To Ease Old-Age Worries and Boost Retirement Pensions, "We Need to Change Like This Country"

National Pension Research Institute Report
"Reform Toward the Dutch CDC Model Is Appropriate"

Amid ongoing criticism that South Korea’s retirement pension system fails to serve as an effective old-age income security mechanism, a recommendation has been made to restructure the system in line with the Dutch model, which strengthens state responsibility and regulation while distributing risks collectively.

Asia Economy DB

The National Pension Research Institute stated in its recently published report, “Categorization and Comparative Analysis of Retirement Pension Systems by Type,” that “South Korea’s retirement pension system, introduced in 2005 under the Employee Retirement Benefit Security Act, has not properly fulfilled its role as an old-age income security system even after more than 20 years.” The report added, “It is now necessary to fundamentally restructure the system to promote further development of retirement pensions.”

According to the report, as of 2022, South Korea’s retirement pension participation rate stood at only 53.2%, indicating that the system cannot be considered mandatory. In particular, as of 2023, only 10.4% of participants receive their benefits as a pension, highlighting that the retirement pension system is not functioning effectively as a means of old-age income security.

The research team classified global retirement pension systems into eight types (A?H) based on two criteria: “scope of coverage (mandatory/voluntary participation)” and “degree of old-age income security (risk bearer/state regulation).” However, types D, E, F, and H were excluded from consideration, as real-world examples are rare or they are not relevant for the development of South Korea’s retirement pension system.

Type A, represented by Switzerland, is a “state responsibility?mandatory participation” model. The federal parliament sets by law the minimum interest rate (1.25% in 2024) and annuity conversion rate (6.8% in 2024), operating the system as a de facto defined benefit (DB) plan. Switzerland’s retirement pension system has strong public pension characteristics, providing not only old-age income but also coverage for death and disability.

Type B, represented by the Netherlands, is a “joint employer-employee responsibility?quasi-mandatory participation” model. It is operated based on industry-level collective labor agreements, and as of 2022, about 93% of the working-age population is enrolled. Due to concerns over the sustainability of the DB model, the Netherlands is transitioning to a collective defined contribution (CDC) system that distributes risks among workers. The system mandates the establishment of solidarity funds to protect benefit rights, thereby maintaining the value of solidarity.

Type C, represented by Australia, is an “individual responsibility?mandatory participation” model. All investment risks are borne by individual workers. The government focuses more on regulating the market environment than on the content of the system itself. By operating a default option (MySuper) under government supervision, market competition is promoted, resulting in lower fees and higher returns.

Type G, represented by the United Kingdom, is an “individual responsibility?voluntary participation (with opt-out)” model. The introduction of automatic enrollment in 2012 increased the participation rate to 79% (as of 2021). The government operates a state-led retirement pension scheme (NEST) to support low-income workers and those employed by small and medium-sized enterprises.

The report stated, “If the goal is to enhance the function of retirement pensions as old-age income security, it would be desirable to move toward the Swiss or Dutch models.” However, it also noted, “Given the current environment of population aging and low growth, as well as the excessive burden on employers, reforms are underway to shift from DB to DC retirement pensions. In this context, reforms toward the Swiss model, which would require pension funds to assume responsibility for minimum interest rates and similar obligations, are likely to face very low acceptance.” The report concluded, “When considering the allocation of risk, reforming toward the Dutch CDC model is deemed appropriate.”