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Asset Management/Pension
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보고서 1
Analysis of Pension Tax Systems: Characteristics and Directions for Improvement [24-01]
Senior Research Fellow Kim, Kab Lae and others / Mar. 14, 2024
The swift advancement of aging populations combined with declining birth rates is increasingly highlighting the critical role of pensions. Growing skepticism about the long-term viability of public pension systems is fueling a shift toward reinforcing private pension schemes. This shift is notably evident in key nations including South Korea. A pivotal factor in bolstering private pensions is the structure of the pension tax system. Indeed, tax incentives are the primary motivators for private pension plans. The configuration of this tax system profoundly affects how individuals allocate their pension assets and can also influence the evolution of capital markets.

In South Korea, the pension framework is broadly categorized into public and private systems. The public pension system encompasses national pensions and occupational pensions, while private pensions comprise employer-based retirement plans such as Defined Benefit (DB) and Defined Contribution (DC) schemes, along with individual retirement plans like IRP and pension savings. The taxation approach for pensions predominantly adheres to the EET method. This method entails exemption (non-taxation) at the contribution phase, exemption on earnings at the management phase, and taxation at the pension income distribution phase.

Challenges within the domestic private pension tax system include a lack of diversity in tax-advantaged pension plans, insufficient tax incentives to encourage the pensionization of retirement benefits, and relatively low limits on income deductions (or tax credits) compared to overseas, with inflexible limit adjustments.

This study undertook a comparative examination of pension tax systems in key international jurisdictions to investigate the evolving trends in these systems. Through the analysis of pension tax systems in the United States, Japan, Australia, and Germany, it was confirmed that various tax incentives are being provided for the development of the private pension market. A critical observation from studying these international pension tax systems is the recognition that the essence of an effective pension tax system hinges on the strategic design of tax benefits for pensions. In the case of private pensions, while there are some retirement plans where enrollment is compulsory like retirement pensions, many retirement plans operate based on the voluntary will of the subscribers. The most powerful incentives to induce voluntary subscription of the participants are tax benefits.

This study of international pension systems suggests several key legislative measures to develop the domestic pension tax system. Firstly, bolstering private pensions requires increasing the limits on tax benefits. Legislative reforms should allow for periodic adjustments to these limits, using economic indicators like the growth rate, inflation, and average wage increases. Secondly, to discourage the trend of opting for lump-sum withdrawals of retirement contributions, there's a need to consider higher tax rates on such lump-sum withdrawals. This approach would promote the receipt of retirement income in the form of pensions. Thirdly, the mechanism for offering tax benefits on pension contributions should shift from a tax credit method to an income deduction method. Fourthly, a variety of methods for providing tax benefits ought to be allowed. Specifically, introducing a TEE pension system could offer a new framework, where contributions are taxed, but earnings and withdrawals are exempt. Lastly, it is recommended to consider implementing a refundable tax credit system or a matching subsidy scheme for pension contributions made by socially vulnerable groups, ensuring a more inclusive and equitable pension system.
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보고서 1
Outsourced Chief Investment Officer Market: Growth Potential and Need for Full Discretion [22-22]
Research Fellow Nam, Chaewoo / Nov. 08, 2022
Korea’s Outsourced Chief Investment Officer (OCIO) market has grown on the back of public funds and is now diversifying its client base into private companies and foundations. As a way to enter the oligopolistic OCIO market, some financial services firms have tried to open up a new niche market, leading to such diversification. This article has estimated the accurate market size based on data provided by OCIO service providers. As a result, Korea’s OCIO market is projected at KRW 132 trillion as of end-August 2022. In the OCIO market, 85% of assets under management are still concentrated in public funds (KRW 112 trillion) but the proportion of private companies and public organizations has increased noticeably to 6% and 5%, respectively. The segmented OCIO market defined as a target market is expected to continue expanding into public institutions including public enterprises, rather than into private companies or mutual aid associations. What gains the most attention is the segmented OCIO market for retirement pension funds, which has particularly prompted securities firms to advance into the OCIO sector. But the market still amounts to no more than KRW 2 trillion. In this respect, institutional reform is required to encourage DB contributions to flow into the OCIO market.    

