"Era of 2,000 Trillion Won Pension Assets... Need for Discussion on Introducing Fund-Type Retirement Pension System"

In order to efficiently manage domestic pension assets,there have been recommendations to introduce a fund-type retirement pension system and to improve the pre-designated investment option system (default option).

Nam Jae-woo, a research fellow at the Korea Capital Market Institute, made these remarks during a keynote presentation at a policy symposium jointly hosted by the Korea Capital Market Institute and the Korean Securities Association, held at the Korea Financial Investment Center in Yeouido, Seoul, on the afternoon of June 17, under the theme "Improving Pension Asset Management to Increase Retirement Income."

First, Nam emphasized, "The key to managing domestic pension assets is building an investment portfolio with diversified risks," adding, "This can be achieved through efficient indirect investment vehicles managed by external experts." The size of domestic pension assets is estimated to exceed 2,000 trillion won, including 1,227 trillion won in the National Pension, 432 trillion won in retirement pensions, and 370 trillion won in personal pensions.

Accordingly, Nam argued that the introduction of a fund-type retirement pension system and improvements to the default option system are necessary. Currently, Korea's retirement pension operates under a "contract-type" system, in which individual companies or subscribers sign contracts with financial institutions for management. The "fund-type" system, on the other hand, involves establishing a separate pension fund, which, with a professional governance structure, oversees the selection of asset management firms, fee negotiations, and overall management and supervision.

Nam stated, "There is a need to reintroduce the opt-out default option system and to reform the current pre-designated investment option system," and pointed out, "The pre-designated investment option system should be improved to exclude principal-guaranteed products and to present only a single product for each risk grade." He added, "For the fund-type retirement pension system, it is important to encourage active participation from private financial institutions and to foster a competitive environment centered on performance."

Yoon Sun-jung, a professor at Dongguk University and another keynote speaker, also argued that improvements to the fund management system are necessary due to changes in both domestic and global economic and pension environments. Professor Yoon explained, "Due to the growing size of funds, it is crucial to secure flexibility in asset management," and added, "The introduction of a Total Portfolio Approach (TPA) is expected to help enhance returns by providing such flexibility, as evidenced by major pension fund cases." He also highlighted, "It is important to set a benchmark portfolio that reflects the fund's life cycle," and identified "expanding overseas investments and addressing home bias as key tasks."

Following the keynote presentations, Park Hee-jin, a professor at Pusan National University Business School who participated in the panel discussion, noted, "While the National Pension is pursuing the introduction of TPA and expanding alternative investments, a thorough review is needed to determine which approach?active or passive strategies?is more efficient, given the super-large scale of the fund." He stressed, "To assess the validity of management strategies, disclosure of management costs by asset class and by strategy is essential, and this is a basic requirement for ensuring international-level transparency and accountability." He also added, "Retirement pensions need to move beyond an accumulation-focused structure and develop management designs and default strategies for the payout phase, so as to evolve into a true retirement income security system."

Yeo Eun-jung, a professor at Chung-Ang University School of Business, also stated that expanding the role of TPA, reducing home bias, and increasing the proportion of alternative assets are desirable. She said, "To improve the governance of the National Pension, it is necessary to separate policy and management functions, strengthen the independence of the investment management division, and enhance the authority of the CIO." Lee Seuran, Director of Social Welfare Policy at the Ministry of Health and Welfare, expressed gratitude in her congratulatory remarks for the opportunity to discuss ways to improve the management of the National Pension and retirement pensions, stating, "We will actively listen to the diverse opinions of experts and reflect them in fund management policies."