[Asia Exclusive] John Lee "Retirement Varies Greatly Depending on Pension Management... Neglected Retirement Pensions to the Stock Market"

Mandatory '3-tier pension' for retirement preparation...
Most retirement pensions concentrated in principal-guaranteed types

Despite last year's stock market boom
Overall returns remain a dismal 1-2% range
Urgent reform needed with default option legislation

John Lee, CEO of Meritz Asset Management, is emphasizing the importance of expanding stock investments in retirement pensions. Photo by Dongju Yoon doso7@

[Asia Economy Reporter Minji Lee] These days, John Lee, CEO of Meritz Asset Management, is nicknamed ‘John Bongjun (John Lee + Jeon Bongjun).’ This is because he played a pivotal role as the spiritual pillar of the so-called ‘Donghak Ant Movement,’ where individuals rushed into domestic stock investment when the stock market plummeted due to COVID-19 last year. Representative phrases that remind people of CEO John Lee include ‘Save your coffee money and buy stocks,’ ‘Buy stocks instead of private education expenses,’ and ‘Don’t buy a car, buy stocks.’ The sole reason CEO John Lee emphasizes stock investment is that stock investment is essential for all citizens to enjoy a ‘happy retirement.’ In a situation where wealth creates more wealth, if you cannot stably support your retirement and your family’s livelihood with earned income alone, the last means of asset growth is ‘stocks.’

Expansion of Stock Investment in Retirement Pensions Needed

CEO John Lee stated, "Stock investment in the retirement pension system is essential to expand retirement assets," and argued, "The retirement pension system needs to be reformed, and individual pension accounts concentrated in insurance and savings/deposits must be channeled into the capital market to truly enjoy the effects of wealth."

It is commonly said that a ‘three-tier pension’ is essential for stable retirement preparation. The first tier is the public pension led by the government, the National Pension Service; the second tier is the retirement pension (DB, DC, IRP); and the third tier is the private pension (pension savings). The National Pension is managed by the government, but retirement pensions and private pensions differ. The level of wealth one can enjoy in retirement varies greatly depending on how much individuals know about the system and actively manage their pensions.

CEO John Lee emphasized, "When I ask friends who work at companies whether their retirement pension is managed as a DB type (defined benefit) managed by the company or a DC type (defined contribution) managed by individuals, most of them don’t know," adding, "The owner of the pension is the individual, but the domestic pension system is designed around the business operators, so quality funds are left unmanaged."

According to recent statistics on retirement pension reserves released by the Ministry of Employment and Labor, as of the end of last year, the size of retirement pension reserves was 255.5 trillion KRW, a 15% increase from the previous year (221.2 trillion KRW). Since 2016, it has maintained double-digit growth rates, and it is expected to grow to around 290 trillion KRW this year.

Although the pension size is continuously increasing, the overall return rate is at a dismal level. Last year’s annual return rate was 2.58%, up 0.33 percentage points from the previous year (2.25%). Due to the stock market boom caused by COVID-19, the return rate of performance dividend-type products rose to 10.67%, but the return rate of principal-guaranteed products was only 1.68%. Since about 90% of the total retirement pension assets are concentrated in principal-guaranteed products that prioritize stability, the overall return rate remains around 1-2%. Despite the stock market boom last year, the defined benefit type (DB) was managed with assets concentrated in deposits or insurance. Recently, the default option bill (which invests DC subscribers’ funds in qualified products without their operational instructions) has been tabled in the National Assembly, raising expectations for pension reform, but it is expected to take more time to pass due to conflicting interests among sectors.

CEO John Lee said, "In Japan, the proportion of retirement pension funds entering the stock market is about 10%, but in Korea, it is only 2%," adding, "The government should swiftly reform through default options to allow retirement pension funds to flow smoothly into the stock market and fix the system where retirement pensions operate according to the operators’ intentions."

72% of Private Pensions Subscribed to Pension Savings Insurance
Need for Managing High-Yield Pension Savings Funds

For private pensions, active management through pension savings funds is necessary. To maximize returns, pension savings funds are more advantageous than principal-guaranteed pension savings insurance, and strategies to adjust the proportion of safe assets according to age and retirement timing should be implemented. The total pension savings accumulated by individuals amount to 151 trillion KRW, of which 72%, or 110 trillion KRW, is subscribed to pension savings insurance. The proportion of pension savings funds is only 12%, or 18 trillion KRW. In contrast, the return rate shows that pension savings funds had a 17% return last year, far surpassing the 1.5-1.6% return of pension savings insurance. He emphasized, "When you contribute up to 4 million KRW to pension savings funds, you receive a maximum tax credit of 600,000 KRW, which is equivalent to enjoying a 15% compound interest effect," adding, "Recently, some people want to withdraw money needed for retirement early to invest in individual stocks, but this is very wrong; you should steadily accumulate retirement funds by diversifying with small amounts."

CEO John Lee predicted that if retirement pension funds flow into the stock market, the domestic stock market could grow into Asia’s financial hub. He said, "In the U.S., with 401K (defined contribution retirement pension), citizens invest 40-50% of their retirement pensions in stocks, which has expanded the market size and allowed investors to form stable wealth," adding, "Considering the growth speed of the domestic retirement pension market, if it grows to 1,000 trillion KRW in the future, the domestic stock market could become a financial advanced country in Asia."

Public Funds Neglected Due to Direct Investment
Asset Managers Expanding Market through ‘Direct Sales’
Investment Inflow Increasing Mainly from MZ Generation

John Lee, CEO of Meritz Asset Management, emphasized that asset management companies should enhance accessibility by launching direct sales apps to expand the public fund market. Photo by Dongju Yoon doso7@

Regarding the contraction of the public fund market, which the asset management industry has been concerned about for years, he emphasized, "New attempts and creative ideas from asset managers are necessary." This means that launching creative products that attract investors should be the foundation, and continuous consideration on how to supply products to customers at lower costs is required.

The public fund market, which has been shrinking for a long time due to negative perceptions of funds, suffered even more last year as the direct investment market expanded. Looking at domestic equity public funds, as of the 9th, the net asset value was 64.3337 trillion KRW, shrinking by more than 9 trillion KRW from 73.474 trillion KRW on January 2 last year. Last year, the direct investment boom surged, with investor deposits growing from 29 trillion KRW to 67 trillion KRW, a 131% increase, but the net asset value of public funds decreased by about 12%. Although funds flowing into the capital market through direct investment increased, indirect investment funds actually decreased.

To revive the neglected public fund market, CEO John Lee found a breakthrough in asset managers’ ‘direct sales.’ Fund subscriptions are made through applications (apps) without going through banks or securities firms, and convenience was enhanced by allowing customers to subscribe to desired products on mobile screens. Since it does not go through sales companies such as banks or securities firms, the 1% level sales commissions and fees paid to them were eliminated, reducing costs. For example, if 500 billion KRW is invested in a fund, investors benefit because they do not have to pay 5 billion KRW in commissions (assuming 1%) to sales companies.

Although many investors initially felt unfamiliar with asset managers directly selling funds, investment inflows are currently increasing mainly among the MZ (Millennial + Generation Z) generation. Assets flowing in through Meritz Asset Management’s direct sales app account for 40%. As of April, the number of individual accounts subscribed through the direct sales app was about 184,000, the highest among asset managers directly selling public funds in Korea. Asset Plus Asset Management and Samsung Asset Management, which also launched direct sales apps, recorded 12,400 and 930 accounts, respectively.

Discussion = Jeon Pilsoo, Head of Capital Markets Department and Corporate Analysis Department

Summary = Reporter Minji Lee

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