HONG KONG -- After years of waiting for the starting gun to go off, money managers and bankers in Hong Kong are running the obstacle course of pension reform.
The prize they're chasing is a share of the nascent defined contribution market.
Companies in Hong Kong are required by law to have defined contribution plans up and running by December.
The stakes are large, to say the least. Market watchers estimate that $500 million will flow to unit trusts or mutual funds approved by the Mandatory Provident Fund Authority during the plan's first 12 months. After that, fund flows could hit $1 billion per year.
All figures are in U.S. dollars.
"It's almost like if 401(k) happened overnight," said Derek C.K. Yung, marketing director with New-Alliance Asset Management (Asia) Ltd.
The competition among money managers promises to be intense. But fund houses are prepared to take losses on MPF operations for most of the decade before seeing a profit, sources said.
"The key issue with the MPF is education," said Brian Haskin, regional director of North Asia for Barclays Global Investors North Asia Ltd. Investors will have to learn about the styles of different funds, and the level of risk to take depending on their age.
Fund managers are fighting other factors.
Retail unit trusts have been on sale for 20 years in Hong Kong, but only 4% of the public buy retail funds.
And clients promise to be highly sensitive to fees, sources said. All-inclusive fees, from record keeping to managing money, are in the range of 200 basis points. That could see pressure and wearing away over time.
The need for a mandatory pension system was a topic of debate over the past decade in Hong Kong. Now that it's here, and in the hands of the private sector, money managers are trying to figure out the best strategies to grab the most assets.
"The problem is the market size," said Nicholas Rogers, director of marketing, defined contribution and MPF with Schroder Investment Management (Hong Kong) Ltd.
"The volume and scale is not here for service providers" to make a lot of money in the near future.
Schroders runs about $6.5 billion from Hong Kong, with 50% coming from pension funds. Another 30% is in retail unit trusts, with the remainder from private clients and institutions.
Still, money managers will take their shots. Schroders, for example, is one manager that has teamed up with the giant HSBC Group. It will offer 10 funds through HSBC, which in turn is an official master trustee approved by the MPF.
And Schroder might be in the right place at the right time. Distribution is the key to success in the new markets, market watchers said. For that reason the dominant HSBC could win 40% or more of the market initially, observers said. It has a dominant retail presence with hundreds of branches. Along with offering funds by managers such as Schroders, HSBC has its own asset management group.
Much of the activity has been preliminary. Master trusts, many of which are banks, have teamed up with a variety of money managers. At the start of February, master trusts were allowed to sell their products to companies.
So far, 21 master trustees have been approved by the government. A master trustee, in turn, signs up managers, 44 of which have so far been approved, that act as subadvisers.
Workers and employers will both contribute 5% of salary under the MPF. The government, in turn, is leaving the task of creating a new, multibillion dollar pension system in the hands of the private sector.
Right now, the pension market in Hong Kong is small. There is about $17 billion in pension assets, managers estimated. The overwhelming majority is defined benefit.
As much as 90% of that could be in balanced portfolios, sources said.
About 1 million workers in Hong Kong have pensions through their companies, leaving more than 2 million without retirement plans. Banks and money managers are going to have to target smaller companies, many with 10 or fewer employees. Market observers believe that such companies are likely to sign up with the bank or master trustee that does the company's payroll and record keeping.
"There's 300,000 companies with 10 or less employees," said Serena Kwok, marketing director, Fiduciary Trust International Asia Ltd. The MPF could translate into a headache for many employers, she said.
But, she added, if the plan were not mandatory, "20-years from now, two-thirds of the population would have no retirement" savings.
Business in Asia in large part is still driven by relationships. This would benefit fund managers that run money for defined benefit plans in Hong Kong.
All companies, even those with defined benefit plans, must offer a defined contribution plan to its employees. The first step is signing up a master trustee.
Bank of China; Bank of Bermuda; Standard Charter Bank; a host of insurance companies; and the Bank Consortium Trust Co. Ltd., a group of local banks, are in line to become dominant master trustees.
Such groups offer "one-stop shopping, from trustee to fund administration," said Mr. Yung with New-Alliance, a 50-50 joint venture between Alliance Capital Management LP and the local Sun Hung Kai Properties. New-Alliance runs $2 billion from Hong Kong, 90% of which is corporate pension fund and insurance company money.
Some giants are standing on the sidelines. Citibank, for example, dropped out of the race to win clients as a master trust at the end of January after it had submitted an application to the MPF Authority.
And Barclays Global Investors North Asia Ltd. likely will wait a couple of years before offering its unit trusts through a master trustee, said Mr. Haskin of BGI.
He agreed the key issue with the MPF is distribution.
The typical master trustee will offer four or five funds to a company, he said. One will be a cash or money market fund. The others will be a series of balanced funds. They will be mostly equities, with each having a little less risk, he said.
All MPF master trustees must offer one fund option called a capital preservation fund, essentially a money market fund confined to local cash and bonds denominated in Hong Kong dollars.
Other unit trust funds must have a minimum of 30% in Hong Kong-based assets.
When the market develops in a few years, BGI could offer international equity or emerging markets funds, he said. But for now, the firm is staying away.