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Economies of scale: the case of KiwiSaver fees

Economies of scale: the case of KiwiSaver fees International evidence of economies of scale in mutual funds is mixed. KiwiSaver offers an interesting opportunity to examine economies of scale given its growth from a new scheme with few members and low balances, where fund costs should be high, to a much larger scheme that should be cheaper to run. As a defined contribution superannuation scheme, fees play an important role in determining the eventual retirement savings members achieve. This paper aims to examine whether the anticipated economies of scale are passed onto members.Design/methodology/approachThe authors use a sample of 267 KiwiSaver funds over 2013-2018 and relate fund fees to assets under management (AUM) and the number of participants using regression analysis and a translog cost function.FindingsThe authors find evidence to suggest funds are passing on cost savings. Specifically, the authors observe that fees increase slower as the number of members grows, suggesting economies of scale are driven by the number of members, but not the size of the assets being managed. All else held constant, a 1 per cent increase in fund participants increases fees by 0.93 per cent on average. In contrast, a 1 per cent increase in AUM results in effectively 1 per cent increase in fees, all else held constant.Originality/valueWhile KiwiSaver has been an undeniable boost to the local funds management industry, regulators are increasingly under pressure to ensure fees are appropriate. In 11 years, New Zealand-based KiwiSaver has grown to over $50b in AUM, with over $400m in total fees per year. This paper provides evidence that economies of scale are partially present in the KiwiSaver sector, although not where it arguably counts: in the size of the AUM. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Economies of scale: the case of KiwiSaver fees

Gilbert, Aaron; Scott, Ayesha; Xu, Shuohan
Pacific Accounting Review , Volume 31 (4): 16 – Nov 4, 2019
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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0114-0582
eISSN
0114-0582
DOI
10.1108/par-04-2019-0040
Publisher site
See Article on Publisher Site

Abstract

International evidence of economies of scale in mutual funds is mixed. KiwiSaver offers an interesting opportunity to examine economies of scale given its growth from a new scheme with few members and low balances, where fund costs should be high, to a much larger scheme that should be cheaper to run. As a defined contribution superannuation scheme, fees play an important role in determining the eventual retirement savings members achieve. This paper aims to examine whether the anticipated economies of scale are passed onto members.Design/methodology/approachThe authors use a sample of 267 KiwiSaver funds over 2013-2018 and relate fund fees to assets under management (AUM) and the number of participants using regression analysis and a translog cost function.FindingsThe authors find evidence to suggest funds are passing on cost savings. Specifically, the authors observe that fees increase slower as the number of members grows, suggesting economies of scale are driven by the number of members, but not the size of the assets being managed. All else held constant, a 1 per cent increase in fund participants increases fees by 0.93 per cent on average. In contrast, a 1 per cent increase in AUM results in effectively 1 per cent increase in fees, all else held constant.Originality/valueWhile KiwiSaver has been an undeniable boost to the local funds management industry, regulators are increasingly under pressure to ensure fees are appropriate. In 11 years, New Zealand-based KiwiSaver has grown to over $50b in AUM, with over $400m in total fees per year. This paper provides evidence that economies of scale are partially present in the KiwiSaver sector, although not where it arguably counts: in the size of the AUM.

Journal

Pacific Accounting Review – Emerald Publishing

Published: Nov 4, 2019

Keywords: KiwiSaver; Economies of scale; Retirement savings; C23; G23; H55

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