[Financial Planning for the 100-Year Life] Expansion of the DC-Type Retirement Pension Market and Pension Investment Education

The retirement pension system introduced in December 2005 has grown to a balance of 382 trillion won as of the end of 2023. By system type, the DB (company-responsible) type, where the company is responsible for pension asset management, accounts for 53.7%, the corporate DC (defined contribution) type among DC (participant-responsible) plans accounts for 26.5%, and the individual DC type, IRP, accounts for 19.8%. Notably, the proportion of corporate DC and IRP has been steadily increasing.

Most medium-sized and small enterprises newly adopting the retirement pension system are choosing the DC plan, and among companies that previously adopted the DB plan, more are switching to DC plans. Additionally, a significant number of retiring employees are converting their retirement pensions into IRPs. The issue lies in how DC-type pension assets are managed. Approximately 78% of managed assets are placed in products with principal and interest guarantees, such as deposits or short-term financial products. The proportion of investment products that can expect some level of returns is only 22%. As a result, the average return over the past 10 years has been just slightly above 2%.

In the United States, about 80% of DC-type pension assets are invested in investment products. This is because DC pension participants have established the perception that "long-term asset management for retirement should be invested in products that, despite short-term downside risks, can expect higher returns than deposit interest rates over the long term." Although there is no official data on the operating returns of DC pensions, according to the American Investment Company Institute, the average annual return over the past 10 years has been about 8%. Many employees start their working life with the dream of becoming retirement pension millionaires and actively manage their pension assets in investment products. The development of the DC pension market and fund market in the U.S. through mutual interaction has been the result of institutional improvements such as expanded tax benefits and the introduction of automatic fund enrollment systems, as well as efforts to improve management methods. However, these efforts would have been difficult to achieve without the awareness level of pension participants. The investment knowledge and sense of personal responsibility accumulated among Americans through home education, school education, corporate training, and the activities of economic and financial education organizations with a 100-year history have laid the foundation for the development of DC pensions and the fund market. Even in Japan, where the development of DC pensions and the fund market lags far behind the U.S., much effort has been made since the introduction of the DC retirement pension system in 2001 to expand DC pensions and improve pension asset management methods. Companies adopting the DC pension system, the government, and financial institutions have made special efforts not only to improve institutional and management methods as done in the U.S. but also to raise the relatively low levels of investment knowledge and personal responsibility among Japanese people. After long discussions, mandatory financial and economic education has been implemented in elementary and middle schools since 2021 and in high school curricula since 2022. Companies are also actively providing pension investment education under the awareness that it is their obligation to educate participants (employees).

The DC pension system originally shifts the pension asset management risk, which should be borne by the company, onto the employees. From the employees' perspective, it is a system that requires them to participate in asset management themselves. If investment education is not properly conducted, problems such as old-age poverty due to management failures caused by lack of investment ability may arise, or large differences in management returns among employees may create new inequalities, which could lead to distrust in the pension system. This is why advanced countries' companies, governments, and financial institutions have been striving to promote pension investment education. In this regard, domestic companies, governments, and financial institutions should seriously reflect on how much interest and effort they have devoted to improving the returns of DC pensions so far. Institutional improvements and management method improvements are important, but such efforts cannot succeed without the support of employees' investment knowledge and sense of personal responsibility. In particular, the activation of pension investment education for companies that have introduced DC pensions, shifting the responsibility for pension asset management from the company to the employee, is urgently needed.

Kang Changhee, Representative of the Happy 100-Year Asset Management Research Association