Retirement Pensions Hit Hard by COVID-19... Top 5 Banks' Q1 Returns in the '0%' Range

Average Return of Defined Contribution (DC) Type 0.86%
Principal and Interest Not Guaranteed, IRP Returns 'Negative'

[Asia Economy Reporter Kim Min-young] The defined contribution (DC) type retirement pension yield of the five major banks in the first quarter of this year recorded in the 0% range. This was due to the principal and interest non-guaranteed product yields plummeting into the negative amid the domestic and international financial markets fluctuating due to the spread of the novel coronavirus infection (COVID-19). The retirement pension, introduced to help workers prepare stable retirement funds, seems to have turned into a source of worry rather than hope for retirement.

According to the Bankers Association on the 20th, the average DC-type retirement pension yield of the five major commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?was only 0.86% in the first quarter of this year. Compared to the average yield of 2.35% for these products in the fourth quarter of last year, it plunged more than 1 percentage point in just one quarter.

By bank, Nonghyup Bank barely exceeded a 1% yield at 1.09%, but Hana Bank (0.90%), Shinhan Bank (0.87%), Woori Bank (0.85%), and Kookmin Bank (0.63%) fell into the 0% range. This was because the yields of principal and interest guaranteed products recorded between 1.81% and 1.93%, but the yields of principal and interest non-guaranteed products sharply dropped into the negative.

Kookmin Bank recorded the worst performance with a principal and interest non-guaranteed product yield of -7.85%. It was followed by Hana Bank at -7.46%, Nonghyup Bank at -6.12%, Woori Bank at -5.61%, and Shinhan Bank at -5.29%. In the previous quarter, the yields of principal and interest non-guaranteed products of the five major banks ranged from 4.70% to 7.75%, marking a record high performance.

Unlike the defined benefit (DB) type retirement pension, the DC type is a product where the company deposits a fixed amount into the account monthly, and the worker manages the funds directly. Principal and interest guaranteed products mainly include deposit products, while principal and interest non-guaranteed products can include domestic and international stocks, bonds, and commodity exchange-traded funds (ETFs).

In the first quarter of this year, due to the impact of COVID-19, domestic and international stock markets fell sharply, and this decline was fully reflected in the DC-type yields. Compared to the beginning of the year (January 2), the KOSPI index fell more than 20% by March 31, and during the same period, the U.S. Dow Jones index dropped about 24.1%, from 28,868.80 to 21,917.16.

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The individual retirement pension (IRP) yield, which is subscribed to for additional retirement funds, is even worse. Combining the yields of principal and interest guaranteed and non-guaranteed products, the yields by bank ranged only from -0.84% to 0.12%. Looking at only the principal and interest non-guaranteed products, Kookmin Bank recorded -10.01%, Nonghyup Bank -8.44%, Hana Bank -7.06%, Woori Bank -5.46%, and Shinhan Bank -5.04%, with all major banks posting negative yields. Although IRP is managed individually with advice from financial companies, the negative yield this quarter is more painful as it had achieved up to 3.06% yield in the previous fourth quarter of last year.

The total accumulated funds combining DB, DC, and IRP in the first quarter of this year amounted to KRW 84.9621 trillion at the five major banks. Shinhan Bank had the largest amount at KRW 22.5994 trillion, followed by Kookmin Bank with KRW 20.168 trillion, Hana Bank with KRW 15.8319 trillion, Woori Bank with KRW 13.9296 trillion, and Nonghyup Bank with KRW 12.4332 trillion.

A financial industry official said, “Along with the National Pension, retirement pensions are major retirement funds for workers,” adding, “While retirement pensions should be evaluated based on long-term yields rather than short-term yields, the 10-year long-term yields of major banks are only around the high 2% to 3% range annually, so efforts by financial companies to maximize yields are urgently needed.”