KOR

Research Staff

Research Staff

Hong, Wonku Research Fellow Fund&Pension

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Opinion

Current State and Improvement Policy of Retirement Pensions in the Pension Reform Era / Oct. 24, 2023
The current retirement pension scheme provides considerable flexibility to companies and individual participants in the stages of enrollment, accumulation, and withdrawal. However, this flexibility can hinder the advancement of the retirement pension scheme.Although it has been over 17 years since the introduction of retirement pensions, nearly 50% of employees are still covered by the severance pay system. Some have cast doubt on how defined contribution (DC) plans, which are similar to private investment, manage pension assets. The low annuitization rate highlights that the retirement pension scheme has a long way to go before it serves as a tool for stabilizing retirement income.Low returns and low annuity selection rates have been pointed out since the initial stage of retirement pension introduction, but finding solutions has proven challenging. These issues are closely related to employees’ existing rights, making it legally difficult to mandate a shift toward retirement pensions. Accordingly, it is necessary to find a solution for each stage. In this regard, it is worth considering an alternative system to supplement the existing retirement pension scheme. Under the proposed system, companies will switch to retirement pensions with higher contribution rates than the current 1/12 and adopt a collective asset management approach while an annuity is selected as a default withdrawal option.
Need for Disclosing Retirement Benefit Liabilities and Funding Ratios / Apr. 18, 2023
To address the drawback of the severance pay scheme, the retirement pension scheme has been introduced to guarantee employees’ retirement benefits in the event of corporate bankruptcy by implementing the externally funded system. Accordingly, the funding ratio of pension assets to pension liabilities is a key performance indicator for pension plans. Despite its importance, the size of pension liabilities has not been disclosed. It should also be noted that after 17 years of the introduction of retirement pensions, about 50% of all employees are still covered by a severance pay system, instead of the retirement pension scheme. As a company opting for severance pay is not obligated to keep accumulated contributions outside of the company, it is impossible to figure out the funding position of retirement benefits for more than 5.6 million employees as of the end of 2020. Considering that funding ratios are critical information, retirement benefit liabilities generated from both retirement pensions and severance pay should be disclosed regularly. As the externally funded system may place a financial burden on companies, it seems difficult to obligate all companies to immediately adopt the retirement pension scheme. A more feasible approach is the implementation of mandatory reporting of the severance pay amount to identify the accurate size of severance pay liabilities.
Default Investment Options and Growth of Target Date Funds / Oct. 11, 2022
Target Date Funds (TDF) are showing a rapid growth trend. In the US, the size of the TDF market increased sharply in the wake of the adoption of default investment options. Accordingly, the growth of TDFs is expected to pick up speed in tandem with the implementation of the default investment option scheme in Korea. As Korea has begun to put default investment options in place, companies that have adopted Defined Contribution (DC) plans need to designate TDFs in advance in consultation with employees by taking into account TDFs’ returns and costs. After achieving stable returns, TDFs have recently suffered higher volatility in the return due to a decline in stock prices, which could aggravate difficulties in selecting TDFs. Although lower fees are one of the advantages of TDFs, the costs of TDFs are not necessarily in proportion to their returns. Accordingly, relatively lower-cost TDFs are likely to draw the attention of investors. Given that TDFs are relatively new to the Korean market, the currently available performance indicators of TDFs do not seem to offer reliable information. What is needed in this situation is the selection of suitable TDFs in a transparent manner through a reasonable process.
Investment Returns and Expenses in Retirement Plans / Apr. 19, 2022
The average rate of return in retirement plans for 2021 is estimated at 2.05%, down 0.61%p from 2.67% in 2020. In 2021, the rate of return lower than the payroll increase rate of 4.6% imposed an additional burden on plan sponsors or gave rise to opportunity costs for plan members. The average expense ratio of retirement plans, which indicates the expense to be borne by plan sponsors or plan members, slightly rose to 0.43% in 2021 from 0.42% in 2020. This can be attributable to the increase in fund-related expenses resulting from a higher proportion of investment-linked products. In the meantime, there remains a persistent gap between plan providers’ performance indicators such as the rate of return and expenses and market share measured by the value of plan assets. Since the retirement pension scheme was introduced, issues have been continuously raised about plan asset management, including the low rate of return, the expense structure irrelevant to plan providers’ products and services and market share deviating from plan providers’ performance. A range of improvements have been proposed to lift the low rate of return, among which “institutional-type” retirement plans, default options and the mandatory plan asset management committee will be implemented this year. Although these policy measures are designed to boost the rate of return on plan assets, they may lay the foundation for promoting competition in the retirement pension market. What is also necessary is the reform of the expense disclosure system and the continued development and improvement of fund products that constitute the mainstay of investment-linked products.

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