By Kwon Eun-young
A veteran pension expert said that South Korea needs to reform its pension governance system in order to prepare for a rapidly aging population to ensure stability for life after retirement.
He points out that since corporate pension plans are relatively new in Korea, there is still greater focus on plan adoption than ongoing requirements but it is now time to change to meet such needs.
“Korea is facing the challenge of one of the most rapidly aging populations in the world as a result of continuing improvements in life expectancy combined with low birth rates,” Simon Ferry, a pension actuary from Aon Hewitt said in a recent interview with Business Focus.
This means that the current working generation may not be able to rely on receiving enough financial support from the government or their children to maintain their current quality of life in retirement.
“The changes bring Korea closer to how retirement benefits are provided in many other countries by allowing the option to introduce defined contribution plans, where benefits are based on contributions made by the employer and investment returns earned on those contributions. Corporate pensions can provide an important role in helping support people in their retirement.”
Defined contribution plans, which entitle an employee to decide how to invest based on their own appetite for risk and return, differs from severance pay arrangements or defined benefit plans, where the benefit paid is based on the final pensionable salary.
He also points out that current pension plans lack in addressing “conflicts of interest” between stakeholders.
“This is a situation where a decision maker or advisor may personally benefit ― either directly or indirectly ― from the decision being made on behalf of others. An example could be where a pension provider is giving investment advice to employees, but the provider manages one of the products available ― thus can make more money if people select their products,” he said.
“In this case, the pension provider might be inclined to suggest people invest in their own products, which may not necessarily be the right choice for the employee.
“It's not practically possible to remove all such potential conflicts from the pension system, but by increasing the transparency of how and why decisions are made in addition to taking independence advice when needed, the potential for such conflicts can be managed.”
Ferry, who has over 10 years experience in pensions and benefits, said that in order to avoid mistakes in pension decisions, it is crucial to find out what you don’t know and seek advice for that.
“The key is to have enough knowledge to make informed decisions ― such as to understand what decision is needed and what the potential consequences are depending on the decision made,” he said.
“Depending on the decision, having a core understanding of areas such as the pension structure, investment concepts, key pension legislation and tax may be necessary. It’s more important to be able to recognize what you don’t know and seek independent advice when needed.”
He also warned that if a pension plan does not have the right oversight, then it may be up with poor results for the employee and/or employer.
“Depending on the type of plan, the potential risks could include lower benefits for employees, higher fees, increased costs to the employer, greater volatility of plan cost or benefits and reputational risk to the employer among other things. At the extreme end, a lack of governance increases the probability for misappropriation,” he said.