[Initial Perspective] Default Option as 'Ilgam Molaeju-gi?'

[Asia Economy Reporter Hwang Junho] "We will select only the best products to compose the default option."

On the 12th, ahead of the introduction of the Retirement Pension Pre-Designated Operation System (Default Option), the CEO of a retirement pension operator (securities company) stated this. The default option is a system in which the retirement pension operator manages pension assets according to the investor's risk profile when subscribing to defined contribution (DC) or individual retirement pension (IRP) plans, where the subscriber is responsible for investment. It is highly anticipated as a way to grow the 296 trillion won of retirement funds currently tied up in principal-guaranteed products with bank-level interest rates.

This statement carries significant meaning. At least, if investors subscribe to the default option through this securities company, it means they can manage their pension assets through carefully selected products created by various asset management companies.

At first glance, this sounds obvious. It is common sense that to attract subscribers, the best products should be offered. However, the situation is moving in a strange direction. There are signs that some securities companies are trying to compose default option products solely with products from their affiliated asset management firms.

This trend is especially active among large securities companies that have affiliated asset management firms. The Ministry of Employment and Labor, the supervising department, will conduct the first preliminary consultation on financial institutions and products from the 12th until the end of next month (up to 7 applications allowed). Some large securities companies are attempting to fill their products exclusively with those from affiliated asset managers. Initially, banks also joined this trend but recently changed direction to avoid inevitable controversy.

The reason for this behavior by large securities companies is largely due to insufficient regulations. The Enforcement Decree and Enforcement Rules related to the Worker Retirement Benefit Security Act (근퇴법) do not contain provisions to prevent securities companies from including only their own asset management products in the default option. Even recent task force (TF) discussions between the Ministry of Employment and Labor and financial institutions show the same. The industry views this as a 'loophole' created by rushing the system's implementation. It has created room for securities companies to exploit loopholes.

Securities companies see the default option as the last remaining lucrative opportunity to change the market landscape of asset managers. Last year, the popularity of exchange-traded funds (ETFs) caused cracks in the market structure previously dominated by a few asset managers. The expansion of pension assets through the introduction of the default option is either an opportunity to widen these cracks or the last chance to prevent them.

There is still an opportunity to correct this. The full bloom of the default option era is expected to be possible only by the end of next year, allowing some time. The Ministry of Employment and Labor’s first approval of default option products will not be completed until the end of October. Even after product approval, it will be tight to have the IT systems fully ready for the year-end implementation. Moreover, to introduce the default option, discussions must take place to reflect it in the rules of each investor (companies, individuals, etc.)?between companies and labor unions. From the securities companies’ perspective, the year-end is a busy time to attract funds for defined benefit (DB) retirement pensions, which hold most pension assets, so the full-scale blooming of the default option is realistically possible only by the end of next year.

The aforementioned securities company CEO defined the default option as "a measure prepared because it is difficult to form retirement assets with retirement pensions limited to bank interest rates amid worsening aging." He added, "It must provide optimal asset allocation and returns to gain investors' trust." Before the default option becomes a symbol of self-dealing, action must be taken to ensure the happy retirement of the people.