Korean pension subscribers show ultra-low risk tolerance

South Korean pension plan subscribers prefer to protect their money rather than taking risks for capital gains despite the government's effort to encourage them to seek out investments for higher returns, data showed on Tuesday.

Principal-guaranteed products have made up 90% of 32.9 trillion won ($2.4 billion) of retirement pensions managed under the default option in Korea as of the end of June, according to the Ministry of Employment and Labor and the Financial Supervisory Service (FSS).

Compared with the first quarter of this year, the cumulative amount in default option retirement pensions increased by some 7 trillion won, with about 380,000 subscribers added to reach 5.65 million.

In a pension plan, an employer contributes retirement allowances to an outside financial institution for a worker’s future benefit.  

Korea introduced the default option to retirement pension management in July 2023. Under this system, outside financial institutions manage contributions according to the level of risk tolerance that its subscriber has said they are willing to endure — unless they give specific instructions on the types of investments.

The system applies to defined contribution and individual retirement pension plans, not to the defined benefit type.

At present, 41 financial institutions manage retirement pensions, dealing with a combined 305 financial products.

Kookmin Bank is the country's largest retirement pension manager, managing 6.08 trillion won under the default option, followed by Shinhan Bank with 5.83 trillion won and the Industrial Bank of Korea with 4.88 trillion won.

RETURNS

Financial products in the highest-risk category accounted for 1.5% of default option pension contributions, and yielded a 16.55% return over the past year.

That compared with the annualized 3.47% return from ultra-low risk products and the average of 10.82% generated from all products in which default option pension plans have invested as of the end of June.

The labor ministry and the FSS grade risk tolerance into four categories: ultra-low, low, medium and high risk.

In a joint statement, they said they will post returns on financial products held by default option pension plans on a quarterly basis so that their subscribers could compare them and consider diversifying their portfolios beyond principal-guaranteed products.

Meanwhile, Korea is seeking to introduce corporate pension plans to all workplaces in phases starting in 2025.

Write to Han-Gyeol Seon at always@hankyung.com
 

Yeonhee Kim edited this article