The Principal proves benefits of privatised retirement solutions
Long-term savings are beneficial on individual and macroeconomic levels, whether in developed or developing economies. In Asia, where massive savings can be mobilised through employer-based retirement schemes, they spell greater resilience to more frequent turbulence in today's rapidly changing world.
"The best way to attain a higher level of economic growth is to promote long-term savings," says Larry Zimpleman, chairman, president and CEO of the Principal Financial Group. "When you look at the United States experience, our decade of highest economic growth was the 1990s and all of that was attributable to 401k plans."
An early mover in the 401k business in the US, The Principal is one of the biggest players in this space and one of the world's leading investment managers. It has grown in size - with assets under management expanding from US$2 billion in the early 1970s to US$517.9 billion as of the second quarter of this year - largely through the strength of small- to medium-sized businesses (SMBs).
Focused on SMBs
Founded in 1879 as the Bankers Life Association, The Principal has flourished despite economic turmoil and two world wars by keeping its focus on SMBs. Among the first to use direct mail and broadcast advertising in the early 1900s, it set the course for the financial services business for decades to come.
On its 75th anniversary in 1954, the company had significantly grown its group insurance business. This was attained through the rigorous training of its agents in all aspects of pension, life and health insurance in order to fully serve a diversifying client base.
With the advent of the computer age, The Principal introduced Adjustable Life, an innovative product that allowed customers to adapt their insurance policies to the realities of ageing. By 1978, the value of The Principal's assets had more than tripled as the market embraced the flexibility provided by Adjustable Life. This firmly established the company's leadership role in the insurance industry.
Today, The Principal provides services to more than 45,000 retirement plans of all sizes, covering nearly 4.6 million participants. Aside from this core business, it manages assets for 13 of the top 25 largest pension funds in the US and is among the top 30 asset managers globally.
As of the second quarter of this year, Principal Global Investors and Principal International, the group's international asset management units, reported record assets under management at US$307.3 billion and US$118.8 billion, respectively.
Strong partners
The company has long recognised the potential of defined contribution schemes such as 401k plans in emerging economies. This was the impetus for its expansion into Asia in the 1990s, particularly to Hong Kong and Malaysia, as part of an internationalisation strategy targeting the emerging middle class in developing countries.
As a global brand, The Principal's goal is to champion financial security among businesses and individuals. Recognising the wherewithal of Asia's pre-eminent institutions, it has partnered with Japan's Nippon Life, China Construction Bank (CCB), India's Punjab National Bank and Malaysia's CIMB. These heavyweights rely on The Principal's asset management and retirement services expertise in implementing their diversification strategies.
For instance, CCB Principal Asset Management, The Principal's Beijing-based joint venture with CCB, has grown exponentially since its founding in 2005. Leveraging CCB's strong distribution network, which spans 13,630 branches across the mainland, CCB Principal Asset Management independently managed US$13.7 billion in assets as of the second quarter of this year. This subsidiary offers diversified investment and long-term savings products to millions of Chinese customers, who are growing accustomed to the highest standards of integrity, professionalism and innovation that The Principal is known for as a global brand.
In Malaysia, CIMB-Principal Asset Management is one of the largest asset managers and has won domestic and international awards for conventional and sharia-compliant products. These include equities, fixed income and money market investments that are distributed across Southeast Asia.
"Our potential is much greater because of the strength of our partners," Zimpleman says. "Our joint ventures stand the test of time because we bring complementary skill sets to the table."
Lifecycle funds
Through its partners, The Principal has introduced lifecycle funds - the fastest-growing mutual funds in the US - to select Asian markets. Lifecycle funds make it easy for middle-income investors, who typically have no interest in becoming investment experts, to diversify their holdings.
"The way the time-based lifecycle fund works, basically it adjusts its asset allocation over time as you come closer to the target, right to the target date," Zimpleman says. "What you have is a very well-diversified and always up-to-date asset allocation fund and you'd only ever have to make one choice. Just tell us when you're going to retire, and from that we're able to give you a sophisticated investment solution."
For risk-based instruments, investors come into lifecycle funds based on their risk appetite - whether it be aggressive, moderate or conservative.
Lifecycle funds are gaining traction as a long-term savings option in Brazil, where The Principal was the first to offer such products. The Principal is the second-largest retirement provider in Latin America.
"We think one of the real opportunities we have is to bring some of these leading-edge solutions into markets where they don't exist today," Zimpleman says. "For many upper-middle-income investors, lifecycle funds are going to be a very appropriate solution."
Dedicated real estate group
The firm is also influencing trends for real estate investment trusts (reits). The Principal's five-year institutional real estate securities fund was named the best out of
81 funds globally and won this year's Lipper Fund Award in this category. The fund has outperformed other fixed-income or equity instruments throughout 30 years, providing returns in the range of 12 per cent annually over the past five years. It is underpinned by a broadly diversified pool of commercial real estate assets earning rental income in the US.
A dedicated subsidiary, Principal Real Estate Investors manages The Principal's exposure to the real estate market globally.
It executes Principal Global Investors' multiboutique strategy in this space, aiming to diversify real estate holdings to remain in step with evolving market trends.
Experienced portfolio managers based in Singapore, who have in-depth knowledge of the regional market, identify the real estate investment opportunities in the Asia-Pacific region.
"We're a big player in the reit industry," Zimpleman says. "We happen to believe that reits are going to be an area of significant investment over the next couple of decades."
Most advanced technological solutions
Regardless of its success with other financial offerings, it is in annuities where The Principal envisions the most impact in Asia. Its 135-year track record in the retirement business comes with the industry's most advanced technological solutions.
One of the most innovative users of information technology in the US, The Principal has been on InformationWeek's Elite 100 list for 17 years. Its key technological solutions include a global research platform, automated updating of group benefits systems and an online document tool with e-signature capability.
This year, The Principal launched an application that uses algorithm analytics to help financial professionals customise retirement income plans for their clients. This is an important tool as retirement income planning is reaching a critical point today.
To help SMB owners cope with the rising costs of health care in the US, The Principal joined the Bright Choices Exchange, a private benefits exchange where employees can access an array of benefit offerings and select products based on personal priorities and threshold levels set by their employers. The Principal offers all ancillary group benefits - including dental, life insurance, disability insurance and critical illness - on the online portal.
As Asian economies mature, retirement schemes will gradually move from government-sponsored programmes to such openly accessible defined contribution plans. The Principal is well positioned to transfer knowledge, experience and technologies to help establish a robust retirement business in the region, especially amid the evolving regulatory environment in significant markets such as China and Malaysia.
In order to spur the growth of privatised retirement solutions within Asia, The Principal supports enabling legislation and tax incentives for potential service providers. It has continuing information and skills exchanges with Chinese market players and relevant authorities through representative offices in Beijing.
"As China recalibrates from manufacturing to more of a consumer-driven economy, it would need long-term investment into its economy," Zimpleman says. "We fundamentally believe that a more robust retirement system, with greater levels of long-term savings and capital into the economy, is one of the foundational elements to that. We think it makes sense not only for social reasons, but it makes a lot of sense for economic reasons."
An employer-based retirement scheme is the most effective economically because efficiencies can be built into the system through innovative technologies. With such efficiencies come lower cost, and the prospect that the 401k model can catapult China and the rest of Asia to economic peaks that the US reached in the 1990s.
"We're in the process of completing our Asia strategy," Zimpleman says. "We want to be the retirement provider of choice for the small- to medium-sized businesses and the middle-income investor in the key markets of Asia."
http://www.principal.com