Experts: "Fiduciary Responsibility and Benefit Protection Must Be Strengthened" [Fund-Type Retirement Pension] ⑤

Widespread Fiduciary Responsibility in Anglo-American Countries
"Obligations Must Be Systematized and Clearly Defined"
In the US, Legal Entities Guarantee Pension Benefits
"Exit Strategies and Supervision Needed for Poor Management"
Redefining the Ambiguous Nature of Pension Funds
"Consistent System Design and Implementation Required"

"The fund-type governance structure is not simply a mechanism that pursues high returns through aggressive management. It is an institutional device designed to enhance operational efficiency from the perspectives of risk adjustment and returns. The significance of institutional reform lies in the fact that it provides an environment in which various policy tools aimed at improving returns can function efficiently." (Nam Jaeu, Research Fellow at the Korea Capital Market Institute)

On the 30th, elderly people were walking on the streets near Tapgol Park in Jongno-gu, Seoul. Photo by Kang Jinhyung aymsdream@

There is an assessment that introducing a fund-type retirement pension system could serve as a turning point to address the structural limitations of the current retirement pension system. However, the introduction itself does not immediately lead to improved returns or stronger old-age income security. Alongside preparing the necessary legislation for the introduction of the fund-type system, supporting mechanisms must also be established. Experts advise that it is essential to strengthen fiduciary responsibility and benefit protection, while also laying the foundation for long-term management.

The fund-type retirement pension system is a scheme in which a fund management committee, consisting of labor, management, and experts, determines the fund's management direction, which is then implemented by a trustee corporation. The core challenge is to develop an appropriate asset allocation strategy that reduces the risk of losses while enhancing returns. However, according to investment principles, the higher the expected returns, the greater the risk of loss. There is also the possibility of poor management due to moral hazard on the part of the trustee corporation. This is why there are calls to strengthen fiduciary responsibility and benefit protection, referencing similar systems in the Anglo-American world.

In its 2022 report, "Discussion on the Reform of Retirement Pension Governance Structure and Policy Directions," the Korea Insurance Research Institute stated, "In the fund-type governance structures of the UK and the US, fiduciary responsibilities tend to be set specifically and clearly." The report added, "To minimize side effects following the introduction of the fund-type system, it is necessary to systematize and clarify the scope of fiduciary duties, duties of care, asset management obligations, and information management responsibilities to the level stipulated in these countries."

Kim Jaehyun, Professor at the Department of Global Finance and Management at Sangmyung University and former President of the Korean Pension Association, explained, "Fiduciary responsibility originated in the trust system, which began in Anglo-American law," adding, "The concept of fiduciary responsibility was established in the UK and later adopted by the US and Australia." He continued, "Examining how specifically fiduciary responsibilities are defined in Anglo-American countries will be a key point in the introduction of the fund-type system," and added, "I understand that the government is currently looking into this."

Hong Kyungsik, President of the Korea Retirement Pension Development Institute, said, "In Japan, there was a case where the welfare pension fund system was abolished after failing in its operation," and added, "We should not only focus on returns, but also consider what exit strategies exist for poor management, and how to manage and supervise the funds." He also emphasized, "In the US, there is a legal entity called the Pension Benefit Guaranty Corporation (PBGC), and if a fund becomes insolvent, the institution pays pensions to workers on its behalf. We need to prepare management, supervision, and benefit protection mechanisms."

In fact, in Japan in 2012, AIJ, which had been entrusted with managing the assets of the welfare pension fund, caused a 90% loss of assets due to poor investments and manipulated returns. Afterwards, Japan strengthened regulations and supervisory systems for trustees and reformed its pension system. In the UK, in 1991, media tycoon Robert Maxwell caused a total loss of 400 million pounds by illegally diverting retirement pension funds from several affiliated companies for business purposes. Subsequently, the UK enacted pension laws to strengthen fiduciary responsibility and established a new pension supervisory authority.

There are also suggestions that measures are needed to encourage subscribers to maintain their retirement pensions for the long term in order to ensure stable fund management. This includes legally restricting early withdrawals from retirement pensions and introducing collateralized loans. There are also calls to expand the pre-designated management system (default option). Financial support such as tax benefits and management fee assistance for the initial establishment of the fund-type system is also mentioned. Some propose that the nature of retirement pensions should be clearly defined and that the system should be designed consistently.

Nam stated, "Retirement pensions are statutory mandatory pensions enforced by law, but they are also classified as private pensions. Because retirement pensions straddle both categories, the government faces difficulties in implementing policies." He continued, "If early withdrawals from retirement pensions are legally prohibited, it could be argued that it is unconstitutional for the state to restrict what is essentially a private pension and private property," and added, "The government should consistently implement policies after classifying retirement pensions accordingly."