Despite this quantitative growth, Korea’s OCIO scheme (K-OCIO) has structural limitations in that its role is confined to the execution of funds, which inhibits the OCIO model from providing a comprehensive asset management solution to OCIO service users. This can be attributable to the partial discretion scheme adopted by the K-OCIO. The full discretion model should be widely adopted to fully serve the OCIO’s goal of using external experts and stimulate healthy competition between trustees. To this end, this article recommends the use of the referent portfolio, selected by the Seoul National University Development Fund. The reference portfolio scheme, extensively used by Korea’s National Pension Fund and foreign public pension funds, is an effective tool to implement the full discretion OCIO model aimed at entrusting independent financial institutions with the top-level strategic decision-making process including the Strategic Asset Allocation (SAA). Full discretion can be implemented based on a trustor’s confidence in a trustee’s investment capability. It is notable that the OCIO scheme designed for supervision, instead of management, would end up delivering low operational efficiency.          
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보고서 1
Discussions on Sustainability Disclosure by Collective Investment Vehicles [22-18]
Senior Research Fellow Lee, Inhyung / Oct. 04, 2022
After recognizing greenwashing and investor protection as critical issues, financial authorities of major economies have recently worked on administrative restrictions and legislative bills to meet the related challenges. As part of these efforts, the European Commission adopted the Regulatory Technical Standards (RTS) for implementing the Sustainable Finance Disclosure Regulation (SFDR), while the US Securities and Exchange Commission (SEC) released the regulation mandating ESG disclosure by investment advisers and investment companies.         

A wide range of funds are subject to ESG disclosure. All funds managed within the EU should in principle describe sustainability risks and major adverse impacts in the format and template set forth by the RTS at the level of both GPs and funds. If they fail to do so, the reason for non-compliance should be explained in detail. In the US, a broader definition of ESG funds by the SEC could make most funds subject to the ESG disclosure regulation. Notably, the EU and US have adopted the principle of proportionality in their ESG disclosure rules, meaning that how much impact sustainability factors have on investment decisions determines the level of information to be disclose.    

It might be difficult for Korea to bring its ESG disclosure practices up to the level of the EU’s scheme in a short period of time. Hence, a more practical alternative would be the establishment of guidelines for effectively encouraging ESG-related information disclosure, based on the existing regulatory framework for better investor protection and greater responsibility for asset managers as specified in the Financial Investment Services and Capital Markets Act. But separate guidelines should be devised only if ESG is represented or mentioned in the name and prospectus of funds.

ESG funds should provide a detailed description of the investment type and method and periodically report the process and results of investments. The internal control system is necessary to guarantee the participation of professionals for sustainability analysis and integrity of data being used. Additionally, a due diligence process should be arranged if a fund depends on third-party service providers for data and analysis. ESF funds also need to adopt a benchmark that aligns with sustainability features pursued by them and if they engage in shareholder activities for ESG agendas, they should inform investors of such agenda items and the implementation process and report whether the goal of shareholder activities is achieved on a periodic basis.        
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보고서 1
Reforming Korea’s Multi-Pillar Pension system for Increasing Income Replacement Rates [22-15]
Senior Research Fellow Song, Hong Sun / Aug. 16, 2022
This article aims to explore the pension scheme reform to achieve a higher income replacement ratio. As Korea’s combined income replacement ratio ranges from 57% (DC plans) to 61% (DB plans), reform for post-retirement income security should be directed toward achieving higher replacement ratios to ensure a post-retirement life with reasonable living standards. However, given the predicted depletion of pension assets, the public pension reform should focus on how to achieve stability of replacement ratios between generations (financial sustainability). Furthermore, it is necessary to overhaul private pension plans that could help raise income replacement ratios by boosting returns without additional premium payment in order to increase the contribution level within the multi-pillar pension scheme. 

Even if the return is maximized through the reform of fund management, the pension fund depletion could be postponed by two to five years at most since the National Pension fund is drying up at a rapid pace. This necessitates an increase in the contribution to achieve financial sustainability. Notably, advanced management of pension assets could reduce the contribution burden significantly, considering that it is expected to generate additional profits that could be translated into 12 to 20 years’ worth of contribution income. In this respect, what is needed is social consensus for raising the contribution level. To this end, how to share the burden of fund deficit should be established and the contribution that the government and the national pension fund could make as trustees through the fund management reform should be reflected in actuarial valuation before the long-term contribution rate is determined. 

If private plans—highly inefficient in asset management, compared to the public pension contributions—are overhauled, it is likely to drive up the income replacement ratio without any additional costs. If Korea enhances its pension scheme to the level of advanced economies by introducing fund-type retirement plans, the replacement ratio could climb by up to 5%p to 11%p, approaching the internationally recommended combined replacement ratio of 66% to 68%. Therefore, further discussions of pension reform should center around a multi-pillar approach encompassing public and private pension plans to devise an optimal policy mix for adequate post-retirement income security and the public pension’s financial sustainability.             
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