By Cho Jin-seo
The size of corporate pension plans has doubled in only 10 months to 20 trillion won ($17.8 billion) as of the end of September, data from the Financial Supervisory Service (FSS) showed Sunday.
Some 1.83 million workers at 83,160 firms are now subscribed to corporate pension plans, in addition to the mandatory public pension scheme of the National Pension Service (NPS). The total deposits in corporate pension plans amounted to 20.3 trillion won, up from 10 trillion won in November 2009 and from 5 trillion won in November 2008.
This means that roughly one in four workers with permanent jobs are now paying into corporate pension schemes. On the other hand, most temporary workers and people at small firms with less than 10 employees are not covered by such a program, yet.
Considering the pace of expansion, the corporate pension market is expected to exceed 50 trillion won by the end of next year.
This sector is regarded as the next goldmine for financial firms, as the population is rapidly aging and markets for traditional products, such as life insurance, are being saturated.
Korea has the lowest birthrate among OECD nations, signaling that the tax from the young generation will not be enough to support the relatively large number of retirees in the future.
Even the NPS, the government-run pension fund, is expected to run out of money around 2050 even with an optimistic scenario of a 6.8 percent annual return. This leaves Koreans doubtful about whether they can trust the government with their retirement funds.
In response to these growing worries, financial firms, such as banks, insurance companies and even stock-trading firms, are jumping into the business of corporate pension plans. They sell plans to companies and run funds for them for fees and commissions.
Compared to other investment tools such as hedge and mutual funds, these private pension plans are operated in a more conservative way. About two-thirds of the plans are the (relatively) safe defined-benefit (DB) type, where a firm promises to pay a fixed amount of pension to employees.
The remainder are the more aggressive defined-contribution (DC) types, where the pension is managed by financial firms and the laborer is later paid the returns on the investment. As the commission is fatter with the DC type, financial firms are eager to sell the DC type rather than the DB type.
In general, commercial banks are dominating this corporate pension sector. But Samsung Life Insurance has the largest market share, with 3.6 trillion won under management ― without competition, it sells pension plans to Samsung Group, the largest business group in Korea.
Past performances are good enough to persuade companies and employees to buy into more of these private pension plans. On average, the private sector has made a 7.2 percent return on investments every year, the FSS said. The NPS, on the other hand, has shown a 6.9 percent return since its inception in 1988.
The higher return does not mean a higher risk. About 90 percent of the corporate pension pool is invested in safer fixed-income assets such as bank deposits and bonds. At the NPS, the fixed-income proportion is 72 percent, with the rest in stocks, real estate and other riskier assets.
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