Hong Kong pension battle kicks off

Principal's purchase of AXA’s HK retirement savings unit signals start of fight for HK’s HK$514 billion pension nest egg as fees fall.

The US’s Principal Financial Group has won the fiercely contested auction for Axa's retirement savings unit in Hong Kong for $335 million, as the fight to manage pensions in the aging territory intensifies.

The purchase price also includes the right for Principal to sell pension products through Axa's agency network in Hong Kong for 15 years.

Hong Kong’s HK$514 billion ($66.29 billion) compulsory savings scheme, called the Mandatory Provident Fund (MPF), generates about HK$9 billion a year for funds at a relatively high average management fee of about 1.7%.

Its fees and administration costs as a percentage of assets under management (AUM) were higher than other mature markets such as Australia, Chile, Mexico and the US, according to a 2012 study by consultancy EY.

Those fat fees have been under attack from Hong Kong lawmakers, regulators and asset managers looking to boost market share. One of the smallest players China’s Haitong International Securities waived its fee for three years in order to grab business as brokerage fees have waned. Many of Hong Kong's financially savvy savers are also critical of the scheme's highs fees and lacklustre performance.  

As fees fall, many asset managers are either looking to bulk up or are heading for the exit. The regulator is certainly pushing for consolidation. In more mature markets such as Australia there are far fewer players. 

The survivors are likely to be the largest players. Employers generally pick providers for employees and conservatively lean towards larger players or those that give them other financial services such as loans.

HSBC combined with Hang Seng is the top MPF provider in terms of assets with a 31% market share, followed by Manulife at 18%, AIA at 10%, BOCI-Prudential with 8% and Bank Consortium with 6%, according to Hong Kong-based pension consultants Gadbury as of June 30.

Principal’s purchase would nearly double the AUM of its Hong Kong pension business to more than $6 billion, making it the territory’s fifth-largest MPF provider. Principal had a 3.4% share and AXA a 3% share, according to Gadbury.

AXA, France’s largest insurer, is focusing on markets where it has a higher market ranking.

Nest egg

While fees are undoubtedly falling, one industry expert pointed out that the overall pie is likely to grow. He noted that the maximum contribution to the MPF scheme is relatively low compared with other mature markets and there is scope for it to rise.

Hong Kong needs to nurture its nest egg: in less than 30 years’ time, the number of elders aged 65 and above will surge from the current 1 million to 2.6 million in 2041. The median age would also climb to 52 by then, versus 43, according to a government study in 2013.

Source: EY
HK's fat fees as % of AUM

For the winners in the coming round of consolidation, the assets up for grabs are very sticky. Most employers rarely opt to switch providers.  

Principal paid 11.2% of AUM, relatively high compared to other such deals globally and reflected the fierce competition for the business as well as the 15-year long distribution agreement.

“The distribution agreement with AXA will provide a significant opportunity for growth for our business in Hong Kong,” said Principal’s president and chief executive Larry Zimpleman.

Deutsche Bank advised Principal and JP Morgan advised AXA.

Principal beat competition from Canadian insurers Manulife and Sun Life; Fidelity Worldwide Investment; Haitong and BCT, according to people familiar with the matter. 

The two Canadian insurers have been on a tear, gaining business at the expense of other providers. For the first time, HSBC/Hang Seng was overtaken recently in terms of net inflows by Manulife.

Principal is a pensions specialist and AXA saw it as a more suitable partner for distribution rather than its close insurance competitors according to people familiar with the matter. Future deals could increasingly take the form as assets sales minus distribution tie-ups.

Principal's purchase marks the first major purchase of retirement savings assets in Hong Kong in over a decade. When FWD bought ING's Hong Kong assets retirement savings were included but AXA's sale to Principal is the first focused on retirement assets.

As such the regulator is expected to take longer than usual to get comfortable with the deal. The transaction is expected to close in the third quarter of next year. 

Deal details

  • Principal is buying the French insurer’s Mandatory Provident Fund (MPF) and Occupational Retirement Schemes Ordinance pension business in Hong Kong.
  • Principal expects the transaction to be accretive to EPS and ROE in the first full year. The deal marks Principal’s ninth transaction since the financial crisis.
  • Founded in 1879, US-listed Principal has $513.5 billion in assets under management and serves some 19.5 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States.
Source: HK government'sDemographic Statistics Section, Census and Statistics Department.
HK's ageing population


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