[The Editors' Verdict] What Should I Do With My Retirement Pay?

[Asia Economy Reporter Jeon Pil-su] “Who can take responsibility if the National Pension, which secures the retirement funds for seniors aged 65 and over, invests in the highly volatile stock market and suffers huge losses?”

This was said by Dr. Kim Jong-in, who served as the head of the emergency committee across both ruling and opposition parties, nine years ago. Although he spoke in the context of opposing artificial stock price support through the National Pension, it reflects the underlying perception that the stock market is risky. Besides Dr. Kim, many politicians have voiced similar criticisms whenever the topic of the National Pension’s stock investments arises, gaining considerable sympathy. It was even a time when the phrase “Don’t even have children who invest in stocks” appeared in TV drama dialogues.

Although perceptions of stock investment have improved significantly these days, thoughts on investing retirement funds in stocks remain conservative. Even though the number of stock accounts has surpassed 50 million, entering an era of one account per person, the proportion of people willing to invest their retirement funds in stocks is very low. In South Korea, 80-90% of retirement pensions are principal-guaranteed products.

Because of the strong belief that severance pay must be protected, companies left their reserves idle in savings or deposit products or insurance products at their main banks, and financial companies managed them overly conservatively with the mindset that avoiding losses was sufficient. As a result, the average return on retirement pensions last year was only around 2%. This is why people say retirement pensions have been neglected amid the “three no’s” of no interest, no competition, and no risk.

To revive our neglected retirement funds, the “default option (pre-designated management system)” starts today (the 12th). The default option, derived from “default value,” means an initial value or basic setting when no separate setting is made. It is a system that allows retirement pension subscribers to automatically invest in pre-selected products even if they do not give separate management instructions. The actual returns of financial advanced countries that first implemented the default option exceed four times those of South Korea’s retirement pensions. The average returns of retirement pensions in countries like Australia, the UK, and the US are 8-9%, and most subscribers in these countries choose the default option.

At first glance, the default option seems like a panacea for the low returns of retirement pensions. But is that really the case? Naturally, there is no universal key that solves everything. The average return of Japan’s default option, which introduced it earlier than us, is only in the 2% range. The reason why Japan’s retirement pensions have not escaped low returns despite introducing the default option, unlike other financial advanced countries, is surprisingly simple.

Unlike other financial advanced countries such as the US, Japan included principal-guaranteed products in its default option. Since conservative Japanese retirement pension subscribers mostly want principal guarantees, the proportion of principal-guaranteed products increased compared to before the default option. It is a structure that protects the principal but sacrifices returns.

Although market conditions fluctuate, the National Pension’s average return over the past three years, which has been criticized every time stock investments increase, is as high as 10%. The reason for this strong performance is simple. The National Pension, managing 900 trillion won, invested 157 trillion won in domestic stocks and over 250 trillion won in overseas stocks as of last year. The alternative investment portion, including real estate, infrastructure, and private equity, exceeds 124 trillion won. Although it has achieved high returns over the past three years, it is a portfolio that can incur losses depending on market conditions. In fact, the return in 2018 was -0.92%.

In the world of investment, achieving high returns requires bearing corresponding risks (high risk, high return). Although financial companies manage investments on your behalf, whether to bear the risk is entirely up to you. It is time to reconsider how to manage your retirement funds.

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