Korean retirement funds, mutual aids struggle with profitability

Some major retirement funds in South Korea are raising interest rates on their members’ savings accounts in line with global central banks’ rate hikes this year. The funds are struggling with high target returns amid a worsening investment climate.   

The Korean Teachers’ Credit Union (KTCU), which managed 41.8 trillion won ($32.1 billion) in assets as of end-2021, increased the maximum interest rate of its savings products from 3.74% to 3.8% as of July 1. Before that, the school teachers' retirement fund had last raised the maximum rate from 3.6% to 3.74% in September 2019.

The Public Officials Benefit Association (POBA), with 19 trillion won of assets under management, also raised the maximum interest rate from 3.55% to 3.85% effective July 1. The mutual aid association for provincial government workers had last increased the interest rate from 3.4% to 3.55% in January 2019.

The Military Mutual Aid Association (MMAA), with 9.4 trillion won of AUM as of end-2021, increased its maximum interest rate from 3.6% to 3.85% on the same day. The 25 basis point increase is the largest in the fund’s history. The MMAA said more than 31.5 billion won worth of payouts will be given to its members through the interest rate hike.       

The Police Mutual Aid Association (PMAA), with 4.1 trillion won of AUM as of end-2021, raised its maximum interest rate from 3.58% to 3.75% as of May 1, four years after its most recent rate increase. The Korea Scientists and Engineers Mutual-Aid Association (SEMA), managing 10 trillion won in assets as of end-2021, provides the maximum 4.05% interest rate to its savings accounts for members.   

LOWER PERFORMANCE EXPECTED AMID RATE HIKES, ASSET PRICES PLUNGE

In 2021, Korean mutual aids and retirement funds enjoyed ample liquidity and annual return rates higher than interest rates. The KTCU, POBA and Korea Fire Officials Credit Union (FOCU) posted high investment return rates of 11.3%, 10.9% and 10.5%, respectively, last year.    

But most Korean mutual aids and funds expect lower performance this year. They are seeing domestic and overseas bond and equity prices plunge, as well as downward pressure on some alternative asset prices. Loans to members have also soared – KTCU’s loans to members surged to 8.98 trillion won as of end-2021, up 20.4% from 7.46 trillion won the previous year. Its lending assets’ annual rate of return is between 3% and 4%.

“Compared with pension funds and insurers, mutual aids and retirement funds have higher funding costs, which makes them bet on high returns on private credit and private equity. The global interest rate hikes increased the institutions' leverages. This means improving returns on investment is now more challenging,” a mutual aid CIO said on the condition of anonymity.

STRICTER CRITERIA FOR NEW INVESTMENT

Some alternative investment managers in Korea have lowered their fundraising target sizes on forecasts that institutional investors’ alternative investments will shrink.

“Mutual aids and retirement funds are significantly reducing new investments in alternative assets. Some funds, with loans to members surging, are reviewing their lending to secure money for capital calls,” a PE management source said.
 
As institutional investors pursue high rates of return, they will screen PE firms’ investment proposals using stricter criteria, and small- and-mid-sized PE firms will face hard times, a securities firm source said. The number of Korean general partners for institutional investors jumped by 58 to 394 in 2021, according to the Financial Supervisory Service.

Write to Tae-Ho Lee and Jun-Ho Cha at thlee@hankyung.com
Jihyun Kim edited this article.