Mirae Asset: "Asset Allocation Is Essential for Defined Benefit (DB) Retirement Pensions"

Publication of Mirae Asset Investment and Pension Center Investment and Pension Report No. 55

[Asia Economy Reporter Junho Hwang] "Now, asset allocation is essential even for managing DB-type retirement pension reserves."

Mirae Asset Investment and Pension Center highlighted the significance of introducing the Reserve Management Committee and IPS (Investment Policy Statement) to establish an operational system for defined benefit (DB) retirement pension reserves in its 55th Investment and Pension Report titled 'Resetting DB Reserve Management with Reserve Management Committee and IPS' on the 25th.

Mirae Asset proposed three asset allocation strategies: responding to retirement liabilities volatility, cash flow matching, and improving returns.

First, it emphasized the need to build a portfolio with an appropriate maturity structure and inflation hedging function to respond to retirement liabilities volatility caused by discount rates (interest rates) and wage growth rates (inflation). It also pointed out that liquidity should be secured considering the cash outflow from retirement benefits paid annually, and the management strategy until maturity should be properly adjusted. Furthermore, it stated that asset allocation and investment proportions need to be decided based on setting target returns and risk tolerance limits. Subsequent asset allocation can utilize global diversification and alternative investments appropriately to pursue long-term retirement liability management and improved risk-adjusted returns.

Currently, the proportion of principal-guaranteed products in DB reserves management reaches 95%, but the operating yield of DB reserves exposed to low interest rates has remained in the 1% range in recent years. Meanwhile, the retirement benefit liabilities that companies must pay continue to increase due to wage pressure and low interest rates. As a result of most domestic companies relying on principal-guaranteed products for DB reserves management, there is a significant risk of insufficient asset accumulation relative to retirement liabilities. To address this issue, the government introduced the Reserve Management Committee and IPS (Investment Policy Statement). The Reserve Management Committee is an organization established to create a DB reserve management system by managing asset operations based on the IPS, which is the basic operational guideline, along with establishing asset management policies.

Park Young-ho, Director of Mirae Asset Investment and Pension Center, said, "Retirement benefit liabilities are sensitive to changes in macroeconomic variables such as interest rate fluctuations and inflation, and they have long maturities. Corporate pension asset management responding to this should establish and execute asset allocation strategies from a mid- to long-term perspective." He added, "With the introduction of the Reserve Management Committee and IPS, it is necessary to guide companies to select and establish optimal DB asset allocation strategies considering the characteristics of retirement benefit liabilities and financial conditions."

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