Article 336: Stop Retirement Pension Money Moves... Financial Services Commission Responds to Increased Interest Rate Volatility

Retirement Pension Fund Transfer Market Stability Meeting

The financial authorities will continue to encourage installment payments and diversification of maturity dates for retirement pensions this year. This is based on the assessment that if new contributions to DB-type retirement pensions and the maturity of DB managed reserves are concentrated in December, high-interest competition to attract funds could lead to increased market volatility, as seen last year.

On the 26th, the Financial Services Commission announced that it held a market stability meeting related to retirement pensions, chaired by Standing Commissioner Kwon Dae-young, together with the Ministry of Employment and Labor, the Financial Supervisory Service, and the Korea Financial Investment Association. The meeting was organized to review and discuss risks related to fund movements in the retirement pension market and to actively promote risk mitigation measures that the financial sector can implement.

As of the end of last year, retirement pension reserves amounted to 335.9 trillion KRW. When companies’ retirement pension contributions and the maturity of reserve management products by asset managers are concentrated at specific times, financial market volatility due to fund movements may increase.

According to the Financial Services Commission, the new DB contributions companies must pay this year amount to 38.3 trillion KRW. Of this, 25.6 trillion KRW (66.7%) is expected to be paid in December. Additionally, out of 190.8 trillion KRW in DB managed reserves, 71.4 trillion KRW will mature in December, accounting for 37.4% of the total reserves.

A Financial Supervisory Service official stated, "This means that asset managers, banks, and securities firms compete in sales to secure companies’ new contributions and reinvest matured funds," adding, "We communicated to prevent volatility from increasing by raising market interest rates through offering high interest rates."

As the first response measure, there was consensus to actively pursue installment payments and diversification of maturity dates. Specifically, financial companies agreed to split and pay more than 40% of the total DB-type retirement pension contributions in two or more installments before December. For the existing reserves maturing in December (7.7 trillion KRW), they plan to diversify maturities over periods such as one year and six months.

Each association plans to actively encourage financial companies to implement installment payments and maturity diversification and to collect and share the implementation status with the financial authorities. In addition, financial companies will actively offer various maturity products besides the standard one-year maturity when providing retirement pension products.

Secondly, the 'Retirement Pension Supervisory Regulations' will be revised by September to prevent excessive competition based on high interest rates. Last year, as the corporate bond market tightened and liquidity shortages occurred in some financial sectors, financial companies sought to raise funds through retirement pension attraction. During this process, excessive competition arose, such as copying interest rates by offering higher rates after seeing other institutions’ disclosures and providing irregular principal-guaranteed products.

To prevent this, the financial authorities decided to impose the same disclosure obligations on principal-guaranteed products offered by non-registered retirement pension providers as those registered with the Ministry of Employment and Labor.

Irregular derivative-linked bonds that effectively function as principal-guaranteed products but evade related regulations will also be subject to the same rules as principal-guaranteed products. Furthermore, the authorities will improve the practice of manufacturing high-interest principal-guaranteed products using fees (premiums) by banning the receipt and provision of such fees.

Meanwhile, installment payments of contributions will also be recommended to public institutions and large corporations, led by the financial sector. Previously, the Ministry of Economy and Finance confirmed and announced this policy in the economic policy direction for the second half of 2023.

Standing Commissioner Kwon Dae-young stated, "Going forward, the financial authorities will closely monitor fund movements across products and sectors, including retirement pensions," adding, "We will continue to communicate and review with the financial industry to prevent market instability caused by sudden fund concentration in the capital markets."

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