The ruling party and the government are launching a joint offensive to raise the retirement pension revenue rate, which is merely in line with the inflation rate. They plan to amend the law so that retirement pensions can be funded like the National Pension Service (NPS), introducing the effect of 'economies of scale' into retirement pensions while promoting a plan to exclude savings accounts from the default option, thereby increasing the proportion of risky assets.
According to political circles and the financial investment industry on the 18th, the Democratic Party of Korea plans to propose a bill to change the retirement pension system from its current contract-based operation to a 'fund model' managed by experts. This is also the content that the Ministry of Employment and Labor has argued for as a way to improve retirement pension revenue rates.
Furthermore, the government plans to exclude principal-guaranteed products, such as savings accounts, from the default option for retirement pensions. The government plans to report this pension reform plan to the National Planning Advisory Committee.
Some voices suggest that to raise retirement pension revenue rates, it is necessary to relax or eliminate the regulations that limit the investment ratio in risky assets to 70%. However, there are significant differences in positions between the Ministry of Employment and Labor, which oversees retirement pensions, and the financial authorities on this matter.
The ruling party and the government expect that revenue rates will increase if retirement pensions are funded. Experts evaluate that if the pensions are integrated and concentrated in one place, it can expect the 'economies of scale' effect during the investment process.
According to the Ministry of Employment and Labor and the Financial Supervisory Service, the average revenue rate of retirement pensions over the past five years has been around 2.93%. Considering the inflation rate, there is virtually no asset accumulation effect. In contrast, the revenue rate of the National Pension Service, which is operated as a fund, reaches 8.17%. This is why the government is trying to reform the retirement pension system based on the model of the National Pension Service.
However, after the retirement pensions are funded, social discussion is needed on whether subscribers can accept a decrease in operational revenue rates. The National Pension Service is a public pension led by the government, so even if the operational revenue rate decreases, the pension benefits received by subscribers do not change. On the other hand, the situation is different for retirement pensions, which are privately operated. If the operational revenue rate falls, the pension benefits that the subscribers receive may also decrease.
In this regard, the ruling party noted that they are considering a plan to establish a specialized financial institution to oversee retirement pension operations, which would enhance both stability and revenue rates. They said, 'Specific operational plans for retirement pensions have yet to be determined and will be decided in consultation with experts.'
As discussions on the funding of retirement pensions intensify, plans to improve the operation of retirement pensions are also being prepared. The government is discussing a plan to exclude principal-guaranteed products, such as savings accounts, from the default option for retirement pensions, thereby increasing the proportion of risky assets.
The default option is a system that manages assets in a pre-designated manner when retirement pension subscribers do not provide separate operational instructions. It recommends asset allocation based on four levels of risk according to the investment inclination. The problem is that most retirement pension subscribers are in the lowest risk category, leading to a concentration of funds in low-yield products like savings accounts.
According to the 'Retirement Pension Investment White Paper' released by the Ministry of Employment and Labor and the Financial Supervisory Service, of the approximately 431 trillion won in domestic retirement pension funds, 356 trillion won is managed as principal-guaranteed funds, accounting for 82.6% of the total. The yield of principal-guaranteed products is half that of risky assets.
A financial authority official explained, 'Even if savings accounts are excluded from the default option, subscribers can still invest in low-risk products such as bonds and dividend-yielding products, allowing retirement pension revenue rates to improve steadily. However, since retirement pensions are subject to the Financial Consumer Protection Act (FCPA), there are restrictions on products depending on investment inclination, so exception clauses must be established.'
Some experts have advised that discussions on expanding the investment ratio in risky assets for retirement pensions are also necessary. Currently, the retirement pension system limits the investment share of risky assets to 70% in most products, excluding target date funds (TDF). This means that at least 30% of the portfolio must be invested in safe assets like savings accounts and bonds.
A representative from an asset management company stated, 'Even looking solely at the U.S. retirement pension system (401K), there are no restrictions on investment in risky assets. This has led retirement assets to bolster the stock market, creating a virtuous cycle where rising stock prices lead to increased revenue rates.' They added that we need to ease the restrictions on risky asset investments in our retirement pensions to facilitate the inflow of funds into the stock market.
They explained, 'Soon, as the National Pension Service depletes its funds and begins to liquidate stocks, there is concern over large capital outflows from the domestic stock market.' They emphasized that the Lee Jae-myung administration should prioritize boosting the stock market and that consistent policy execution, including retirement pension reform, is needed. This official added, 'Since retirement pensions are ultimately private pensions, there is also a need to improve the restrictions on investments in risky assets concerning the aspect of ensuring autonomy.'