3rd Year 30s, Retirement in 10 Years 40s, Pre-IMP 50s... Post-Retirement Wealth Scenario [Geumjjok Pension Snowball⑤]

[Asia Economy Reporter Lee Seon-ae] 'Retirement Pension Management Strategy Scenarios of Three Individuals'

Kim Ji-hwan (IT Developer, 30), Lee Ji-yoon (Sales, 40), and Seo Myung-jin (Office Worker, 55), who work in Seoul, changed their retirement pension accumulation method from Defined Benefit (DB) to Defined Contribution (DC) to manage their retirement pension funds directly. However, due to difficulties in selecting investment products and concerns about principal loss, they have not chosen any significant investments, leaving their retirement pensions managed at a principal-guaranteed level. However, with the introduction of the retirement pension 'Pre-Designated Management System (Default Option)' starting in July, DC subscribers will no longer leave their retirement pensions unattended and can expect higher returns than principal-guaranteed products.

However, managing retirement pensions does not guarantee high returns automatically, so continuous attention is necessary. The 'Default Option' is a system where, if a retirement pension subscriber does not provide management instructions, the pension is managed according to a pre-selected product. If no management instructions are given for 4 weeks, the subscriber is notified that the pension will be managed under the default option, and if no further instructions are given for 2 more weeks, the pension is actually managed under the default option. Even while managed under the default option, subscribers can issue individual management instructions at any time. Since the returns of various investment products can vary annually depending on market conditions, we examined expected scenarios for the retirement pension investment management of the three workers through experts.

◆Kim, a 3rd-year MZ Generation Employee

Kim joined the company at age 27 and has worked for 3 years. As a member of the MZ generation (Millennials + Generation Z), he tried to manage his pension directly with performance-based products from early this year using information obtained from social networking services (SNS). However, due to global inflation concerns and heightened geopolitical risks causing a general stock market slump, he has hesitated to invest and is currently leaving his funds unattended. In this situation, Kim designated a Target Date Fund (TDF) as his default option. A TDF is an investment product that adjusts the allocation ratio of stocks and bonds according to the remaining period until the investor's retirement target date. When the subscriber is young, the ratio of risky assets like stocks is high, but as retirement approaches, the ratio of safer assets like bonds increases.

Assuming Kim retires in 22 years as per the scenario, if managed under the default option for 22 years, the total retirement pension would depend on the assumed return rate of the designated TDF fund. Calculating with an annualized return of 5%, the total retirement pension would be about 330 million KRW. Without the default option (managed at a principal-guaranteed return rate of 2% for 22 years), the total retirement pension would be about 230 million KRW. If he had remained under the DB plan from the start, his pension would be calculated as the 'average wage for the last 3 months × years of service,' so with an average monthly salary of 11.21 million KRW in the final year × 25 years, it would be about 280 million KRW.

◆Lee, 40, Dreaming of Retirement in 10 Years

Lee plans to retire in 10 years and was assigned to an overseas post earlier this year. Due to the sudden assignment, he has been too busy to focus on investments. His retirement pension fund, which he switched to DC to manage directly, has ultimately been left unattended. In this situation, he chose a real estate infrastructure fund as his default option.

Assuming Lee retires in 10 years as per the scenario, if managed under the default option for 10 years, with a booming real estate market and an annualized return of 10%, the total retirement pension would be about 260 million KRW. If the real estate market declines and the annualized return is -5%, the total retirement pension would be about 80 million KRW. Without the default option, managed at a principal-guaranteed return rate of 2% for 10 years, the total retirement pension would be about 140 million KRW. If he had remained under the DB plan from the start, his pension would be calculated as the 'average wage for the last 3 months × years of service,' so with an average monthly salary of 5.5 million KRW in the final year × 25 years, it would be about 140 million KRW. Since the principal-guaranteed return rate and salary increase rate are the same, managing with principal guarantee or accumulating under DB is almost the same.

◆Seo, Facing Wage Peak

Seo, aged 55, is subject to the wage peak system at his company. Since it is advantageous for workers under the wage peak system to switch to DC, he was switched but has no particular intention to manage directly. Planning to retire in 2025, he hopes to manage his pension fund, which is worth hundreds of millions of KRW, safely and chose a principal-guaranteed product as his default option. Assuming Seo retires in 3 years as per the scenario, if managed under the default option for 3 years at about 2% principal-guaranteed return, the total retirement pension would be 160 million KRW. Without the default option, managed at a principal-guaranteed return rate of 2% for 3 years, the amount would be the same. If he had remained under the DB plan from the start, since wages decrease annually under the wage peak system, the retirement pension would be reduced compared to before the wage peak system application. Therefore, workers under the wage peak system generally switch to DC.

An official from a securities company's retirement pension management department said, "Besides these three cases, there are countless scenarios for each worker, but ultimately, the default option system benefits workers when the expected return of the product designated through the default option is higher than the principal-guaranteed return rate," adding, "There is no right answer in investment, but it is necessary to select a default option product suitable for one's situation and maintain continuous interest."

The financial investment industry expects improved returns with the introduction of the default option. An industry official said, "At the end of last year, retirement pensions approached about 300 trillion KRW, but nearly 90% of the amount was invested in principal-guaranteed products. Once the default option is fully implemented, pension investment products like TDFs are expected to become more active," adding, "The recent 10-year average annual return of domestic DC retirement pensions is 2.7%, which is low compared to the US (8.6%) and Australia (7.7%). We expect returns to improve through investment-type products under the default option."

However, if subscribers focus only on 'principal guarantee,' the story changes. The industry official said, "The introduction of the default option is expected to improve long-term returns for pension investors, and pension investors are also expected to actively utilize the default option," but added, "Even if the default option operates, depending on investors' choices, financial companies may have to manage funds in safe assets like principal-guaranteed products. Therefore, pension investors need to set target returns suitable for themselves and take responsibility for the corresponding risk."