[Insight & Opinion] The Power of a 1% Return in Private Pensions

752 Trillion Won in Private Pension Funds
The “Pension = Principal Guarantee” Myth Is Risky
Managing Returns Through Investment Products Is Essential

As of the end of 2023, the accumulated amount of private pensions in South Korea stands at 752 trillion won. Of this, the accumulated amount of retirement pensions exceeds half, reaching 382.4 trillion won. Due to demographic structure, this amount is bound to increase for a considerable period. This is because the baby boom generation (born 1955?74) continues to enter retirement, causing the scale of retirement pensions to keep growing. In fact, the accumulated amount of retirement pensions has doubled over the past five years.

The increase in accumulated amounts of private pensions, including retirement pensions, presents us with two important challenges. The first is the rate of return. If the current rate of return on private pensions were to increase by just 1%, the total amount would increase by 7.52 trillion won. What if it increased by 2%? Or even 3%, 4%? If such an increase is achieved, the situation would change dramatically.

We tend to think of welfare issues only in terms of government support. However, welfare is never free, as demonstrated by Japan, which experienced aging about 20 years ahead of us. The more individuals make self-help efforts, the less burden there is on the state. Moreover, the National Pension, which serves as a safety net for citizens’ old age, will eventually run out of funds. Naturally, the shortfall must be covered by taxes. Pension reforms must also be implemented to ensure sustainability by paying more, receiving less, and receiving benefits later. One of the most reliable ways to reduce such national-level risks is to increase the rate of return on private pensions. This is why pension-advanced countries such as the United States, Australia, and the United Kingdom strive to raise pension returns through investment products rather than principal-guaranteed products like deposits.

Looking at our reality, among the 382.4 trillion won in accumulated retirement pensions, 87.2%, or 333.3 trillion won, is in principal-guaranteed products. Nearly 90% is invested under the guise of safety in principal-guaranteed products. As a result, the annualized returns over the past five and ten years have been 2.35% and 2.07%, respectively. Although the return rose to 5.26% in 2023, this is interpreted not as good management but as a result of interest rate hikes. At this level, it is absolutely impossible to keep up with inflation. Since pensions are future living expenses, they must hedge against inflation. Considering that historically bonds or deposits have not hedged inflation over the long term, it is clear that South Korea’s private pensions are highly vulnerable to inflation risk.

Korean society still harbors the myth that “pensions = principal guarantee.” This is despite the invisible tax of inflation eroding pensions. From now on, Korean society must make tremendous efforts to increase pension returns. When private pension returns rise, it simply means individuals’ retirement funds increase, but socially, it reduces the burden of elderly support costs. Individual investors must also build investment knowledge and pursue global diversification rather than chasing hot themes that follow trends. It is advisable not to concentrate investments in one region but to diversify. Financial companies should act as stewards of pension trustees, providing various information, services, and education to improve customers’ pension asset returns.

Korean society has now entered an irreversible path of aging. By the end of 2024, the population aged 65 and over will exceed 20% of the total population, entering a super-aged society. Unlike before, the demographic changes ahead will transform from a calm lakeside to a large waterfall-like flow. It is a time when the future must not be viewed through the lens of the past. The collapse of a sandcastle is caused by the last grain of sand. Now, South Korea’s demographic structure has begun to collapse. The social framework must be changed to fit a shrinking society characterized by low growth and aging. Among these, improving pension returns is one of the new era frameworks that need no further emphasis.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center

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