[Viewpoint] Let's Entrust Retirement Pension Management to the National Pension Instead

Not many employees fully understand how their retirement pensions are managed. Most choose the Defined Benefit (DB) plan, assuming that like the old severance pay system, 8.33% of their monthly salary is deducted and gradually accumulated. If they select the Defined Contribution (DC) plan, they must manage their retirement pension themselves, which is cumbersome and does not guarantee stable high returns. For this reason, as of the end of last year, 53.7% (205.3 trillion KRW) of the 382.4 trillion KRW in retirement pension reserves were in DB plans.

Most people still receive their retirement pension as a lump sum upon retirement. At the end of last year, the proportion of lump-sum withdrawals from retirement pensions was 89.6% (based on the number of accounts). This is because the total amount of retirement pension is not very large or is used as a lump sum for purposes such as purchasing a home or repaying loans. This undermines the original purpose of the system, which was to serve as a financial pillar supporting old age alongside the National Pension.

Earlier this year, the government announced in its economic policy direction that it will gradually mandate the introduction of retirement pensions in all workplaces. Various incentives are being discussed to support this, but the most important factor is the rate of return. If retirement pensions offered significantly higher returns than other investments, no one would refuse them.

Let’s compare the returns of retirement pensions and the National Pension. From 2017 to 2021, the average annual return on retirement pensions was only 1.94%, whereas the National Pension achieved an average annual return of 7.63%. That is nearly a fourfold difference. In the strong stock market of last year, retirement pensions yielded a 5.25% return, while the National Pension recorded 13.59%. The National Pension has set a target return of 5.4% for the next five years.

However, the National Pension’s performance is not outstanding compared to major countries’ pension funds. It is rather puzzling that privately managed pensions yield an average annual return of around 2%, which is lower than interest rates on savings and deposits. In countries with well-developed retirement pensions such as the United States and Canada, retirement pension returns exceed those of the Korean National Pension. In Sweden, for example, 2.5% of the 18.5% pension contribution is managed by private financial institutions, achieving returns exceeding 7%.

Experts have proposed various ideas to increase returns. Many suggest creating a “fund-type intermediary organization” that invests the reserves on behalf of subscribers, similar to the National Pension. Many foreign countries have actually introduced such fund-type intermediary organizations. A notable proposal is to establish a separate “Retirement Pension Fund Management Headquarters” within the National Pension Service, distinct from the existing “National Pension Fund Management Headquarters,” to manage retirement pensions.

This would be welcomed by workers. Retirement pension reserves are expected to grow to 940 trillion KRW by 2033. Considering the advantages of economies of scale in investment, much higher returns can be expected than currently. Private financial institutions managing retirement pensions now are essentially “swimming with their feet on the ground,” showing little interest in returns. If a powerful competitor emerges, private financial institutions will find it difficult to sustain such low returns. It would be like introducing a strong catfish into the retirement pension market.

When there is a trustworthy place to entrust retirement pensions, and when it becomes clear that receiving pensions periodically is much more advantageous than taking a lump sum severance pay, the retirement pension system will naturally take root. The curse of low birthrates and aging targets “poor retirees.” The government should promptly introduce improvements to ensure that retirement pensions function as intended.