................. 3 1.2.2 Documenting the effects of KiwiSaver on capital markets .............................. 4 1.2.3 International context ....................................................................................... 5 1.3 Objectives of this Review ........................................................................................... 5 2 Policy Settings and Interventions ...................................................................................... 7 2.1 KiwiSaver policy as a whole ....................................................................................... 7 2.2 Administration of the scheme ..................................................................................... 7 3 KiwiSaver in Context of the New Zealand Economy ....................................................... 11 3.1.1 Membership size ........................................................................................... 13 3.1.2 Market size ................................................................................................... 13 3.1.3 Contribution to household net wealth ........................................................... 15 3.1.4 KiwiSaver contributions ................................................................................ 17 3.2 KiwiSaver providers .................................................................................................. 18 3.3 Significance of KiwiSaver funds in domestic capital markets ................................... 19 3.3.1 KiwiSaver capital gaining significance .......................................................... 19 3.3.2 KiwiSaver capital in New Zealand public markets ........................................ 20 3.3.3 KiwiSaver in private capital markets ............................................................. 22 4 Economic Efficiency and Competitiveness of Fund Manager Market ............................. 23 4.1 Assessing the Efficiency of the KiwiSaver Fund Manager Market ........................... 23 4.1.1 Competition theory ........................................................................................ 23 4.1.2 Economies of scale ....................................................................................... 24 4.1.3 The structure-conduct-performance framework ............................................ 25 4.2 Structure of the KiwiSaver Market ............................................................................ 25 4.2.1 Market concentration .................................................................................... 26 4.2.2 Market share of Default Funds and Providers .............................................. 31 4.2.3 Market share of major banks ........................................................................ 31 4.2.4 Market contestability (barriers to entry)......................................................... 34 4.2.5 Market consolidation ..................................................................................... 35 4.2.6 Member transfers between managers .......................................................... 37 4.3 Conduct in the KiwiSaver Fund Management Market .............................................. 39 4.3.1 KiwiSaver fees .............................................................................................. 39 4.3.2 International comparisons of fees ................................................................. 45 Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets | i 4.3.3 Regression analysis of determinants of fees ................................................ 47 4.3.4 Non-price conduct ......................................................................................... 48 4.4 Financial performance of KiwiSaver fund managers ................................................ 53 4.4.1 Profitability of the six largest providers ......................................................... 53 4.4.2 Profitability of default providers vs rest of market ......................................... 54 4.4.3 Member flow and fund flow ........................................................................... 55 4.4.4 Regression analysis of the determinants of success for KiwiSaver funds ... 55 4.5 Concluding remarks ................................................................................................. 57 5 KiwiSaver Investment Performance and Asset Allocation Review .................................. 58 5.1 Returns and performance of KiwiSaver funds .......................................................... 58 5.2 KiwiSaver asset allocation ........................................................................................ 62 5.2.1 KiwiSaver asset allocations .......................................................................... 65 5.2.2 Allocation to domestic assets ....................................................................... 68 5.2.3 Allocation to overseas assets ....................................................................... 69 5.2.4 Asset allocation by pension funds in other jurisdictions ................................ 70 5.3 Conclusion on asset allocation ................................................................................. 75 6 Conclusion ....................................................................................................................... 76 References ............................................................................................................................. 77 Appendix 1 ............................................................................................................................. 81 Appendix 2: Regression analysis of fund flow ........................................................................ 86 Methodology .................................................................................................................... 86 Data ................................................................................................................................. 87 Results ............................................................................................................................ 88 Appendix 3: Regression analysis of fees ............................................................................... 90 Methodology .................................................................................................................... 90 Results ............................................................................................................................ 91 Appendix 4: KiwiSaver provider profitability ........................................................................... 93 Methodology .................................................................................................................... 94 Results - Profitability Study of the six largest providers .................................................. 94 Results - Profitability of default providers vs rest of the market ...................................... 95 ii | Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets 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
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