DB-Type Savings and Deposits? ... The Era of Investment Opens [Geumjjok Pension Snowball④]

Amendment to the Employee Retirement Benefit Security Act
Expressing Opinions on the Reserve Fund Operation Plan

[Asia Economy Reporter Hwang Yoon-joo] About 80% of Defined Benefit (DB) retirement pensions are managed through savings and deposits. Only 20% of the funds are actually invested. In DB retirement pensions, the company is responsible for management, so they have to operate conservatively. This is why DB-type returns remain in the 1% range. To increase returns, investment must be expanded, but this is not an easy task.

With the enforcement of the revised Enforcement Decree of the Employee Retirement Benefit Security Act, a safe investment path has opened for DB-type retirement pensions. DB retirement pension subscribers also need to actively take interest and raise their voices regarding the changed system. In particular, if company members express their opinions in the Investment Policy Statement (IPS), investment returns can change. Above all, if you work at a company with fewer than 300 employees, check the minimum retirement pension reserve ratio as well.

◇Wake up dormant savings and deposits... Establishment of Reserve Management Committee & IPS preparation = With the enforcement of the retirement benefit amendment, companies are now required to establish a Reserve Management Committee. This can be understood as a system to ensure that no single person is responsible for gains or losses arising from investments. The Reserve Management Committee consists of 5 to 7 members, and the chairperson is an executive in charge of retirement pension operations.

When forming the committee, it is mandatory to include at least one each of ① employee representatives, ② heads of departments related to the retirement pension system, and ③ retirement pension and asset management experts. Since the committee deliberates and resolves matters such as the IPS and changes to asset allocation policies, expert assistance is necessary. The committee can also autonomously propose agenda items related to reserves. In other words, if employee representatives are well selected, even DB-type retirement pension subscribers can operate investment-type products depending on the company, potentially increasing returns.

One notable point is that IPS preparation has been made mandatory. The IPS must include six items: △ IPS draft △ setting target reserve ratio △ target return on reserve management △ securing appropriate liquidity △ reserve management methods △ evaluation criteria for reserve management performance.

Specifically, DB-type retirement pension workplaces must set target returns. Generally, the baseline is ‘inflation rate (wage increase rate) + α’.

Deciding on reserve management methods is also important because it determines returns. Even large corporations are known to deposit 98% of reserves in savings and deposits. A Samsung Asset Management official emphasized, "DB-type retirement pensions investing in savings and deposit products suffer from persistently low returns. Expanding asset allocation strategies from savings and deposits to bonds, REITs, and alternative investments can increase returns."

◇Minimum retirement pension reserve ratio raised to 100% = A point where companies and employees have differing interests in this amendment is the minimum retirement pension reserve ratio. For companies with 300 or more employees, the minimum reserve ratio has been raised from 90% to 100%. Even if a company faces liquidity crises in the future, employees’ retirement funds will be protected. Companies with 300 or more employees that fail to maintain the 100% minimum retirement reserve will be fined. Additionally, failure to notify the results of financial verification or failure to inform employee representatives of the shortfall in the minimum reserve will also result in fines.

DB-type retirement pensions fundamentally place management responsibility on the company. However, the Enforcement Decree has been revised so that employees can receive reports on major retirement pension matters and intervene in pension management through the Reserve Management Committee. The key figure in this is the employee representative, who acts as a watchdog managing the retirement funds of all employees. Even if you cannot voice opinions on asset allocation strategies, you must at least confirm whether the minimum retirement reserve ratio is being met.

However, medium and small enterprises with fewer than 300 employees are not subject to mandatory application. For small businesses, meeting the retirement pension reserve ratio increases liabilities and financial burdens. As a result, there is a disparity between employees of large corporations and those of small and medium enterprises in terms of retirement preparation.