'NPS Participation' Draws Mixed Reactions: "Catfish Effect Expected" vs "Undermining Multi-Layered System" [Fund-Type Retirement Pension] ④

Debate Over National Pension Service Participation Emerges
Bill for NPS Involvement Proposed in National Assembly
Expectations for Change in the Retirement Pension Market
Public Interest and Fee Reduction Also Discussed
Opponents Raise Concerns About Undermining Multi-Layered Pension System
"National Pension and Retirement Pension Fund Management Methods Differ"

There is a division of opinion regarding whether the National Pension Service (NPS) should participate in the introduction of the fund-type retirement pension system. Some expect that the NPS could play a catalytic role in the market, leveraging the benefits of economies of scale. However, there are also concerns that this could undermine the multi-layered pension system, and some argue that participation may be inappropriate because the fund management methods of the National Pension and retirement pensions are different. The NPS itself appears to take a positive view of participation.

Discussions about the NPS participating in the fund-type retirement pension system became more active last year, centered around the government and the National Assembly. At that time, the government convened relevant ministries, including the Ministry of Economy and Finance, the Ministry of Employment and Labor, and the Ministry of Health and Welfare, to operate a "Retirement Pension System Improvement Task Force (TF)" to examine whether NPS participation was necessary. The National Assembly, during the Health and Welfare Committee’s audit, also called on the NPS to participate in the fund-type system. Han Jeongae, a member of the Democratic Party of Korea, even spearheaded a revision to the Employee Retirement Benefit Security Act, which included a provision that the NPS would manage fund-type retirement pensions for workplaces with 100 or more employees.

The NPS has indirectly expressed a positive stance. In February, the NPS submitted a "2024 National Assembly Audit Correction and Follow-up Report," which stated, "We will strive to contribute to strengthening income security for the elderly, depending on the outcome of legislative discussions in the National Assembly." At an event last month, NPS Chairman Kim Taehyun explained the potential impact of the NPS entering the retirement pension market, saying, "The NPS will play a catalytic role by increasing the returns of retirement pension providers through yield comparisons, while avoiding friction with existing private financial institutions."

Those who view NPS participation positively make similar arguments. They believe that even without direct government regulation or supervision, the involvement of the NPS?a giant in the field?could effectively drive overall changes in the retirement pension market. The NPS has demonstrated high expertise, with a fund management return of 15.0% last year, and some argue that its participation would enhance the public interest aspect of retirement pensions. The potential to lower fees is also mentioned. Amid growing concerns over the depletion of the National Pension Fund, some argue that NPS participation could improve its sustainability.

Kim Taeil, a professor of public administration at Korea University, said, "While the fund-type system may be more costly than the contract-type system, the reason for introducing it is to increase returns. However, simply introducing the fund-type system will not immediately boost returns as seen in some foreign countries." He added, "The NPS should compete alongside private operators." He also emphasized, "We should consider what is better from the perspective of subscribers (the public), rather than from the standpoint of operators," and stated, "Given that the NPS has achieved high returns, there is no reason not to allow its participation."

On the other hand, there are also many who believe that NPS participation would do more harm than good. Some argue that the NPS and retirement pensions have different fund management philosophies and legal foundations, so NPS participation may not guarantee high returns. There are also concerns that the multi-layered pension system?consisting of the first layer (public pension), second layer (retirement pension), and third layer (private pension)?could be undermined. The core of the multi-layered system is to diversify income sources in old age to reduce risk, but over-reliance on the NPS could increase concentration risk. Excessive government intervention potentially shrinking the private market is cited as another concern.

Song Hongseon, a research fellow at the Korea Capital Market Institute, noted, "The National Pension Fund operates on a defined benefit (DB) basis, while the retirement pension fund will be centered on defined contribution (DC) plans, so there are significant differences in management methods and required organizational capabilities." Furthermore, he added that if the potential for "market friction with private operators" is considered, "it may be more desirable at the national level for the NPS to focus on strengthening its capacity to efficiently manage what will become a super-large fund of about 3,500 trillion won by 2050."