[Initial Insight] "Will My Retirement Pension Yield Increase?"

[Asia Economy Reporter Hwang Junho] "My retirement pension yield will increase."

This is a card news displayed on the Financial Services Commission's homepage main screen. It aims to inform that, starting from July 12, the default option (pre-designated management system) for retirement pensions will be introduced, allowing up to 100% of retirement pension reserves to be managed through the default option. But will simply enrolling in the default option really increase the yield of my pension?

The asset management companies operating the pensions respond, "It is still unknown." This is because the overall outline of the system has not yet been finalized. Their management strategies are also inconsistent. For example, if the asset allocation is set at 50% risky assets and 50% safe assets, when the stock market plunges as it has recently, each management company has different opinions on whether to maintain the allocation or reduce it further to maximize subscriber returns. In this situation, talking about yields itself is very premature.

Basically, to switch to the default option, existing defined benefit (DB) plan subscribers must convert their pensions to defined contribution (DC) plans. However, there are many considerations in this process. In the DB plan, the pension is paid based on a fixed return calculated from the average monthly salary of the last three months before retirement. In contrast, the DC plan deducts one-twelfth of the annual total salary, and the subscriber manages the retirement pension. If the annual wage increase rate is about 3-4%, but the management yield falls short of this, it results in a loss. For example, in a workplace where the salary is 1,000,000 KRW and the annual wage increase rate is 10%, a DB plan subscriber with 3 years of service would receive 3,630,000 KRW, calculated by multiplying the average salary of the last three months (1,210,000 KRW) by the years of service (3 years). On the other hand, under the same conditions (salary 1,000,000 KRW, annual wage increase 10%), a DC plan subscriber would have a base amount of 3,310,000 KRW, which is the sum of one-twelfth of the annual total salary over 3 years (1,000,000 KRW + 1,100,000 KRW + 1,210,000 KRW), and the retirement pay depends on the management yield. They need to earn about 320,000 KRW in returns on the base 3,310,000 KRW to break even. However, the Financial Services Commission asserts that simply enrolling in the default option can guarantee management returns sufficient to cover this difference and more.

In particular, the main product to be invested in through the default option, the Target Date Fund (TDF), has a yield of -12.17% as of the 22nd day since the beginning of the year. Due to the global stock market adjustment, funds where asset management companies autonomously allocate assets and aim for target yields are also struggling. In this situation, giving the impression that the default option can act like an alchemist and provide "gold bars" may even violate the Financial Consumer Protection Act.

It is also questionable whether the management entities can truly select and provide only products that maximize subscribers' returns. Since each financial institution is affiliated with banks, securities firms, or asset management companies, opinions often arise in the financial investment industry that "it is natural to offer products of the same color."

It is hard to believe that the Financial Services Commission was unaware of this situation. They might have expected that the introduction of the default option would stimulate competition among providers and increase subscribers' yields, or they might have intended to allow "fake news to spread" or "anti-intellectualism to distort the truth," or it could be a disaster caused by the careless sign-off of those responsible. Regardless, it is not lacking in grounds to criticize that "the Financial Services Commission, which should be a strong shield to protect financial consumers, is instead misleading the public with fake news."