This figure is a 2 percentage point decrease from 89% during the same period last year. As a result, there are calls to prioritize improvements to the default option over the funding of retirement pensions to enhance their yields.
According to the Financial Supervisory Service on the 15th, out of the 44.8 trillion won in retirement pension default option accumulations in the first quarter of this year, 39 trillion won is in principal-protected products.
The default option is a system where financial companies automatically manage retirement pensions without the participant's direction. It was introduced to prevent defined contribution (DC) and individual retirement pension (IRP) participants from neglecting their retirement funds.
However, the inclusion of principal-protected products in the default option, reflecting the voices of members of the National Assembly's Environment and Labor Committee at the time of its introduction, has hindered the proper realization of the system's purpose.
Looking at the yields of different types of default options last year, ultra-low risk yielded 3.3%, low risk 7.2%, medium risk 11.8%, and high risk 16.8%, showing a significant disparity. Even the low-risk type, which is primarily composed of deposits and bonds with almost no risky assets like stocks, has a yield that is about 4 percentage points lower than the ultra-low risk, which is principal-protected. This means that principal-protected products are the main culprits preventing retirement pension yields from keeping up with inflation.
Some point out that the naming of default option types as ultra-low risk, low risk, medium risk, and high risk reflects investors' risk-averse psychology, leading to a preference for principal-protected products. As a result, the classification has changed this year to stable type, stable investment type, neutral type, and aggressive investment type.
Since banks account for 80% of the total retirement pension default options, there is a significant amount of accumulated funds in principal-protected products. In fact, 90.9% of bank retirement pension accumulations are in ultra-low risk products, while only 58.1% of securities firm retirement pension accumulations are in ultra-low risk products, indicating a disparity among providers.
While there are calls for funding to leverage economies of scale to enhance retirement pension yields, there are also opinions that improving the default options for DC and IRP will take less time and be more effective. The recognition is that achieving the original purpose of the default option, which accounts for 45 trillion won of the 400 trillion won in retirement pensions, to increase yields is a priority.
Unlike the National Pension, retirement pensions face liquidity issues such as mid-term withdrawals due to job changes, raising concerns that even if they are funded, it will be difficult to achieve yields comparable to the National Pension. This is because retirement pensions must have shorter investment periods to prepare for unpredictable withdrawals.
In Australia, where retirement pension yields are high, there are retirement pension funds, but they exclude principal-protected products from the default option. If a participant does not choose a product for a certain period, the financial company automatically enrolls them in non-principal-protected products, and even if losses occur, the financial company cannot be held legally responsible.
[Reporter Kim Je-rim]
