[Viewpoint] Stock Market and Retirement Pensions

The stock market boom that began last year continues unabated this year. In mid-March 2020, the KOSPI fell to the 1400s, and the market seemed on the verge of collapse. However, it rapidly rose as individual investors, known as Donghak Ants, poured in funds, setting new records. The KOSPI surpassed 3000 on January 7th and even exceeded 3200 at one point, with fluctuations continuing thereafter.

Future outlooks are divided among experts. Those who view the current situation as a bubble argue that the global stock market boom stems from ultra-low interest rates. They predict that as inflationary pressures arise starting with advanced economies and interest rates rise, the stock market bubble will quickly burst.

On the other hand, there are strong forecasts that the current upward trend will continue. Investor deposits, which were 65.6 trillion won at the end of last year, reached a record high of 74.4 trillion won by mid-January and still remain in the 60 trillion won range as of early April, indicating ample market liquidity and sufficient room for growth. According to data released by the Korea Exchange on January 15th, the price-to-earnings ratio (PER) of the Korean stock market is 15.4 times, which is still significantly lower than the United States’ 23.7 times and Japan’s 23.6 times.

While the future direction of the stock market remains uncertain, individual participation and interest in stock investment should be transformed into a foundation for securing the public’s retirement life. For this, improving the retirement pension system is urgently needed. Most citizens, especially the younger generation in their 20s to 40s who have led this stock market boom, are vulnerable to retirement security. It is a reality that stable retirement life is difficult with only the National Pension, and the best way to supplement this is through retirement pensions. The size of retirement pensions has rapidly increased, exceeding 255 trillion won at the end of 2020, up 34 trillion won from the previous year.

However, more than half of retirement pensions are operated as defined benefit plans, and including both defined benefit and defined contribution plans, about 90% of total assets are invested in principal-guaranteed products, yielding only 1-2% annual returns. Last year, when the stock market was booming, the retirement pension yield was 2.58%, significantly lower than the National Pension’s 9.7%.

It is very difficult for individuals to achieve stable returns in the stock market. According to a securities firm’s survey comparing stock returns by generation in 2020, the 20s generation had returns in the 10% range, significantly lower than the early 20% range of those in their 40s to 60s. This is attributed to younger investors engaging in high-turnover short-term trading, resulting in poorer returns.

Currently, the National Assembly is discussing the introduction of a default option. The default option is a system where defined contribution (DC) retirement pension subscribers do not have to instruct how to manage their funds; instead, the pension manager operates according to a pre-set method. This system is already widely used in advanced countries’ retirement pension schemes. Generally, the default option applies a Target Date Fund (TDF) management approach, increasing the proportion of risky assets like stocks when the subscriber is young and gradually shifting to safer assets as retirement approaches. Although higher proportions of risky assets may lead to negative returns in some years, advanced countries’ experience shows that diversified and systematic management can achieve medium-risk, medium-return results over the long term.

Since last year’s stock market boom, many investors, especially young people in their 20s and 30s, have significantly increased their stock investments. We hope that their participation will not be a mere one-time event but will lead to improvements in the retirement pension system that enable systematic retirement preparation.

Jinyoung Shin, Director of the Korea Corporate Governance Service and Professor at Yonsei University Business School