Personal Pensions to Supplement the National Pension... What Are the Rational Benefit Strategies?

Insurance Institute: "Interest in Personal Pensions Grows as Baby Boomers Retire"
'Whole Age Maturity' and 'Term Maturity' More Reasonable Than Lifetime Annuities
Early-Concentration and Increasing-Type Plans Should Also Be Used Appropriately

As the baby boomer generation begins to retire in earnest, interest in securing financial stability for old age is growing. There is increasing support for the argument that personal pensions are necessary to supplement the National Pension, as relying solely on the National Pension may not be sufficient for a stable retirement.

According to the report "Rational Personal Pension Benefit Strategies for Stable Retirement Income," published by the Korea Insurance Research Institute on June 8, the first wave of baby boomers (born between 1955 and 1963) have already reached the statutory retirement age of 60 and most have retired. The second wave of baby boomers (born between 1964 and 1974) will all reach retirement age by 2034.

Pensions, which form a major pillar of retirement income, are divided into the National Pension, retirement pensions, and personal pensions. The starting and ending points of these pensions differ. The National Pension begins at the age specified by law and is paid for life. In contrast, individuals can choose the starting point and payment period for personal and retirement pensions.

If one relies solely on the National Pension, there is a risk of income gaps due to pension gaps. This is because there is a difference between the age at which baby boomers begin receiving the National Pension and the age at which they retire from work. For the second wave of baby boomers, the National Pension starts at age 63 to 65, but the statutory retirement age is 60. Therefore, a strategic combination of various types of pensions is necessary to ensure a stable retirement after leaving the workforce.

Kim Seokyoung, Senior Research Fellow at the Korea Insurance Research Institute, suggested that among personal pensions, products that pay benefits until a specific age (whole age maturity) or for a set period (term maturity) may be more reasonable than lifetime annuities.

For example, suppose a man (with a life expectancy of 80.6 years) and a woman (with a life expectancy of 86.4 years) receive personal pension benefits until their expected life expectancy. In this case, the pension payment period would need to be about 20 to 30 years. However, if a lifetime annuity is chosen, the payment period is assumed to be about 40 years, which increases the likelihood that the final pension amount will be lower. This is because insurers calculate the final age conservatively to account for longevity risk and determine the pension amount based on age-specific mortality rates. As a result, the calculated pension amount is lower than that of whole age or term maturity products. Kim stated, "Although life expectancy has increased, in reality, there are not many people who live beyond 100 years old," and added, "Since the National Pension already provides lifetime coverage, unless there are special health conditions or family history, it is appropriate to set the pension payment period to term maturity or whole age maturity."

Personal pensions can also be structured in various forms, such as early-concentration or increasing-type, depending on the policyholder's future cash needs. Kim advised, "The early-concentration type allows for larger pension payments in the early stages of the payout, which can help cover the pension gap before the National Pension begins. On the other hand, if post-retirement expenses are expected to be lower but future needs such as healthcare or nursing costs are anticipated, the increasing-type is a better choice."