PRIVATE PENSIONS: Playing the long game

Hong-KongRule changes may see pension providers competing for US$15bn of pension savings in Hong Kong, finds Nick Fitzpatrick. The fact that The Hong Kong Jockey Club is both the largest tax payer and biggest private contributor to charity funds in Hong Kong points firmly to the population’s love for nail-biting finishes that come with the hope of riches. Similarly, their passion for trading mutual funds also reflects Hong Kong residents’ liking of risk if large, quick returns are in the offing – although much to the frustration of asset managers who have to cope with the volatile fund flows that result.
By comparison, long-term saving for retirement severely lacks adrenalin, but that could change following a relaxation of rules that gives members of Hong Kong’s compulsory state pension fund more say in how to invest their money.
When the Mandatory Provident Fund (MPF) was set up in 2000, workers had to tie their contributions to one provider chosen for them by their employer.
Pension fund members are now set to be able to invest their contributions with whichever provider they wish when they change employment, and this could unleash US$15bn (€12.3bn).
At least this is the amount of money Terry Pan, vice chairman of the Hong Kong Investment Funds Association (HKIFA), says could be available from the fund, which is a compulsory defined contribution pension scheme. “Employees will have the opportunity to change all of their own contributions and this means that around US$15bn could move,” Pan says.
Under one of the three options in the MPF, employers have to choose a pension plan from a range of providers for their employees to pay into, together with an employer contribution.
Although workers could take their savings with them when they found a new job, they still had to invest with whatever provider their new employer had chosen.
But in future they will be able to invest their own contributions – 5% of salaries – with whichever provider in the MPF scheme they wish.
Any changes they make could start to happen next year, though perhaps slowly at first. As the MPF is a young scheme, Pan believes many members have not yet realised just how much money they are sitting on. Investment changes will not happen until they do.
“The MPF is only ten years old. Because it is very young, you have to ask when will it be that their MPF savings become big enough for employees to take notice of what they have saved, and say to themselves, ‘Wow, look at all that! I’ve got to do something with it’.
“They get an annual statement, so 2011 might be too soon for them to realise this, but it could be two years from now.”
Current providers of MPF funds include Invesco and Fidelity, as well as banks and insurance companies like Manulife.
The MPF could make for a source of stable cashflows for providers, who can keep hold of business once the new rule takes effect. Members are, unsurprisingly, not able to withdraw their savings until they retire. In a region where individual and institutional pensions saving still lacks development, the move by the MPF – which could be seen as quasi-institution – is a notable one. Institutional investment
Institutional pension funds are relatively thin on the ground in Asia, although there are some. There are, of course, other types of investment institutions, including sovereign wealth funds, and, again in Hong Kong, there is the Hong Kong Jockey Club itself, which invests primarily to support the club’s corporate aims.
“There are large corporates in Hong Kong like the Jockey Club and Swire [a diversified conglomerate], but the list is not long,” says Pan, adding: “After the top 30 names the mandate size gets extremely small.”
Yet around 50% of the client base that falls under Alex Boggis, director at Aberdeen International Fund Managers in Hong Kong, is institutional, and he believes that institutional investment within Aberdeen will grow more than the wholesale sector, which makes up the other half of his business.
“I expect our share of institutional investment will grow more than the more retail side of the business, partly because the retail segment got hurt by the 2008 crash and the resultant scandals,” he says, referring mainly to the collapse of a Lehman Brothers minibond scheme which scandalised the  Hong Kong public. “It will take a while for the retail investor to regain confidence.”
He adds: “The institutional market here is dominated by consultants who have intimated that institutions were thinking much more about restructuring their portfolios after 2008. This probably means that if you are one of the big institutional houses, you will be worried about maintaining assets, and if you are a newer entrant, or just someone challenging the status quo, you have plenty of opportunity.
“We’ve had some pick-up from this and the demand we see currently is for global equity, Asian and emerging market fixed income, and for domestic equity.”
Fixed income has also included local currency instruments. Regional clients are said to understand the case for local currency investment, which hangs on the expected growth in emerging market currencies. They also know that government authorities in the region want to increase the role of bond markets in raising company finance.
Similarly, Lieven Debruyne, chief executive at Schroders in Hong Kong, says that there has been a high level of activity on the institutional side.
“A lot of the searches we have been involved in were for global equity, global fixed income and global emerging markets, rather than regional emerging markets.”
Debruyne expects the broader pensions market in Asia to develop along defined contribution (DC) lines. “The MPF in Hong Kong has continued to grow, and the pension fund market in this region will develop mainly through DC, but on the whole, there’s a long way to go to build pensions systems in Asia.
“A key factor of the success of 401k plans in the US was the tax incentives, which we do not have in Asia.” Reaching out
For fund managers to find success in the MPF market, Pan says, it is necessary for players to reach out to members. “It is no longer about a provider being able to rely on the fact that it might know an employer very well. Pension fund providers and fund managers will have to talk, not just to the employers any more, but to the members too.”
The HKIFA has a pensions working group that has been liasing with the Mandatory Provident Fund Schemes Authority to see how the industry can expand the offering in the pensions sector.
It also has a working group that focuses on investor education, which is necessary if Hong Kong residents are to take decisions about pensions savings for time horizons that last longer than a horse race.
In June last year, at a meeting of the Hong Kong Hospital Authority, which runs the HK$30bn (€3.15bn) Hospital Authority Provident Fund Scheme, a pension scheme for health workers that predates the MPF, it was suggested that the scheme should give quarterly updates on the market outlook to facilitate members’ choices when they switch investments.
The fund suffered significant losses following the financial crisis. The meeting noted that 60-70% of the total equity in lifestyle funds had been invested in the US and European markets – a significantly higher allocation than the market average of 40-50%. The Hospital Authority agreed to introduce a global equity fund and global bond fund and open up a money market fund to all members. 
The Hospital Authority scheme is part of the Orso scheme, a voluntary pension system that was a forerunner of the MPF.
Hong Kong has a rapidly ageing population. In 2009, the proportion of the population over the age of 65 was around 13%, but by 2036 this is projected to rise to 26.4% owing to low birth rates and increasing life expectancy. Life expectancy is much greater in Hong Kong than the global average: over 86 for women and almost 80 for men.
Before the implementation of the MPF system, only about one-third of the Hong Kong workforce had some form of retirement protection.
As more people come into the system and employers and providers expand their offering, fund managers will inevitably be expected to play a role in providing high-quality information for investors to take intelligent decisions.
Investment choices may not be at the complex level of hedge funds yet, but absolute returns are playing a greater role, at least going by the experience of Gerry Ng, managing director at Baring Asset Management in Hong Kong.
“The pension funds that we provide to tend to look for balanced, multi-asset portfolios of stocks and bonds. Some are benchmarked and some are absolute return. I think absolute returns will feature more in the near future because pension funds are more focused on the fact that they could lose 5% even though the market is down only 3%.” ©2010 funds global

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