[Initial Insight] Retirement Pension Returns Worse Than KOSPI and the Default Option

[Asia Economy Reporter Junho Hwang] Can the default option system for retirement pensions become a reliable pillar to protect our retirement assets?

The default option is approaching its year-end introduction, with the final review for product group composition underway. The Ministry of Employment and Labor held meetings over two weeks until last week, gathering retirement pension providers from securities firms, insurance companies, banks, and others. At these meetings, fierce sales battles among providers competing to secure the last pension assets and strategic moves by the government to block them took place.

One major domestic retirement pension provider was criticized for having high fees on key products such as TDFs, while another provider reportedly faced difficulties after being pointed out that their products did not comply with current retirement pension regulations.

Judging by the level of discussion, it seems possible that default option products will be launched by the end of the year. However, the market situation is far from favorable. The U.S.'s strong tightening stance and financial market instability worldwide are severely pressuring pension market returns. Some even argue that if the default option legislation had not passed last year, it would have been difficult to pass under current conditions.

Recently, retirement pension returns have been abysmal. According to the Financial Supervisory Service’s Integrated Pension Portal, the average return of principal-non-guaranteed defined contribution (DC) products across 43 providers is -11.96%. Except for two providers, all are recording double-digit negative returns. Among them, Hanwha Investment & Securities and Shinhan Life Insurance have fallen to -19.36% and -18.19%, respectively. This is a dreadful level even considering the KOSPI dropped 13.71% in the second quarter.

The DC type refers to the method where employees manage their pension assets. However, since employees often leave assets in principal-guaranteed products without proper management, the default option was introduced to improve this. Once products under this system are launched, DC subscribers will pre-select products matching their investment preferences, and providers will manage their pension assets accordingly.

Returns on principal-non-guaranteed defined benefit (DB) products have also significantly declined. Except for about four banks, all show negative returns, averaging -8.07%. Samsung Fire & Marine Insurance (-17.54%), IBK Pension Insurance (-14.48%), Hi Investment & Securities (-14.57%), and Gwangju Bank (-13.49%) recorded truly dismal returns. Notably, products from Samsung Fire & Marine Insurance, IBK Pension Insurance, and Hi Investment & Securities had lower returns than DC products. Unlike DC, DB refers to a system where the company manages the assets.

The industry explains that returns have dropped because pension assets decreased compared to the previous quarter. However, if returns had not continuously fallen, it is questionable whether assets would have outflowed. It is somewhat fortunate that principal-guaranteed products across both DB and DC types show returns in the 1-2% range. Given the increased volatility in financial markets this quarter, returns are likely to decline further next quarter.

Given this situation, despite the year-end start of the default option, the atmosphere remains bleak. It feels like a Christmas Eve without carols. While systems like those in the U.S. or Australia are said to yield annual returns of about 6-8%, it is not just the author who feels concerned.

Ultimately, what providers must prove is their ‘management capability’ itself. Building trust to entrust one’s retirement assets is the way for the default option to survive. Even if products are launched amid sales battles and strategic moves, if they are merely imitations of existing retirement pension products, there is no reason to entrust pensions to them. Over the past year, the government and industry have promoted the advantages of the default option; now is the time to prove them. Hopefully, someday in 10 years, someone who subscribed to a default option product will receive their pension and recall that the time when default option products first appeared was ‘the right time for long-term bottom investing.’

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