[Inside Chodong] The 'Uneven Playing Field' in the Retirement Pension Principal-Guaranteed Product Market

[Asia Economy Reporter Junho Hwang] It has been just over a month since the implementation of the Default Option system for retirement pensions. More precisely, it is accurate to say that a little over a month has passed since the related law came into effect. Retirement pension providers and the Ministry of Employment and Labor are currently working on selecting the first-tier products within the default option product group. If consultations conclude and product applications are submitted by the end of this month, it is expected that a full-scale product lineup adjustment will be possible around the end of October. Once the product lineup is finalized, enrollment in the default option could begin next year.

The default option is a system under which financial companies manage the defined contribution (DC) retirement pension funds without the participant’s operational instructions, based on a pre-determined investment method decided by the participant. It is designed to cultivate ‘pension millionaires’ through stable long-term investments, similar to systems in the United States and Australia. However, since principal-guaranteed products?which do not exist in the US or Australia?are included, there is a high likelihood that most funds will be concentrated in these principal-guaranteed products. As of the end of last year, out of the total retirement pension reserves of 295.6 trillion KRW, 255.4 trillion KRW (86.4%, including standby funds) were invested in principal-guaranteed products.

Amid this situation, there are concerns about the interest rates of principal-guaranteed products in the market. It has been pointed out that an uneven playing field exists between retirement pension providers and non-providers regarding the interest rates of principal-guaranteed products, highlighting the need to establish a fair competition framework.

According to financial authorities’ regulations, retirement pension providers must disclose interest rates by the last week of each month. Typically, interest rates are announced between the 25th and the end of the month to allow time for correction announcements or printed material revisions if any issues arise. This means that most providers have their interest rates disclosed by the end of the month.

However, non-providers are not subject to these supervisory regulations. They can announce or revise interest rates at any time. Therefore, when providers disclose their rates, non-providers review them and offer higher rates to enhance the competitiveness of their products, employing this as a tactic.

Providers can also revise their interest rates, but since the regulations were established to prevent excessive interest rate competition and collusion, they must carefully consider the strict scrutiny of the authorities. In practice, this means they cannot delay or frequently revise their disclosures.

From the perspective of participants such as companies and individuals, it is natural to want to subscribe to products offering the highest possible interest rates. In this context, providers have no choice but to acquire products from non-providers. However, to acquire these products, providers must pay fees to non-providers. For example, if a product worth 100 billion KRW is acquired, a fee of about 0.3% of that amount is paid. Due to the uneven playing field, a kind of interest rate recycling occurs. So, who bears this cost? An industry insider explained, "It inevitably gets absorbed into the management fees paid by participants, which is why fees cannot be lowered even if they cannot be raised." Ultimately, participants may feel pleased to have acquired products with higher interest rates, but in reality, the fees paid to providers increase or cannot be reduced, resulting in a situation akin to a deceptive trade-off.

Preventing excessive interest rate competition is also meaningful. However, the playing field needs to be leveled. The industry suggests that if everyone competes below a certain baseline, the average interest rate could rise. Recently, interest rate competition to attract principal-guaranteed products has intensified due to the recent base rate hikes. Would it not be wise to start leveling the playing field before the full-scale introduction of the default option?

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