Part­ners be­lieve $740b pen­sion in­dus­try has huge po­ten­tial

China Daily (Hong Kong) - - BUSINESS | MARKETS - By CAI XIAO and ZHUANG QIANGE

Global fi­nan­cial in­vest­ment man­age­ment com­pany Prin­ci­pal Fi­nan­cial Group Inc has part­nered with China Con­struc­tion Bank to seek op­por­tu­ni­ties in the coun­try’s huge but de­vel­op­ing pen­sions mar­ket, which is cur­rently worth more than $700 bil­lion.

Daniel Hous­ton, chair­man and CEO of Prin­ci­pal Fi­nan­cial Group, said his com­pany had signed a strate­gic co­op­er­a­tion agree­ment with CCB for a po­ten­tial pen­sion part­ner­ship in China and the two sides would as­sess what role the Iowa-based com­pany would play.

“We have great con­fi­dence in the na­tion’s huge pen­sion mar­ket, and we re­main op­ti­mistic that we can evolve the mem­o­ran­dum of un­der­stand­ing into a more mean­ing­ful long-term re­la­tion­ship,” said Hous­ton, adding that they are con­sid­er­ing a sec­ond joint ven­ture with CCB Pen­sion Man­age­ment Co Ltd.

CCB and the Na­tional Coun­cil for So­cial Se­cu­rity Fund set up the na­tion’s first pro­fes­sional pen­sion man­age­ment com­pany — CCB Pen­sion Man­age­ment Co Ltd — in 2015, in which CCB holds 85 per­cent of the stock, with SSF hold­ing the bal­ance.

De­spite ma­jor growth since then, in­dus­try play­ers be­lieve China’s pen­sion po­ten­tial re­mains enor­mous.

A re­port by the China Ag­ing Fi­nance Fo­rum said that the coun­try’s pen­sion funds were worth more than 5 tril­lion yuan ($741.3 bil­lion) at the end of 2016 and the mar­ket is es­ti­mated to ex­ceed 10 tril­lion yuan by 2020.

Yet that would ac­count for less than 20 per­cent of the na­tion’s GDP, which is far smaller than the av­er­age pro­por­tion of 80 per­cent among the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment mem­ber coun­tries.

With an ever-grow­ing pop­u­la­tion, lead­ing to higher pay­outs na­tion­ally, the coun­try’s pen­sion sys­tem has been fac­ing a po­ten­tial long-term fund­ing short­age.

Un­der China’s three pil­lar pen­sion sys­tem, the first pil­lar is ba­sic pen­sion led by the gov­ern­ment and it has the char­ac­ter­is­tic of wide cov­er­age and low se­cu­rity. The sec­ond pil­lar in­volves en­ter­prise an­nu­ities and the third pil­lar is com­mer­cial en­dow­ment in­sur­ance.

Ac­cord­ing to data from the Min­istry of Hu­man Re­sources and So­cial Se­cu­rity, the pen­sion of each re­tired cit­i­zen has to date been borne by the con­tri­bu­tions from 2.8 wageearn­ers, but by 2050 only 1.3 wage-earn­ers will feed one re­tired per­son.

“It is an is­sue that China’s Pil­lar One for the ba­sic pen- sion is go­ing to be un­der stress,” said Luis Valdes, pres­i­dent and CEO of Prin­ci­pal In­ter­na­tional, part of Prin­ci­pal Fi­nan­cial Group.

Valdes said with re­gard to Pil­lar Two and Pil­lar Three, vol­un­tary mar­kets needed to be de­vel­oped in China to meet the fi­nan­cial se­cu­rity re­quire­ments of the mid­dle class.

A re­port re­leased by Chi­nese Academy of So­cial Sci­ences found that the coun­try’s en­ter­prise an­nu­ities to­taled 134.3 bil­lion yuan by the end of 2015, only ac­count­ing for 3.5 per­cent of the na­tion’s en­tire pen­sion funds.

It found that the ba­sic pen­sion in­sur­ance to­taled 3.2 tril­lion yuan, ac­count­ing for 82.7 per­cent.

Re­nee Schaaf, chief oper­at­ing of­fi­cer of Prin­ci­pal In­ter­na­tional, said China has good con­di­tions to de­velop its en­ter­prise an­nu­ity mar­ket. That was be­cause China had a more for­mal and reg­u­lated la­bor force com­pared with other de­vel­op­ing mar­kets.

“China is very well po­si­tioned to de­velop its Pil­lar Two and Pil­lar Three pen­sion sys­tems, which can lower the pres­sure on the gov­ern­ment and help peo­ple lead bet­ter lives af­ter re­tire­ment,” Schaaf said.

CEO Daniel Hous­ton said the chal­lenges for the Prin­ci­pal Fi­nan­cial Group to de­velop its busi­ness in China in­cluded the need to per­suade em­ploy­ers to adopt en­ter­prise an­nu­ities, mak­ing Chi­nese peo­ple com­fort­able about us­ing the sec­tor’s prod­ucts to in­vest for the long term, and form­ing a good work­ing re­la­tion­ship with the in­dus­try reg­u­la­tors.

Prin­ci­pal Fi­nan­cial Group started in China in 2005, set­ting up a joint ven­ture as­set man­age­ment com­pany with China Con­struc­tion Bank.

CCB Prin­ci­pal As­set Man­age­ment Co Ltd is now the sixth big­gest fund man­age­ment com­pany in the coun­try.

Be­sides Prin­ci­pal Fi­nan­cial Group, heavy­weight in­ter­na­tional play­ers in­clud­ing AMP Cap­i­tal, Fidelity and Van­guard are step­ping up their pres­ence in the Chi­nese pen­sion mar­ket.

We have great con­fi­dence in the na­tion’s huge pen­sion mar­ket.” Daniel Hous­ton, chair­man and CEO of Prin­ci­pal Fi­nan­cial Group value of China’s pen­sion funds at the end of 2016

Con­tact the writ­ers at caix­iao@chi­


A ser­vice robot rolled out by China Con­struc­tion Bank in­ter­acts with vis­i­tors at a fi­nan­cial fair in Bei­jing.

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