Major Korean savings funds cut interest rates on contributions to 3% level from 4%

The Police Mutual Aid Association (PMAA) has become the latest savings fund in South Korea in shaving the interest rate applied to long-term contributions from its members, after its board members voted on June 22 to cut the interest rate by 0.95% point to 3.42%, according to investment banking sources.

The move came after the Korean Teachers’ Credit Union has recently decided to slash its interest payment rate on long-term savings products by 0.72% point to 3.60%, starting from this July.

As money continued to flow into major South Korean savings funds, away from lethargic domestic stock markets and record-low bond yields, those funds have been lowering interest rates paid to their members over the past few years. Declining returns on alternative investments including property assets from the previous 7~8% add pressure on domestic savings funds.

Last year, they cut the interest rates to a 4% level from the 5% range in 2014.

The Public Officials Benefit Association (POBA) is set to follow suit. On June 28, its board members will discuss a possible cut in the interest rate on long-term contributions to 3.4% from the current 4.08%.

Last April, the Military Mutual Aid Association (MMAA) chopped the rate of interest payments on long-term savings products to 3.26% from 4.0%. The Korea Scientists and Engineers Mutual-aid Association also recently cut the rate to 3.80% from 4.75%.

South Korea’s major savings funds, which receive contributions form teachers, military personnel and other public service officials, respectively, have been offering higher yields than banks and other financial services firms. Still, the recently-adjusted rates are more than those offered by domestic banks which stay at the 1% level. The Bank of Korea cut its base rate to a record-low 1.25% early this month.

At a parliamentary audit last October, the MMAA came under attack. Lawmakers warned that the fund, of which the interest rate paid to members is higher than market rates, may lead to riskier investments

However, most savings funds are having a hard time in persuading their board members to approve of a cut in their interest rates.

“We are explaining to board members, focusing on that fact that if we stick to the current interest rate, we cannot help expanding riskier investments,” said a source of a local savings fund. “We must have our payment rate move in line with market rates immediately. But we also need to get board approval for it,” the source added.

By Dae-hun Kim

daepun@hankyung.com