'Naedonnaesan' IRP Surpasses 50 Trillion Won, Default Option Benefits Next Month [Geumjjok Pension Snowball③]

③ Retirement Pension IRP is Rising

Cumulative Reserves Exceed 50 Trillion Won in Q1
Over 30% Growth Since 2019
Generous Tax Benefits Drive Popularity
Competitiveness Enhanced by Default Option Introduction

[Asia Economy Reporter Hwang Junho] #. Office worker Kim Ji-seok decided to subscribe to an Individual Retirement Pension (IRP) as a retirement asset in addition to the Defined Benefit (DB) retirement pension provided by his company. It is reasonable because he can manage the assets himself while enjoying tax benefits. In particular, the fact that one can receive a tax credit of 1.15 million KRW by contributing up to 7 million KRW annually, including pension savings, makes it an appropriate investment tool in the current ultra-low interest rate tightening environment.

IRP reserves exceeded 50 trillion KRW in the first quarter of this year. This is the result of establishing an essential means to build a ‘retirement pension snowball system.’ Since most office workers subscribe to DB-type retirement pensions, which yield returns at the level of bank deposit interest rates, the popularity of IRP is gradually increasing as a means to improve asset allocation and returns. In particular, from the 12th of next month, the pre-designated operation system (default option) will also be applied, making management much easier.

IRP Reserves Surpass 50 Trillion KRW

According to the integrated pension portal of the Financial Supervisory Service on the 14th, the total IRP reserves (principal-guaranteed + non-guaranteed) increased by 4.45 trillion KRW in just the last quarter. From 46.4945 trillion KRW in the fourth quarter of last year, it recorded 50.95 trillion KRW in the first quarter of this year, breaking the 50 trillion KRW barrier. IRP reserves are also growing significantly this year. Since 2019, IRP reserves have shown a growth rate exceeding 30%, approximately 32.4%, 35.5%, and 35.1% respectively.

The popularity of IRP is attributed to tax benefits. For pension savings, a tax credit of 4 million KRW per year is available, and by additionally subscribing to IRP, one can receive a tax credit up to 7 million KRW (13.2~16.5%). For those aged 50 and above, whose retirement is approaching, the pension savings deduction limit increased from 4 million KRW to 6 million KRW until 2022. For those over 50, the combined deduction amount including IRP rises to 9 million KRW. In a situation where direct investment is the trend, it is regrettable for individual investors that out of the total retirement pension of 296 trillion KRW, 255 trillion KRW is concentrated in the DB type, where the company is responsible for management.

Song Jae-hak, head of the Pension Consulting Division at NH Investment & Securities, analyzed, "The increase in IRP reserves is attributed to the ability to trade principal-guaranteed products such as savings/deposits, funds, and Exchange-Traded Funds (ETFs), satisfying the investment desires of various age groups," adding, "The amendment of the Employee Retirement Benefit Security Act, which requires the transfer of retirement pay of job changers and retirees into IRP accounts, also seems to have had an impact."

Default Option Also for IRP

In particular, from July 12th, along with DC plans, the limit for including financial investment products such as equity-type and mixed equity-type funds and public ELS in IRP will be expanded from the current 70% to 100%. The authorities judged that about 90% of the reserves are managed only in low-interest principal-guaranteed products due to subscribers' indifference, resulting in a persistent low return rate. Accordingly, the default option was introduced, and the investment limit was increased. The default option is a system where, if the subscriber does not provide separate management instructions, the subscriber is notified that the default option will be applied after four weeks, and from two weeks after the notification, the business operator manages the pension.

With the introduction of the default option in IRP, IRP returns are also expected to improve. As of the first quarter of this year, the IRP return rate was 0.76%. Like the DC type, returns significantly decreased due to stock market fluctuations. Following the stock market boom after COVID-19, the return rate over the past three years was 3.06%, similar to the DC type (3.11%) and DB type (1.72%). The top five companies by reserves recorded returns in the 1% range.

The lineup of investment products is also diversifying. As interest in investment rises, Target Date Funds (TDFs), which allocate assets according to the investor’s retirement timing, and ETFs that invest in various indices and themes are increasing significantly. As of the 13th, the net assets of TDFs reached about 9 trillion KRW, up about 1 trillion KRW from 8 trillion KRW at the end of last year. ETF net assets stand at about 73 trillion KRW, maintaining a level similar to the beginning of the year. An asset management industry official said, "Although market volatility has increased, we are designing various products to allow asset allocation effects and long-term investment benefits through IRP accounts."