Asset managers set for China IRA market boom

The long-awaited launch by China's regulators of a framework for individual retirement accounts could finally be drawing near, leaving foreign asset management firms scrambling to compete for what some expect will become a multitrillion-dollar market over the coming decade.

"A lot of managers have started internal preparations" to pursue that private pension opportunity, said Ivan Shi, head of research with Shanghai-based financial industry consulting firm Z-Ben Advisors, in a recent interview. A lot of global managers, meanwhile, are likewise "very, very interested" in competing for that business, he said.

Manulife Asset Management is one of them. Calvin Chiu, Hong Kong-based head of pensions development with Manulife Asia, in a recent interview, said: "We've been actively preparing for all the possible products and solutions that may qualify under (China's) pillar three," even as key details — such as the scale and scope of tax incentives — have yet to be announced.

Regulators, most recently the China Securities Regulatory Commission in November, are focusing their attention on fund-of-funds strategies — including target-date and target-risk offerings — as the foundation of that third pillar of China's pension safety net. Private pensions would complement the national and provincial public pension funds that make up China's first pillar and the second pillar enterprise annuities that corporations ​ offer to their employees.

A January report on China's pension system by KPMG China estimated the country's third-pillar market, "still in its infancy," could grow to 11.4 trillion renminbi ($1.78 trillion ) through 2025.

The report predicted local insurers will be the first providers favored under a pilot program to be launched in three or four cities, followed by fund management companies. The report's authors, Howhow Zhang and James Harte, both directors with KPMG China's global strategy group, couldn't be reached for further comment.

Foreign firms in fund management company joint ventures with local firms will have a leg up in pursuing private pension opportunities when regulators announce final guidelines, potentially as early as this quarter, some analysts predict.

Manulife's Mr. Chiu said his firm is leveraging both its 51%-49% Shanghai-based joint venture with Sinochem Finance Co., Manulife-Sinochem Life Insurance Co., and its 49%-51% joint venture with Tianjin TEDA Investment Holding Co., Manulife TEDA Fund Management Co., "to prepare for all eventual outcomes."

Regulations had limited foreign partners to stakes of less than 50% in joint venture fund management companies but China's government is putting in place revisions now that would allow foreign firms to acquire a majority 51%, and remove ownership limits altogether in three years.

For now, foreign managers who avoided minority partner status in joint ventures serving local retail investors in favor of setting up wholly foreign owned enterprises offering "private funds" to "qualified investors" will be on the outside looking in.

Firms taking that approach to China's market include some of the U.S. market's biggest managers of individual retirement accounts, including Boston-based Fidelity Investments and Malvern, Pa.-based Vanguard Group Inc. China-focused executives for both managers couldn't be reached for comment.

Wholly foreign-owned enterprises and private funds "are out of luck for now," said an executive with one Shanghai-based WFOE, who declined to be named. "We want to move very quickly" in offering private pension strategies when the market opens, as there are likely to be first-mover advantages, he said. But to do so anytime soon will require seeking out an arrangement with a licensed product provider, he added.

Worth the effort

Z-Ben's report suggested the prize for managers that pursue China's coming private pension market will be worth the effort. The report predicted more than $4 trillion of retail money could flow into individual retirement accounts on the mainland in the coming decade, giving them a 40% share of a mutual fund market that Z-Ben expects will grow to $12 trillion before 2028.

Miao Hui, a Singapore-based senior analyst with Cerulli Associates Asia Pte., who leads the research firm's China coverage, sounded a more conservative note, saying 20 years could be a more realistic timeline for private pensions to gain that kind of traction. Even that will depend greatly on China's regulators getting the tax incentive question right, she said.

"China works at China speed," and any expectations that these new individual retirement offerings will be embraced quickly by the Chinese public probably needs a reality check, said Josef Pilger, Sydney-based global pension and retirement leader with Ernst & Young Global Ltd. Incentives for distributors as well as customers need to be sufficiently well designed to set private pensions on a path for strong, steady growth, he said.

Even for insurance-sponsored products, there'll be a need for "a lot of education," said Ms. Miao. "It's not easy to see a very fast reception" in an individual market well known for having a short-term mindset, she added.

Manulife's Mr. Chiu agreed. With fewer than 30% of savers in the U.S. and Canada participating in their long-standing IRA systems, it's clear that "just having tax incentives isn't going to be the end all and be all" ensuring participation, he said.

Still, even with those challenges, Mr. Chiu said his firm sees "significant long-term growth potential," and expects China's private pension market to reach between $2 trillion and $3 trillion by 2025.

"Looking 10 years out, it's anybody's guess, but for sure it's a major opportunity," concluded Thomas Cheong, Principal Financial Group's Hong Kong-based president of North Asia. He said his firm's joint venture with China Construction Bank, the Beijing-based CCB Principal Asset Management, is already preparing to pursue third-pillar business on the mainland.

Previous deadlines for finalizing guidelines for private retirement accounts — most recently an end of 2017 goal — have come and gone, reflecting the challenges of hammering out agreements among myriad regulators and tax authorities, observers said.

Analysts said their optimism that this time regulators will be able to finalize a set of guidelines is based on the frenetic pace of activity by regulators in the past year.

Following "a very, very serious study" by Chinese regulators "of the IRA system in the U.S." over the past year, "it seems to us that the planning (for a third-pillar, private pension fund market segment) is pretty much done at the central government level," said Z-Ben's Mr. Shi.

Still, working out the details with provincial governments and localities might prove a challenge.

Serious challenges

If tax relief is the key issue, China's disjointed tax system will pose serious challenges to overcome, said Stuart Leckie, founder of Stirling Finance Ltd., a Hong Kong-based consultant and advisory firm on pension plans in China and Hong Kong. A plan that proves workable in promoting a private pension offering in one county could demand different treatment in another, he said.

In addition to the question of tax incentives, another uncertainty is what, if any, steps regulators will pursue to promote long-term investment behavior in a local market better known for chasing short-term profits. While the China Securities Regulatory Commission, in an update on potential guidelines in early November, raised the possibility of imposing minimum holding periods on savers, most observers predict the final guidelines will rely on the carrot of greater tax incentives for longer holding times rather than the stick of lock-ins.