Defined Contribution Plans Abroad Expected to Abound: Opportunities for International Markets Multiply
February 27, 2006
MIAMI - While employers at home are increasingly abandoning defined benefit plans in favor of defined contribution programs, other countries are following suit, said Jay Hooley, executive vice president of State Street Corp. of Boston.
What Hooley termed "the pension crisis," is spreading faster than the avian flu, creating a "global mega-trend" that brings with it major opportunities for fund companies, he told attendees of The National Investment Company Service Association annual meeting here last week.
From the Orient to Old Europe, countries with public pensions are facing increasingly aging populations and unfunded plans. To address that, Hooley said, more and more are turning to defined contribution retirement models, somewhat like the American 401(k).
In addition, many governments are turning over their public pensions to private managers. "The outlook for private pension management [overseas] is bright," said Hooley, during his keynote speech.
In Europe, borders are blurring, as the long-promised European Union is beginning to congeal into a single marketplace. Together, Europe controls $19.1 trillion in assets, $4.7 trillion of which is pensions. Countries with state-sponsored plans, including Germany, France and Italy, are confronting serious liabilities, Hooley said. The United Kingdom, the wealthiest of the European Union, has a nationally funded pension, which is also moving toward a defined contribution format.
"The same kind of story is unfolding in Asia Pacific," Hooley said.
Japan represents the largest market, with $1.5 trillion in government pension funds, and the oldest population in Asia. As more Japanese approach retirement, these funds can be invested. In Singapore, the government pension plan funnels 30% of employees' wages to individual accounts. In China, which has surpassed Hong Kong with $1 trillion in assets to invest, 200 million workers are expected to retire in the next three decades, Hooley said.
Such opportunities are most tenable for companies willing to invest the time and resources needed to forge relationships and build trust.
In Europe, offshore financial centers are blossoming in places such as Luxembourg and Jersey Isle, which has 55 of the world's 500 largest banks and a fund industry that grew 26% in 2005. These centers are drawing investors from all over Europe. Malaysia and Dubai, likewise, are becoming hubs in Asia and the Middle East, respectively.
Even in China, the sheer number of asset management companies has grown fivefold to 50 within the past seven years, while 7,000 Chinese took the exam to become certified financial analysts in 2004, compared to just 24 a decade earlier.
Although none of these markets offers the breadth or depth of the American market, every one of them represents a significant opportunity, Hooley told the crowd.
However, "pick your markets carefully," Hooley warned.
Until the European Union truly comes together into a single market with a single set of rules, companies must be mindful of the laws of each nation. But often, the more difficult countries to break into are the most fruitful. For example, English law is similar to that in the U.S., while German law is significantly different. However, the opportunities in Germany are vast and the competition less fierce.
In Asia, regulations are not as stringent, but as more and more people begin to participate in the marketplace, more and more laws will follow, Hooley predicted. Successful companies will need to adapt.
"The nuances between different markets can be significant and play a critical role in your success." In Europe, for example, State Street has 6,000 of its 20,000 employees already working there. When the EU becomes a truly unified market, a goal Hooley said is five years away, State Street will be well poised to serve it.
Capturing these markets also requires an investment in technology and service, Hooley added. Investors will choose the company that can offer the best support, the most intuitive programs and the least regulatory hassle, he predicted.
And while the changing face of global pension plans may be the entree into the $53 trillion global marketplace, hedge funds and exchange-traded funds will offer even wider possibilities later. "Make sure you do all the legwork," Hooley said, and that work should start now.
"I can't emphasize enough the time it takes to gain acceptance, trust and credibility," he said.
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