FinanceAsia: Many Asian governments are using the American 401(k) model to reform pension systems, but the end result rarely looks like 401(k). What kind of models should they be looking at?
Douglas Henck: I'm still struck by what Chile did in 1981 when I arrived there with Aetna. Then, 100% of pension fund assets were invested in either bank CDs or government bonds. Chile was the first emerging market to privatize. It started in 1973 after Allende was elected and led to nationalizations, inflations, all sorts of problems. So economists began working on what to do so they could approach opposition politicians. When Pinochet took over in a coup, he didn't know what to do. The so-called "Chicago Boys", economists from the Chicago University school, had a plan. And Jose Pinera – he was actually a Harvard guy – he was put in charge of the labour ministry.
Then what?
The biggest problem for Chile, like for many countries today, was how to handle the accrued liabilities in the old system. They had over 50 pension funds, and some were giving retirement benefits as high as 100% of final salary. The government wiped out these old systems and shifted everyone to a defined-contribution basis. Let's say you were a 40-year old worker at the time. By the time you retired, you had a DB lump sum from the old system plus a government payout based on recognition bonds, nothing more than a slip of paper, with which you were forced to buy an annuity. So individuals would go to the insurance companies and buy life insurance annuities with their cash and recognition bonds, which the insurance companies in turn could gradually sell to the government. This process gave the government time – it didn't have to pay that 40-year old for another 20 years until his retirement, and then only in an annuity – and the bonds paid out over the rest of the worker's life. It spread out all the payments. Aetna was the first private participant in that system.
How do you evaluate Hong Kong's recent Mandatory Provident Fund scheme in light of the Chilean experience?
Hong Kong had no past service liabilities, so it was something of an ideal circumstance. But the government chose not to follow the direct retail model, but melded the corporate pension arrangement of the Occupational Retirement Schemes Ordinance (ORSO) with MPF. I think as people change jobs and assets go into residual fund accounts, this will evolve into an almost entirely individual plan. But in Chile the government took the employer right out of the equation from the start, except to administer plans.
But ORSO plans were not the government's responsibility, and they remain popular with almost all employees and companies too.
But the transition costs to MPF have been expensive. Now this effort to transition out of ORSO...I would have done something more radical. Also, this notion of retiring with a lump sum is bad. They do it in Australia too, and retirees get this packet of money and go on a cruise. Some of them return and end up on welfare rolls. From a societal point of view, their retirement should provide enough income to last. But there's a colonial legacy in Hong Kong of British civil servants wanting their lump sum before returning home. Chile required payments in the form of lifetime annuities.
What about China?
China's regions are undergoing different experiments. Pension reform is its biggest, or I should say at least one of its biggest economic challenges. Reform of the state-owned enterprises is leading to enormous accrued liabilities, it's almost immeasurable. No SOE has recognized those liabilities on its books – it is a huge burden they have never priced for.
China is adopting a fully funded model that should work well, but its main problem is there is no money.
Chile found ways to extend these liabilities. It is going to take a more radical approach than just setting up a DC programme. DC is fine, but it doesn't solve the problem of accrued liabilities. There is no panacea for China. Using funds from listing SOEs to pay for pensions can take a big bite out. But politicians in the United States are always dipping into Social Security. Can China effectively protect these funds from short-term interests?
After Aetna, you worked for AIG in Asia for about three years. What brought you to Sun Life last year?
AIG is so huge. It's a great company. I worked under Edmund Tse, AIG's senior vice chairman and head of worldwide operations. I was on his global team, and helped with the acquisition of Lippo Life and negotiated the MPF joint venture between AIA and Jardine Fleming. But at Sun Life I had the chance to do something new, like I had at Aetna. I guess it's being a bigger fish in a smaller pond. But Sun Life has been in Asia for over a hundred years too. We were established in Hong Kong in 1892 as the first Canadian company here, before Manulife. But after World War II, the management adopted a North American focus, which was obviously a mistake. In 1968 Sun Life stopped writing new policies in Hong Kong altogether, which was a dreadful mistake. But in 1980 it reintroduced a sales force here.
What are your regional ambitions?
Now we are the second largest life insurance company in the Philippines, after AIG, but we're doing better on a relative basis: last year we sold two-thirds of AIG's business but with only 25% of the sales force. We're not big yet in Indonesia but have benefited, like others, from flight to quality. In India we have a joint venture with Aditya Birla, as well as mutual fund and securities JVs. And in China we have a JV with Everbright, and hope to start our life insurance business in Tianjin by the fourth quarter; we'll be the first foreign insurer in that market.
And Singapore, Korea and Taiwan?
These markets are open and appealing, like Hong Kong, and we're ready to move forward. We can do a greenfield operation or buy an organization or do a JV. We own Massachusetts Financial Services (MFS), one of the US' top-10 mutual fund companies, and they have a fledgling research presence in Singapore and Japan.
What has happened lately in Hong Kong?
We've had an enormous turnaround lately. When I arrived the office had been happily treading water. Now, you need to look at what we're good at in North America, and that is the high end of the mutual fund and insurance market. With MFS and our ongoing acquisition of Keyport Life Insurance from Liberty Mutual, we are a top-10 provider of mutual funds and variable annuities in the US, and we have I believe the highest premium of any new business sold in the US. Hong Kong, on the other hand, is a more traditional market. We ought to be driving the market toward business that we're good at. Last week, for example, we just launched here our own unit-linked product. We also now have an exclusive bank distribution arrangement through Citic Ka Wah Bank.
Hong Kong aside, much of your business is in Asia's big but less developed markets. How does the provider of more sophisticated products approach these places?
China, Indonesia and India are so big that foreign companies can enter at the same time with different strategies and all do well. You can do an emerging market strategy, or one aimed at sophisticated investors. Ping An Life in Guangzhou has been selling a form of investment-linked insurance to what seems like a market that is not ready yet, but they have managed to tap the sophisticated end. In a place like India, few people will be ready for our products and few agents would be able to sell them. We come with our products and slice out the investment end, make them simple, and try to introduce better consumer value.
