Retirement Pension 'Default Option' Passes National Assembly... Will 1% Level Returns Increase?

[Asia Economy Reporter Ji-hwan Park] Starting from June next year, the Default Option system for retirement pension, designed to improve retirement pension returns, will be implemented. Attention is focused on whether the issue of low returns on retirement pensions, which have consistently been criticized for returns in the 1% range, can be improved.

According to financial authorities on the 10th, the "Amendment to the Employee Retirement Benefit Security Act," which centers on the introduction of the Default Option system for retirement pensions, passed the National Assembly plenary session yesterday.

The Default Option is a system where, if participants in Defined Contribution (DC) retirement pensions or Individual Retirement Pensions (IRP) do not specify their own investment choices, their retirement pensions are managed according to a pre-designated method. This is an alternative to address the difficulty in increasing long-term returns due to passive fund management practices caused by participants' lack of interest or time, which has been pointed out as a problem in retirement pensions.

Until now, if participants did not express their investment intentions, retirement pensions were mainly invested in low-return principal-guaranteed products. The proportion of principal-guaranteed products accounts for as much as 86%, and the returns on retirement pensions over the past five years have remained in the 1% range. Considering the inflation level, this effectively represents a negative real return.

However, going forward, retirement pensions can be managed using pre-designated methods suitable for long-term investment, such as Target Date Funds (TDF), long-term value appreciation pursuit funds, Money Market Funds (MMF), and infrastructure funds.

The Financial Services Commission stated, "We expect that the introduction of the Default Option will bring fundamental and structural changes to the retirement pension market." In particular, they anticipated that "for those lacking time or interest in managing retirement pensions or finding investment decisions difficult, the accumulated funds will be managed more actively," and "the long-term returns of retirement pensions will improve, greatly aiding asset formation for retirement preparation." It is also expected that through the Default Option, evaluations of retirement pension management performance will become more active, accelerating competition in returns within the market among retirement pension providers and product suppliers in securities, banking, and insurance sectors through product development efforts.

When the Default Option is implemented in the second half of next year, participants will first select one of the management methods provided by the providers. If participants do not give investment instructions or wish to be managed under the Default Option, the pre-designated Default Option will be applied.

The Financial Services Commission plans to work closely with the Ministry of Employment and Labor and the Financial Supervisory Service to prepare amendments to subordinate regulations such as enforcement decrees in the first half of next year without delay, in accordance with the purpose of the law amendment. Legislative efforts will continue to introduce discretionary and fund-type retirement pension systems, which were not included in this law amendment process, in the future.

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