Default Option to Take Effect Next Month... Will Japan's Failure Be Repeated? [Geumjjok Pension Snowball⑩]

Default Option Includes Principal and Interest Guaranteed Products
Concerns Grow Over Repeating Japan's Pension Failures Involving Principal and Interest Guaranteed Products

On the 26th, amid trade tensions between the United States and China, the Japanese yen's value rose intraday to 104 yen, its highest level since 2016. At the KEB Hana Bank Counterfeit Response Center in Euljiro, Seoul, an employee is organizing yen currency. Photo by Moon Honam munonam@

[Asia Economy Reporter Junho Hwang] Japan, known as an "aging society," has already introduced a default option in its defined contribution (DC) retirement pension system, but it is considered a representative failure case because it allowed the selection of principal-guaranteed products, undermining the purpose of the system. However, the default option to be introduced in South Korea next month also includes principal-guaranteed products like Japan, raising concerns that it will hinder the culture of investing pension assets and lower the actual rate of return.

According to global consulting firm Willis Towers Watson on the 17th, the proportion of DC-type accumulated funds among retirement pensions in the seven advanced countries for retirement pensions exceeded 53% for the first time in 2020. However, the proportion of DC-type subscribers in Japan is only 5%.

Japan amended the Defined Contribution Pension Act in 2018 to introduce the default option. This was a measure to improve the low returns of defined benefit (DB) retirement pensions, similar to South Korea. However, by including principal-guaranteed products among the selectable products within the default option, Japan failed to differentiate from the DB type.

According to a 2019 survey by the Japan Pension Federation, among 673 retirement pension users who adopted the default option, 70% of the products chosen as default options were principal-guaranteed funds. The proportions of mixed (balanced) or target-date funds (TDF) were only about 12% each.

Senior Research Fellow Hongseon Song of the Fund & Pension Research Division at the Korea Capital Market Institute said, "Defining principal-guaranteed products as default option products does not guarantee investors' choice rights." Since subscribers choose DC-type pensions with the intention of investing themselves to grow their pension assets, including principal-guaranteed products does not guarantee investors' choice rights. He added, "Rather, it may conflict with the purpose of introducing the system to solve difficulties in fund management due to behavioral convenience and lack of expertise, as well as low performance issues, and increase the possibility of under-accumulation of retirement assets."

Changhee Kang, head of the Pension Forum at Truston Asset Management, added, "While including principal-guaranteed products diluted the very purpose of the default option, the weak investment culture among Japanese people themselves also had an impact."

Except for Japan, countries like the United States, Australia, and the United Kingdom allow only investment products to be selected within the default option. They include only portfolio-concept investment products in the default option to secure long-term retirement income.

However, concerns are rising as South Korea's default option, which will be implemented from next month, also includes principal-guaranteed products. A financial investment industry official said, "In South Korea, where awareness of investment using pensions is weak like Japan, there is growing suspicion that including principal-guaranteed products in the default option might lead us to follow Japan's precedent."

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