"Default Option for Retirement Pension, Need for Opportunity to Choose Principal-Guaranteed Type"

[Asia Economy Reporter Oh Hyung-gil] There has been a suggestion that it is necessary to consider introducing a default option (pre-designated management system) to increase the rate of return on retirement pensions and to ensure that the system is structured to prioritize the interests of subscribers rather than the profits of retirement pension providers.

According to the report titled "Discussion and Considerations on the Introduction of the Retirement Pension Pre-Designated Management System" published by the Korea Insurance Research Institute on the 25th, the retirement pension reserves amounted to 255.5 trillion won as of the end of last year.

This is an increase of 1.9% (4.3 trillion won) compared to 221.2 trillion won at the end of 2019. The accumulated assets have increased by an average of 15% annually since the end of 2016 due to the continuous expansion of the retirement pension subscriber base.

However, the proportion of subscribers actively managing their retirement pension assets remains very low. In fact, 83% of subscribers did not manage their accounts even once over the past year. Additionally, 27% of respondents in the retirement pension management survey answered that they "do not know well" about the status of their accumulated fund management.

The institute argued that the introduction of a default option is necessary to improve this situation. The default option is a system where, if the subscriber does not give separate management instructions, the provider manages the retirement pension assets according to a pre-determined method. Users select one of the retirement pension providers' default options to pre-set the asset management method.

It is claimed that the introduction of the default option could improve the poor returns of retirement pension products. The five-year return rate of the principal-guaranteed retirement pension products chosen by domestic subscribers was 1.64%. This is 2.1 percentage points lower than the 3.77% return of the performance-based type, which has a similar effect to the default option. Even when the comparison period is extended to the last 10 years, the principal-guaranteed type's return was 2.47%, which remained 0.87 percentage points lower than the 3.34% of the performance-based type.

The United States introduced the default option along with the enactment of the Pension Protection Act in 2006. As a result, the investment ratio and returns of DC-type retirement pension reserves in default funds increased simultaneously.

It was particularly suggested that when subscribers choose the default option, they should be allowed to select the principal-guaranteed type to ensure system stability and acceptance. There is a need to consider ways to structure the default option fund lineup to prioritize the interests of subscribers rather than the profits of retirement pension providers.

Jung Won-seok, a research fellow at the Korea Insurance Research Institute, said, "If asset management mainly focuses on the performance-based type through the default option, higher returns can be achieved," adding, "However, it is necessary to carefully consider subscriber education on the possibility of losses due to system implementation and solutions to conflicts of interest when selecting products at the introduction stage."

This content was produced with the assistance of AI translation services.