[Retirement Pension Paradigm Shift]② 340 Trillion Money Move Triggered by Default Option... Rapid Growth of TDF

Retirement Pension Returns in the Past Year: Securities > Banks > Insurance
Increased Understanding of Default Options Expected to Accelerate Fund Movement
Funds Concentrate in TDF Products, Net Assets Surpass 10 Trillion Won

While banks and insurance companies occupy 80% of the domestic retirement pension market, a money move phenomenon is emerging as securities firms lead in the retirement pension default option (default option) returns.

Q2 DC-type Average Returns: Securities 6.72%, Banks 6.27%, Insurance 5.88%

According to the Financial Supervisory Service's Integrated Pension Portal on the 21st, the recent one-year operating returns by industry for default option targets, defined contribution (DC) and individual retirement pension (IRP), ranked securities firms > banks > insurance companies. As of the end of Q2, the average return for DC-type on a principal-guarantee excluded basis was 6.72% for securities, 6.27% for banks, and 5.88% for insurance. In the securities industry, Samsung Securities led with 8.54%. Hyundai Motor Securities (8.21%) and Hanwha Investment & Securities (8.01%) also recorded returns in the 8% range. Following were NH Investment & Securities (7.34%), Mirae Asset Securities (6.69%), KB Securities (6.66%), Daishin Securities (6.64%), Hana Securities (6.23%), Shinhan Investment Corp. (6.05%), Shin Young Securities (6.03%), Hi Investment & Securities (6.01%), Yuanta Securities (5.55%), and Korea Investment & Securities (5.50%).

This return performance has caused changes in the size of retirement pension reserves. As of the end of Q1, the domestic retirement pension market size was approximately KRW 338 trillion. Among this, banks held a majority with KRW 174.9013 trillion. Securities firms held KRW 76.8838 trillion, and insurance companies KRW 86.5809 trillion. In Q2, bank reserves increased by KRW 4.4869 trillion (2.6%) to KRW 179.3882 trillion. Insurance reserves increased by only KRW 691.5 billion (0.8%) to KRW 87.2724 trillion. Conversely, securities firms' reserves rose by KRW 2.2696 trillion (3.0%) to KRW 79.1534 trillion.

Banks have been able to lead the retirement pension market largely because most workers subscribe to the retirement pension products of the banks they transact with at work. The retirement pensions of the five major banks are mostly operated as principal-guaranteed products. Given the nature of bank customers, many prefer stable returns, making these products suitable. However, as more young investors seeking high returns through aggressive management increase, securities firms' products are gaining popularity. In particular, the default option is triggering money moves. Securities firms believe that as awareness of the necessity of high-return products for retirement preparation and understanding of the default option increase, they can raise their market share in the retirement pension market.

Money Move to Securities Firms for Retirement Pensions

According to the top six large securities firms by capital (Mirae Asset, Korea Investment, NH Investment, Samsung, Hana, KB Securities) as of the first day of the default option implementation, the amount of retirement pension funds flowing into each firm's default option products in Q2 was approximately KRW 92.25 billion. This represents about an 84% increase compared to Q1.

However, a significant portion of the funds still flows into ultra-low-risk products centered on deposits and savings. This is due to investors' low understanding of the default option. According to the Ministry of Employment and Labor, among the approximately 2 million people enrolled in the default option by the end of June, about 1.77 million invested in ultra-low-risk products. The reserves amounted to KRW 939.3 billion, accounting for 85.2% of the total. Low-risk, medium-risk, and high-risk products had about 90,000 (KRW 80.6 billion), 80,000 (KRW 48.8 billion), and 60,000 (KRW 33.2 billion) subscribers respectively. The returns from January to June were lowest for ultra-low-risk at 2.26%, followed by low-risk at 4.23%, medium-risk at 6.09%, and high-risk at 8.88%. Among the top 10 high-risk products with the highest six-month returns, eight were from securities firms. As the perception that securities firms overwhelmingly outperform in returns spreads, the money move is expected to intensify.

Kim Jin-woong, head of the 100-Year Life Research Institute at NH Investment & Securities, analyzed, "Investors choosing the default option are often not originally aggressive investors, and since bank deposit and savings rates were not bad at around 4% during the initial introduction last year, demand for ultra-low-risk products was higher." He added, "As more people have experienced direct investment through the COVID-19 pandemic, this experience is accumulating, and demand to invest retirement pension funds in higher-return products is expected to gradually increase."

TDF Products Expected to Lead Retirement Pension Money Move

As funds are expected to flow into various investment assets that can boost long-term retirement pension returns, target date funds (TDFs), which adjust the proportion of risky assets according to life cycle, are expected to grow rapidly. Since most retirement pension default option products are selected as TDFs, their influence is expected to increase. Accordingly, TDF products are anticipated to lead the money move in retirement pensions.

Introduced in 2016, TDFs are asset allocation funds that adjust the ratio of risky assets such as stocks and safe assets such as bonds according to the subscriber's target retirement date. Usually, numbers like '2040' or '2055' are attached to the product name, and subscribers choose products matching their expected retirement year. In their 20s and 30s, the proportion of risky assets is high, gradually decreasing as the retirement date approaches, following a "glide path" (life cycle asset allocation curve) design.

The growth of TDFs in the domestic market is steep. According to the Korea Financial Investment Association, as of the end of Q1 this year, the cumulative net asset value of TDFs reached KRW 11 trillion. Among this, the pension class exceeded KRW 10 trillion. The pension portion accounted for 92.3% of the KRW 10 trillion. Within pensions, retirement pensions amounted to KRW 8.1 trillion (73.7%), and personal pensions KRW 2 trillion (18.6%). Moon Yoo-sung, head of the pension department at the Korea Financial Investment Association, stated, "Between 2018 and 2021, TDF reserves within retirement pensions more than doubled annually," and evaluated, "TDFs have established themselves as representative performance-based products in the retirement pension market."

Cumulative returns are also favorable. From 2018 to Q1 2023, TDFs recorded a cumulative return of 15.7%, while principal-guaranteed products recorded 9.1%. Moon said, "In terms of management performance, TDFs have consistently delivered stable results between overseas equity funds and domestic bond funds annually," explaining, "During stock market upswings, they synchronize with major global indices to generate returns, and during downturns, they partially defend against losses."

According to FnGuide, as of the day before the default option implementation on the 11th of this month, the highest return this year was 'Korea Investment TDF ETF Focus 2060' at 14.97%. Following were 'KB On Gukmin TDF 2055' at 14.77%, 'Kiwoom Heroes TDF 2050' at 13.53%, and 'Samsung KODEX TDF 2050' at 12.92%. Over the past two years, KB On Gukmin TDF 2055 (22.4%), Mirae Asset Asset Allocation TDF 2045 (14.9%), and Korea Investment TDF Alseorae 2050 (14.1%) recorded high cumulative returns.

Na Seok-jin, head of the Industrial Market Division at the Korea Financial Investment Association, said, "TDFs are the first pension-specialized products in Korea, and with the introduction of the default option system and growing interest in pension investment, growth is expected to continue," adding, "TDFs align well with the long-term, installment nature of pension investments and will ultimately contribute to improving retirement pension returns and increasing the pension assets of the public."