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We are now past the fifth anniversary since Korea adopted a funded pension system along the lines of that of advanced countries. Korean corporate pension assets more than doubled in 2010 to 29 trillion won, with inflows of 15 trillion won during the year ― that’s more money flowing into pension schemes in 2010 alone compared to the 14 trillion won that had accumulated since 2005.
In particular, 2010 was considered a significant year for Korea’s corporate pension market, as existing tax benefits on legacy severance pay schemes were phased out. This is reflected in the overall adoption rates for pension plans, which rose from 13.6 percent in 2009 to 20.4 percent in 2010. Looking at large companies with over 500 employees, the rate of adoption is even more impressive rising from 39 percent to 58.7 percent in the space of a year.
Such rapid growth comes at a price, however.
Many companies in Korea have spent huge amounts of time and effort agonizing over the decision to adopt or not to adopt, subsequently followed by questions around what to adopt, how to adopt, and who to select as the service provider. All very legitimate and important questions.
In working with corporate sponsors in Korea, we have found that very little time and effort is spent on what comes next, that is, the ongoing management of the pension plan and the governance framework necessary to support it.
Few companies feel the necessity of maintaining a Pension Board or Committee, and even fewer bother to document a Pension Charter that governs the pension plan. Many corporate sponsors have never met the underlying asset managers who manage their money. They assume that the service providers are keeping an eye on things, despite the fact that their service providers have no direct responsibility for the actual investment performance of the funds they offer, although they earn fees on the assets regardless of performance.
Sponsors focus on the task at hand ― the actual adoption ― and true to our short-sighted human nature, fail to think sufficiently about what lies ahead. Unlike global best practice, where pension committees and independent financial advisors play a crucial role in pension governance, the typical Korean sponsor must depend on their own financial knowledge or blindly trust that their service provider is working in their best interests. This does not bode well for the future of Korea’s corporate pension industry.
In order for Korea’s pension markets to mature, sponsors need to take greater ownership and accountability for their decisions, and continue to monitor their pension plans on an ongoing basis. Although setting up the plan in the first place was a monumental task, putting this into context, adoption is a 100-meter sprint relative to the 42.195-kilometer marathon that follows after.
Both require high levels of energy, good preparation and coaching. However, you can’t run a marathon in 10 seconds, and successfully managing retirement savings requires a long-term strategy with checkpoints along the way.
Sponsors need to understand the full “asset planning cycle” as shown in the graphic above, build a systematic and manageable framework for monitoring the overall pension plan, and spend more time on the underlying drivers of investment performance rather than its administrative shell.
As the rapid growth phase of the market begins to subside and sponsors start having to live with the choices they have made, we hope to see a greater focus on longer-term investment issues along with a greater appreciation for independent investment advice that is unaffiliated with any particular service provider.
Although Korea’s pension promise may seem relatively simple compared to other countries, investment markets are complex, fickle things and come with a high degree of uncertainty. And sponsors would be well advised to give investment and implementation issues the time, research and consideration they deserve.
Note: Statistics quoted in this article come from Towers Watson’s annual “Korea Pension Report” publication.
Jayne Bok is director of investment services at Towers Watson Korea
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