Principal Aims for Growth Amid China's Reforms to Pension System

  • `We want to enter that market,' international head Valdes Says
  • Valdes says studying Colombian market for opportunities

Principal Financial Group Inc. is eager to gain a share of China’s growing company-sponsored pension system as it opens to foreign investors, according to Luis Valdes, president of the U.S. insurer’s international operation.

“Everything indicates that China is leaving behind pay-as-you-go pension systems and will continue moving toward a system of individual accounts managed by private companies,” Valdes said in an interview Thursday at Principal’s offices in Santiago, Chile. “We want to enter that market.”

Principal is looking at the company-sponsored “enterprise annuity” business of individual savings accounts for retirement, and will consider entering with China Construction Bank Corp., with which it has an asset-management joint venture, Valdes said. The Chinese government has indicated that growth will eventually involve inviting foreign companies to participate, he said.

China’s pension model is separated into three main systems, according to a report from Dimensional Fund Advisors: a voluntary rural system, a pay-as-you-go system for public employees and an urban employee system that combines pay-as-you-go contributions from employers with individual accounts. There is also a much smaller enterprise annuity system that provides services to about 68,000 companies and has about 630 billion yuan ($100 billion) in assets under management.

A year ago, Australia’s AMP Capital became the first foreign investor to purchase a stake in a Chinese pension company by paying A$240 million ($170 million) for 20 percent of China Life Pension Insurance, a provider of enterprise annuities.

Principal joins other U.S. insurers including New York-based MetLife Inc. in building up international units to gain scale and attract a growing number of savers. Des Moines, Iowa-based Principal bought a Chilean pension manager for about $1.3 billion in 2013 and purchased a stake in a Brazilian mutual fund company, Claritas, a year earlier.

Fluctuations in foreign exchange rates have pressured Principal’s results. Operating earnings for the international segment decreased 38 percent to $45.8 million in the third quarter, the company said in a statement on Oct. 22. Principal Chief Executive Officer Dan Houston, who took over in August from Larry Zimpleman, said in September that the insurer would focus on strengthening its position in international markets where it already has a foothold.

Principal is studying the Colombian market as a future region for growth, as the government is advancing on a peace process with the FARC, the country’s largest guerrilla group, Valdes said.

‘Young Population’

“It has a young population and more inhabitants than Argentina. If they sign a peace agreement, that will spur growth even more,” Valdes said. He added that the insurer isn’t working on any specific acquisitions in that country or setting up operations on its own at the moment.

Principal International operations in Brazil, Chile and Mexico and Asian countries including China, India and Thailand.

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