Ruling party's push for fund-based retirement system meets industry backlash

gettyimagesbank

The financial sector is pushing back against a proposal by the ruling party to reform retirement pensions by integrating the current individually managed system into a unified fund model operated by a special institution, similar to the National Pension Service (NPS), industry officials said Tuesday.

Rep. Ahn Do-geol of the Democratic Party of Korea, who was involved in shaping President Lee Jae-myung's economic pledges during the campaign, raised the need to pool retirement pension reserves from various companies and manage them as a unified fund worth over 50 trillion won ($37 billion). The idea emerged as retirement pensions have been yielding low returns and are therefore seen as failing to fulfill their role in securing post-retirement income.

The financial industry agrees that expert-led asset allocation is key to improving returns. However, it opposes shifting to a unified fund system, arguing that structural issues — such as the heavy concentration in principal-guaranteed products and individual-led management — must be addressed first.

According to data from the Ministry of Employment and Labor and the Financial Supervisory Service (FSS), the average return on retirement pensions over the past five years was only 2.93 percent. In contrast, the NPS recorded a return of 8.17 percent during the same period.

Rep. Ahn Do-geol

"Retirement pensions have lost their function due to low returns, poor participation and frequent early withdrawals," Rep. Ahn said.

Ahn expects that shifting retirement pensions to a unified fund structure will enable expert management and investment services, which could significantly improve risk diversification and returns through long-term investment in diverse financial products.

Various options are under review, such as forming a consortium of current pension providers, outsourcing management to the NPS or creating fund corporations based on companies or industries.

The lawmaker said he intends to submit a relevant bill incorporating these ideas soon.

However, industry insiders argue that the existing retirement pension system is inherently structured to limit high returns, so this fundamental issue must be addressed first.

They said that the primary reason for the low returns is the overwhelming preference for principal-guaranteed products. Data from the FSS shows that, of the 431 trillion won in retirement pension assets last year, 356.5 trillion won, or 82.6 percent, was held in principal-protected investments.

The current system, which requires individuals to manage their own retirement pension funds, has also come under scrutiny.

Currently, pension providers such as banks and securities companies are legally barred from managing funds on behalf of subscribers. Instead, after selecting a provider, individuals must choose and manage their investment products themselves.

"It is unfair to blame pension providers for low retirement pension returns when discretionary management is legally blocked," an official from a securities company said. "The system should be improved so that customers who subscribe through securities firms can entrust their funds to the firms and receive professional assistance."

Additionally, concerns have been raised over the high costs involved in switching to a retirement pension fund system. Critics said creating such a fund is a complex and costly process, requiring the establishment of separate entities like trust corporations and the development of new management and oversight regulations.

"The government and the ruling party should first try solutions that are possible within the existing framework," another official from the financial sector said.