Retirement Pension Annual Return 0.44%... Lower Than Bank Interest Rates [Geumjjok Pension Snowball①]

① The Uncomfortable Truth About Retirement Pensions: Can the Default Option Be a Savior?

Retirement Pension Annual Return 0.44%
Profit Decline Due to Stock Market Drop
Sharp Fall from 2% in Q4 Last Year
DB-Type Return Reversal Phenomenon
Passing Through Default Option Expectations

[Asia Economy Reporter Junho Hwang] As the asset bubble, which had been further inflated by COVID-19, begins to deflate, warning signals have been triggered in the retirement pension market. Retirement pensions, which should form stable retirement assets through long-term investment and steady returns like a growing "snowball" swallowing surrounding snowballs, have transformed into "empty pensions" recording significant losses. In particular, the defined contribution (DC) retirement pensions, where subscribers manage their own pensions to achieve higher returns, have been more affected by market fluctuations. It is expected that the introduction of the "default option," where asset management companies directly manage funds even for DC-type pensions, next month will serve as a savior.

The Uncomfortable Truth That "DB-type Returns Are Higher"

On the 10th, Asia Economy analyzed the pension product returns of 43 retirement pension providers disclosed on the Financial Supervisory Service's Integrated Pension Portal. As of the first quarter of this year, the average return on retirement pensions over the past year was 0.44%. While the return was in the 2% range in the fourth quarter of last year, it has significantly decreased this year. This means that 296 trillion won (as of the end of last year) in retirement funds are earning returns lower than bank interest rates.

The decline in pension returns is highly correlated with the sluggish stock market. Since the second half of last year, as the stock market has declined, the returns of pension products aiming for excess returns have also fallen. An asset management industry official analyzed, "Due to inflation and interest rate hikes in various countries, domestic and international stock markets have declined, causing returns to drop significantly last year."

It was found that the returns of DC-type products, where individuals bear the responsibility for management, are lower than those of DB-type products. The average return of DB-type products, including principal-guaranteed and non-guaranteed (performance-linked) types, was 1.32%, surpassing the DC-type's 1.01%. The return of principal non-guaranteed DC products was -1.81%, significantly lower than the DB products' -0.64%. When total fees related to asset management (DB-type 0.35%, DC-type 0.47%) are included, the returns of DC-type products drop even further. The DB-type pensions, which had been criticized for earning returns comparable to bank deposits, are showing stronger resilience amid market downturns.

Kang Chang-hee, head of the Truston Asset Management Pension Forum, analyzed, "In the case of DC-type, where the subscriber is responsible, if individuals do not respond to market changes, returns can be lower."

Default Option: The Savior for DC-type

There is also a significant gap in returns among financial institutions offering different DC-type product groups. Over the past year, Shinhan Life Insurance recorded the lowest return of -5.74% (principal non-guaranteed) among all products. In contrast, KDB Life Insurance posted the highest return of 2.19% (principal guaranteed). Looking at the past three years, which reflect market fluctuations due to COVID-19, NH Nonghyup Bank recorded the lowest return of 1.47% (principal guaranteed), while Hanwha Investment & Securities achieved the highest return of 13.83% (principal non-guaranteed). Over the past 10 years, Samsung Securities had the lowest return of 1.92% (principal guaranteed), and Hana Financial Investment had the highest return of 5.14% (principal non-guaranteed). By accumulated fund size, IBK Industrial Bank recorded 1.15% (8 trillion won), KB Kookmin Bank 1.19% (8 trillion won), and Shinhan Bank 1.24% (7 trillion won).

In the securities industry, there is a point that retirement pensions, as long-term investment products, should be evaluated over a longer period regardless of product differences. However, individual investors, who have been hampered by the sluggish stock market, may have different views on the poor pension returns.

Given this situation, the necessity of the default option, which will be introduced next month, has grown even more. The default option is a system where, if an individual who has chosen the DC-type does not manage their funds for a certain period, experts manage the funds according to the individual's profile. It is analyzed that this could become a savior for DC-type retirement pensions, considering that individuals cannot beat the market.

Choi Jong-jin, head of the Pension Division at Mirae Asset Securities, stated, "With the introduction of the default option, DC-type subscribers will be able to entrust their retirement asset management to experts, which is expected to have a positive impact on improving returns."