Introduction of Pre-Designated Operation System for Retirement Pensions Gains Visibility... "Concerns Over Principal Loss"

Environment and Labor Committee to Hold Expert Meeting on 28th
Performance-Based Dividends to Increase Yield

Returns by Type of Retirement Pension Investment

[Asia Economy Reporter Oh Hyung-gil] As the introduction of the default option system (pre-designated operation system) to improve the rate of return on retirement pensions becomes more visible, there are claims that sufficient consideration of the possibility of pension losses is necessary. Although the total subscription amount is approaching 255 trillion won, the rate of return on retirement pensions remains at the 1% level. While the goal is to increase the rate of return, concerns are rising that the role of the social safety net could collapse.

According to political circles and the insurance industry on the 27th, the National Assembly’s Environment and Labor Committee plans to hold a meeting on the 28th of this month, inviting experts from labor, academia, and finance to discuss the Worker Retirement Benefit Guarantee Act.

The amendment to the Worker Retirement Benefit Guarantee Act, which centers on the introduction of the default option, has undergone two reviews by the Employment and Labor Subcommittee since February but was postponed both times. The Environment and Labor Committee plans to accelerate legislation by gathering opinions on the current issues through this meeting.

Retirement pensions are divided into defined benefit (DB) plans operated by companies and defined contribution (DC) plans managed by workers. Of the 255 trillion won in retirement pension subscriptions, 228 trillion won, or about 90%, is concentrated in principal-guaranteed products such as savings and deposits. Due to the burden on individuals to manage these funds, there is a focus on principal protection, resulting in low returns.

The currently submitted amendments are largely divided into two categories regarding profitability and stability. The amendment proposed by Democratic Party lawmaker Ahn Ho-young in January, after prior consultation with the Ministry of Employment and Labor, stipulates that if DC plan subscribers do not choose how to manage their accumulated funds, the funds will be managed through pre-designated target date funds (TDFs) or other performance-based products.

The amendment proposed last month by People Power Party lawmaker Yoon Chang-hyun introduces the default option but suggests including a management method that guarantees the principal and interest of the accumulated funds, as focusing solely on profitability increases instability.

Environment Minister Han Jeong-ae is attending the full meeting of the Environment and Labor Committee held at the National Assembly on the 20th, responding to questions from lawmakers. Photo by Yoon Dong-ju doso7@

Selection Rights Should Be Guaranteed Including Principal-Guaranteed Options

However, there are claims that choosing principal-guaranteed options contradicts the purpose of increasing returns. According to the Financial Supervisory Service, the average annual return of principal-guaranteed retirement pension products last year was only 1.68%. During the same period, performance-based products investing in risky assets such as stocks recorded a return of 10.67%.

However, this is considered to be excessively influenced by changes in the asset market, and opinions differ on the need to consider workers retiring not only in bull markets but also in bear markets.

Over the past 10 years, the return on public funds has been about 0.2% higher than deposits. When comparing annual returns, there have been cases where returns were 11.5% lower than deposits. In other words, situations where retirees must bear losses due to principal loss should be avoided.

In particular, the default option is criticized for going against the recently strengthened consumer protection policies. Since the implementation of the Financial Consumer Protection Act, efforts have been made to prevent consumers from investing in products with principal loss risks without fully understanding them. However, with the introduction of the default option, automatic investments in funds could occur in situations such as parental leave or overseas work, which the consumer may not even be aware of.

Jung Won-seok, a research fellow at the Korea Insurance Research Institute, said, "If the default option is introduced, a significant portion of the assets of many subscribers who were not actively managing their funds will be operated through the default option. However, since financial companies or experts might recommend default option products for their own benefit rather than the subscriber’s benefit, it is necessary to allow subscribers to choose principal-guaranteed options for their own benefit."

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