Research Staff

Research Staff

Song, Hong Sun Senior Research Fellow Office of Research Coordination




The Implications of Recent US Retirement Plan Reform for Korea / Aug. 08, 2023
The 2022 retirement plan reform by the Biden administration, which is considered the biggest change since the financial crisis, focuses on managing longevity risk management and eliminating blind spots based on confidence gained from the success of the 2006 investment management reform. The reform includes a series of measures such as mandating the disclosure of monthly pension benefits, expanding incentives for including lifelong pension plans, exempting lifelong pension providers from fiduciary responsibility, and easing the minimum withdrawal obligation, and others. All of those suggest that Korea's discussions on annuitization should go beyond the restrictions on IRP withdrawals and be more diversified. Furthermore, the reform allows hourly workers to participate in retirement plans with mandated enrollment in 401(k) plans and wide-ranging tax benefits to employers. This implies that Korea should address the current blind spots with a dual approach combining relaxed enrollment requirements and employer incentives. Another notable implication for the US reform is the importance of prior success in the investment management reform. Under the discretionary system in Korea and the US, policy measures for annuitization and elimination of blind spots may lose momentum without confidence in investment returns. In addition, instead of dealing with public pension reform on which a political consensus can hardly be obtained, the US government effectively used a series of issues–depletion of the social security trust fund, population aging, and increased old-age insecurity due to inflation–as a driving force for retirement plan reform that could better muster bipartisan support. This also has implications for how to carry out pension reform in Korea.
Lessons from Recent NetZero-aligned EU-ETS Reform for K-ETS / Jan. 17, 2023
As advanced economies keep implementing decarbonization policies even in the face of the energy crisis, the EU has recently reached a provisional agreement on the reform of the emissions trading system (EU-ETS). The reform of the EU-ETS, a key mechanism for carbon neutrality, will have a significant impact on Korea’s emissions trading system (K-ETS) which is set to be introduced in 2023. Notably, Korea has revised up the 2030 NDC target to 40% and thus, emission allowances (cap) of the K-ETS are expected to be substantially reduced. Accordingly, there will be a growing need for the market stability reserve (MSR) scheme adopted by the EU as a way of alleviating the supply-demand imbalance. In particular, if reserves are linked to the reduction of supply chain emissions (Scope 3) or indirect emissions reduction activities such as ESG, the MSR scheme would offer strong incentives for the NDC implementation and companies’ net zero emissions. On top of that, the introduction of the Carbon Border Adjustment Mechanism (CBAM) in parallel with the ETS is anticipated to transform Korea’s allowance policy. This requires a shift in the perspective of industries. They should ensure that revenues from payable allowances are put into blended finance for low-carbon innovative investments, rather than evading the expansion of payable allowances.
Default Options in Retirement Pensions and Improvement in the Return on Plan Assets / Aug. 09, 2022
Korea has introduced default options with the aim of raising post-retirement income through a higher return on plan assets. To achieve that goal, it should implement measures including the compulsory introduction of default options and approval for qualified products to ensure the establishment of the default option scheme and effective competition. On top of that, Korea also needs to alleviate negative factors for the long-term rate of return, such as the permission of principal-protected products and employees’ direct selection of default options. Such negative factors could solidify plan members’ lack of interest and a selection bias regarding principal-guaranteed products. This suggests that unlike advanced countries’ default option system, Korea’s scheme should focus more on providing training programs tailored for the life cycle of plan members. Meanwhile, TDF risk rating assessment should also be adjusted reasonably to ensure that Generation MZ (encompassing millennials and Generation Z) can hold TDFs as default options for a long term until retirement, regardless of their investment propensity. In addition, the transfer of default options should be improved to enable plan members to keep holding their portfolios even when they change jobs. Furthermore, the criteria for dynamic eligibility evaluation should be established to facilitate competition for a better return on default options. Building upon such criteria, plan providers should engage in business conduct. Also necessary is to set up a separate default option disclosure system similar to the one adopted by Australia to bolster market discipline by plan members.
Aligning the Capital Market with the 2050 Carbon Net Zero / Feb. 08, 2022
Although the Paris Agreement highlights the importance of climate finance, the growth of climate finance, improvements in capital market infrastructure, and financial firms’ preparation for carbon neutrality have yet to pick up speed. The financial sector could drive carbon neutrality of the industrial sector through net-zero portfolios by allocating financial resources. Thus, it could play a key role in managing and drawing the boundary between risks and opportunities arising from carbon neutrality. In particular, the capital market’s function of enhancing efficiencies in carbon emission reduction through climate finance has come to the fore. Therefore, it is necessary to incorporate the long-standing, complex nature of climate risks into the valuation, performance assessment, and compensation systems to facilitate climate finance. Furthermore, it is desirable to reinforce regulatory supervision over capital market infrastructure such as taxonomy, evaluation scheme, methodologies, and evaluation agencies to ensure transparency and reliability of the capital market in the process of applying ESG factors that are qualitative indicators. Amid the global trend that the capital market is expanded into the carbon credit market, the carbon credit market is evolving into a place where spot and futures trading is implemented. Under the circumstances, the capital market could make up for the weakness of the ESG evaluation based on qualitative indicators by utilizing carbon price indicators, whereas the industrial sector could increase the predictability of carbon reduction costs and enable the more efficient selection of carbon reduction options. In this respect, Korea’s financial investment firms should consider committing to net-zero portfolios, as is the case with foreign financial firms, to ensure that such a shift in the carbon market contributes to carbon neutrality. They should no longer recognize the net-zero strategy as regulatory costs arising from carbon neutrality while preparing for a transition in asset allocation in line with the global asset market trend where added value is moving toward low-carbon sectors. In light of this, a paradigm shift is needed to perceive net zero as a capital market development strategy and investor protection measures to safeguard investors against greenwashing.

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