"Fund-Type Retirement Pension Differs from National Pension... Must Embrace Workers in Blind Spots" [Issue Interview]

Discussions on Introducing Fund-Type Retirement Pensions Surface
Pureun Ssiat in the Spotlight as Korea's Only Fund-Type System
Transparent Decision-Making Centered on Committees
Risk Managed and Returns Increased Through Private Management
Simple Comparison With the National Pension Service Is Difficult
Asset Allocation Reflecting Retirement Pension Characteristics Is Crucial

Discussions on reforming retirement pensions, which surfaced last year, are gaining momentum this year as the system marks its 20th anniversary. The government has announced the introduction of a fund-type retirement pension as a way to gradually mandate retirement pensions and improve returns. The Ministry of Employment and Labor, the main department in charge, recently launched an advisory group to introduce a Korean-style system and plans to propose related legislation in the second half of the year.

Among these, the 'Small and Medium Enterprise Retirement Pension Fund (Pureun Ssiat)' operated by the Korea Workers' Compensation and Welfare Service is attracting attention. Pureun Ssiat is the only public fund-type retirement pension in Korea, introduced in 2022 for workplaces with fewer than 30 employees. It surpassed 1 trillion KRW in reserves last year, with an annual return rate of 6.52%. Employment Minister Kim Moon-soo stated, "The achievements Pureun Ssiat has shown over two years indicate the direction our country's retirement pensions should take."

Hyun Hee-hwan, Director of the Welfare Pension Bureau at the Korea Workers' Compensation and Welfare Service, is giving an interview to Asia Economy at the Seoul Southern Branch of the Korea Workers' Compensation and Welfare Service in Yeongdeungpo-gu, Seoul, on the 20th of last month. Photo by Yoon Dong-ju

The success of Pureun Ssiat is based on a transparent decision-making system and an asset allocation strategy grounded in appropriate risk management. Through a decision-making body composed of academic and industry experts, appropriate return targets and investment strategies were established, and the asset management institutions entrusted with the reserves professionally managed risks to achieve stable returns, laying a foundation for rapid growth.

The direction for the Korean-style fund-type model will likely be similar. However, rather than being fixated on the 'fund-type' itself, it is necessary to consider an appropriate portfolio that fits the characteristics of retirement pensions. Unlike the National Pension Service, retirement pensions may face strong resistance from subscribers if returns decline. Discussions should focus on how to increase the proportion of risk assets to boost returns from a long-term perspective. Measures to include labor providers in blind spots should also be sought.

On the 20th of last month, we met with Hyung Hee-hwan, Director of Welfare and Pension at the Korea Workers' Compensation and Welfare Service Seoul Southern Branch, who is in charge of operating Pureun Ssiat, and Ryu Jong-ho, Senior Manager of the Small and Medium Enterprise Retirement Fund Management Team at Mirae Asset Securities, responsible for managing the reserves, at the Korea Workers' Compensation and Welfare Service office in Yeongdeungpo-gu, Seoul.

―Interest in Pureun Ssiat seems to be growing.

▲Director Hyung: Pureun Ssiat was introduced in September 2022 to improve the situation where, after the first introduction of retirement pensions in 2005, the subscription rate for workplaces with fewer than 30 employees remained at 23%, and the return rate over the past five years was only 2.3%. It is characterized by various supports, including financial subsidies for not only employers but also workers, and exemption from fees. As of the end of last year, 110,000 workers from 23,000 workplaces had subscribed, growing more than tenfold compared to the early stages of the system. The cumulative return rate as of the end of last year was 14.7%. Although it started as a pilot project, it is now regarded as a successful model.

―Why was Pureun Ssiat's return rate higher compared to general retirement pensions (2%)?

▲Director Hyung: Retirement pension returns depend on the individual returns of the investment products chosen by workers. Most workers lack information about investment products and prefer products focused on principal protection, such as savings and deposits, which yield low returns. In contrast, Pureun Ssiat pools workers' retirement contributions into a fund to realize economies of scale and manages it professionally, achieving high returns. The asset management plan was established through a Fund System Operation Committee involving experts from the government, labor, and management sectors, and entrusted to professional asset management firms Samsung Asset Management and Mirae Asset Securities, which contributed to the results.

