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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.
보고서 1
Examination of Mutual Fund Sales Charges and Relevant Implications [23-19]
Research Fellow Kwon, Min Kyeong / Oct. 17, 2023
The current structure of mutual fund sales charges in Korea is more of a historical coincidence resulting from regulatory gaps in the process of separating fund management from sales activities in the mutual fund industry in the 1990s, rather than a result of comprehensive social consensus. Korea’s mutual fund sales market exhibits distinct characteristics, including indirect receipt of distribution fees from a fund’s assets, a higher share of distribution fees compared to sales commissions, and elevated distribution fees surpassing management fees. These features give rise to several unintended consequences such as conflicts of interest between customers and fund distributors, upward leveling of distribution fees, and a lack of competitiveness in low-cost fund products. Furthermore, the limited competition among fund distributors and a mismatch between services and costs hinder the growth of the mutual fund industry in Korea.       

To address these market challenges, this article proposes potential solutions as follows. First, fund distributors should receive sales charges directly from customers, rather than from the fund’s assets, a policy successfully implemented in countries such as the UK, the Netherlands, and Australia. This approach has proven effective in mitigating conflicts of interest between customers and fund distributors and can foster market competition while reducing investment costs. Second, it is necessary to align sales services with costs through cost unbundling. Establishing a match between the nature of services and associated costs can mitigate relative disadvantages faced by DIY investors, long-term investors, and large investors, potentially expending investor base. However, it should be noted that some policy measures can bring about significant changes; therefore, they should be initially applied to online sales channels to minimize potential side effects. 
보고서 1
Eligible Pre-Designated Products for Retirement Pension Management: Characteristics and Implications [23-18]
Research Fellow Nam, Chaewoo / Oct. 11, 2023
The Korean-style default option (K-default option) has been introduced as a pre-designated retirement pension system, prompting the need for a comprehensive discussion on various policy options crucial for its establishment. The focal point of the discussion is a clear understanding of the new system’s characteristics. Notably, the pre-designation of retirement pension plans, operating under an opt-in scheme with explicit investment instructions, diverges from traditional default options as it lacks the nudging element. Instead, the pre-designation scheme aims to encourage defined contribution (DC) plan participants to build a reasonable investment portfolio, positioning itself as a mechanism to utilize representative products rather than default options for portfolio construction. 

This pre-designation retirement pension scheme mirrors the representative product system that includes principal-protected products. Concerns voiced in the scheme design stage have become a reality six months into full-scale operation. Employees who display limited interest in pension asset investment face difficulties in selecting investment-linked eligible products (low, medium, high risk) based on risk appetite, leading to over 88% of eligible employees to opt for the principal-protected type (ultra-low risk). In terms of pension asset management, it is crucial to adopt a management strategy with an appropriate level of risk and reasonable risk premiums. Hence, improvements in the scheme are essential to ensure that products eligible for pre-designation align with the implementation of this management strategy.  

An analysis of risk-return profiles of eligible products reveals that the majority have secured an appropriate level of risk and risk premiums in terms of medium-term returns of three years or more. The analysis further indicates that as risk increases, the risk-adjusted return (Sharpe index) tends to rise. This suggests that it could be effective to adopt a strategy of selecting products based on expected returns required by individual retirement planning. However, it is worth noting that inefficiencies in the composition of portfolio products, predominantly comprising most eligible products, can pose challenges. This is because portfolio products, presented as a combination of Target Date Funds (TDFs), rarely comply with the current scheme’s requirement to maintain a specific risk level. To build an effective portfolio, it is recommended to utilize funds that target specific risk levels, such as Balanced Funds (BFs) or Target Risk Funds (TRFs). Alternatively, using a single retirement date TDF, rather than a portfolio-based TDF, is desirable for optimal results.    
보고서 1
The Impact of Expanded Role of Shareholder Activism on the Market [23-17]
Senior Research Fellow Hwang, Seiwoon / Sep. 21, 2023
Recently, there has been a notable increase in the influence of shareholder activism funds in Korea. Shareholder activism has been predominantly led by foreign hedge funds for a long time. But shareholder activism funds have been initiated by domestic capital in earnest since 2022, spurred by market changes such as the revision to the Commercial Act and the introduction of the Korea Stewardship Code. The number of companies targeted by shareholder activism has witnessed a substantial surge in 2022 and 2023, and this growth trend is expected to continue going forward. 

It is observed that the appointment of executives is the primary focus of shareholder proposals, followed by proposals related to amendments in articles of incorporation and dividend payments. Notably, however, the approval rate of activist shareholder proposals at an annual general meeting (AGM) remains relatively low, hovering around 20%. This modest approval rate suggests that shareholder activism still has a limited impact. Shareholder activism funds have mainly called for changes in corporate governance and shareholder return policies, drawing considerable attention from the market and investors. While various shareholder proposals were put forth, many failed to make it to AGM agendas or were rejected after submission. In terms of stock performance, target companies showed a tendency of posting above-average returns compared to the market, yet only a handful sustained such performance. In performance analysis using the cumulative abnormal return (CAR), short-term CAR was frequently observed; however, most companies analyzed struggled to consistently generate high returns over the long term.

Policy improvements should be put in place to bolster the positive role of shareholder activism. To this end, it is crucial to establish a regulatory framework where directors’ fiduciary duty of care is exercised to safeguard the proportional interests of shareholders. Additionally, the disclosure system should be improved to ensure that small shareholders and ordinary investors can quickly identify accurate details of shareholder proposals and letters to shareholders. Lastly, there is a need to close loopholes in shareholder return policies regarding repurchase and cancelation of treasury shares. In this context, it is also essential for shareholder activism funds to strive to actively cooperate with institutional investors.