[Financial Planning for the 100-Year Life] How to Increase Returns on Individual Retirement Pension IRP

Most Principal and Interest Guaranteed Products Operated
Korea's Returns Significantly Lower Than US and Japan

The number of subscribers and the scale of accumulated funds in individual retirement pension IRPs are rapidly increasing. An IRP is not a financial product but an account. Therefore, it should not be left unattended after subscription. Efforts must be made to actively manage the funds deposited in the account with high-quality financial products to generate returns. IRP accounts have the same investment target products as DC-type retirement pensions. They can be managed in various investment products ranging from principal-guaranteed products like deposits to funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Up to 70% of pension assets can be invested in aggressive investment products such as equity funds. Responsibility for the investment results also lies with the subscriber, just like with DC-type retirement pensions. It is a subscriber (employee) responsibility system. This is why IRP accounts are included in the broad category of DC-type pensions.

However, the rate of return is significantly lower compared to the United States and Japan. This is because the proportion invested in investment-type products is excessively low. Since there is no specific rate of return comparison data for IRPs alone, looking at the broad DC-type retirement pension returns including IRPs, Korea’s average return over the past 10 years is 2.7% (Statistics Korea retirement pension statistics), while the U.S. is 8% (U.S. Investment Company Institute data), and Japan is 3.8% (Japan Pension Fund Association data).

If you deposit 5 million KRW annually into an IRP and manage it at an annual return rate of 3% for 30 years, the amount received after 30 years would be 245 million KRW, but if managed at 8%, it would be 611.7 million KRW. This shows how efforts to increase returns can make a huge difference in retirement life. So why is Korea’s retirement pension return so low compared to the U.S.? There are several reasons, but the biggest is that more than 70% of pension assets are managed in principal-guaranteed products. In particular, the proportion of equity funds, which contain more than half stocks, is less than 10%. This is a structure that cannot generate profits. On the other hand, in the U.S., more than 80% of DC-type retirement pension assets are managed in investment-type products.

Especially, the proportion of stocks or equity funds reaches 60-70%. This is possible because subscribers have widely accepted and established the perception that “long-term asset management for retirement should be invested in stocks or similar assets that, despite short-term price decline risks, can expect higher returns than deposit interest rates in the long term.” In Japan as well, the proportion of investment products is 55%, and principal-guaranteed products account for about 45%. However, increasing the proportion of investment products carries the risk of principal loss. This means that one must study how to manage principal loss risk.

First, it is important to understand that retirement pension asset management is a process of long-term investment of 10, 20, or 30 years through installment investments in investment products. The key is to select high-quality investment products for installment investment. Products should be chosen considering the reputation of the managing company, long-term returns over 5, 10, and 20 years, and fee rates. When pension assets have grown to a certain lump sum through installment investments, it is also important to diversify investments into several products with different characteristics in terms of investment targets and volatility. If installment investment is called time diversification, this is stock diversification. The scope of stock diversification needs to be expanded not only domestically but also overseas. Lastly, what I want to emphasize is the subscriber’s, that is, the employee’s sense of self-responsibility. DC-type pensions including IRPs are systems where subscribers themselves bear the ultimate responsibility for the results of pension fund management. Whatever results are obtained later, one cannot blame the affiliated workplace or financial company. It is not only important to simply deposit into the pension but also to make self-help efforts to accumulate investment knowledge and strive to increase the return on accumulated funds.

Kang Changhee, Representative of the Happy 100-Year Asset Management Research Association

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