Director Hyun Hee-hwan of the Korea Workers' Compensation and Welfare Service (right) and Senior Manager Ryu Jong-ho of Mirae Asset Securities' SME Retirement Fund Management Team are being interviewed by Asia Economy on the 20th of last month at the Korea Workers' Compensation and Welfare Service Seoul Southern Branch located in Yeongdeungpo-gu, Seoul.

▲Senior Manager Ryu: Factors contributing to the high returns over the past two years include high domestic and international bond yields, strong stock returns, and excellent performance by entrusted asset managers. Although the fund's domestic stock return was minus 6.6% last year, risk was reduced through diversified investments in overseas stocks and domestic and international bonds. Overseas stocks returned 34.5%, domestic bonds 5.8%, and overseas bonds 0.1%. This is why the overall fund return was about 2.4 percentage points higher than the target (4.1%).

―It seems asset allocation strategy was important.

▲Senior Manager Ryu: The reason for establishing an asset allocation strategy is to achieve target returns by appropriately combining assets that generate returns over the long term. It is nearly impossible to predict annual returns of stocks and bonds, but long-term returns can be reasonably estimated. Also, active communication between the service and management institutions to regularly check risks contributed to stable performance. When the professional management institution sub-delegated domestic stock management to other firms, selecting firms that performed well was also a factor.

―The government is promoting the introduction of fund-type retirement pensions. Do you think professional pension asset management through 'fundification' like Pureun Ssiat helps improve returns?

▲Director Hyung: When an organization composed of experts participates in fund management, there is a definite advantage in returns due to effects such as portfolio and asset allocation that individuals cannot achieve. I understand the government also feels the need to steadily increase retirement pension returns and is introducing fund-type pensions along with mandatory subscription.

▲Senior Manager Ryu: The significance of fund-type is that fund management is conducted systematically. Pureun Ssiat and the National Pension Service have transparent processes centered on committees to set goals. This is likely part of the process to establish the fund-type system. Also, separate from promoting fundification, the proportion of risk asset investments should be considered separately. The National Pension Service is said to manage well, and a high proportion of risk assets in asset allocation is the biggest factor in its performance. However, retirement pensions mainly invest in principal-guaranteed savings and deposits, resulting in low returns. This is why simple comparisons between retirement pensions and the National Pension Service are meaningless. The National Pension Service is based on long-term investment, and even if the fund incurs losses, individual pension payments do not change, but retirement pensions have a different nature that must be considered.

Director Hyun Hee-hwan of the Korea Workers' Compensation and Welfare Service (right) and Senior Manager Ryu Jong-ho of Mirae Asset Securities' SME Retirement Fund Management Team are seen conducting an interview with Asia Economy on the 20th of last month at the Korea Workers' Compensation and Welfare Service Seoul Southern Branch located in Yeongdeungpo-gu, Seoul.

―This year’s domestic and international economic conditions do not look easy. Are similar results to last year possible, and will there be changes in strategy this year?

▲Senior Manager Ryu: Considering that bond yields are relatively low this year, it will be difficult to achieve results comparable to the past two years. Therefore, the target return for this year's fund management plan has been slightly lowered to 4.0%, with a slight increase in risk assets and the inclusion of alternative assets to achieve stable performance. Alternative assets refer to those other than stocks and bonds, such as infrastructure investments or REITs (Real Estate Investment Trusts).

―Do you have any goals for operating Pureun Ssiat going forward?

▲Director Hyung: We want to increase subscribing workplaces to 38,000 this year. Also, expanding the target to freelancers and platform labor providers (such as quick service and delivery workers, golf caddies, etc.) is the direction we should move toward. Labor providers are not workers and thus are not eligible for retirement pensions, leaving them in a blind spot without legal protection. Since there are subscriber accounts where workers pay contributions themselves, it would be good if these labor providers could be included in the system.

―There are voices calling for gradually expanding the application of Pureun Ssiat from workplaces with fewer than 30 employees to those with fewer than 50 or 100 employees.

▲Director Hyung: Many low-income vulnerable workers work at workplaces with more than 30 employees and thus do not receive benefits. As a result, a bill was proposed in the National Assembly last year to expand the subscription target to workplaces with up to 100 employees. Currently, the National Assembly is hearing opinions from the Ministry of Employment and Labor and the Korea Workers' Compensation and Welfare Service. I hope discussions proceed well so that more employers and workers can receive government support and secure their retirement.