Market volatility slows Korea’s pension reform push
South Korea is leaning toward retaining its 70 percent cap on risky assets in retirement pensions as market volatility slows a reform push to boost weak returns.
According to industry sources Wednesday, the Ministry of Employment and Labor and financial firms have shifted toward retaining the cap to protect long-term retirement savings.
Scrapping the limit was a key reform proposal, but the Kospi’s slide from above 9,000 to the 6,600 range has fueled caution. A meeting on the proposed fund-type pension system has also been postponed for the third time.
The government had sought to improve persistently low returns through the new system and greater access to more aggressive investments. Retaining the cap could limit the overhaul’s impact by restricting how much savers can allocate to higher-risk assets.
“Many in the industry do believe the risky-asset cap should be scrapped, but retirement pensions cannot be viewed simply in terms of expanding investment flexibility. Their role in long-term asset allocation also needs to be considered,” a financial investment industry official said.
“It is difficult for financial companies themselves to insist on scrapping the cap outright.”
Recent market swings have strengthened support for keeping the existing framework, particularly for savers with a moderate or unclear appetite for risk.
“There is growing support for maintaining the 70 percent-to-30 percent asset allocation framework as a minimum guideline rather than removing the cap entirely,” the official said.
The debate also reflects competing commercial interests among asset managers.
Removing the cap could accelerate a shift from target-date funds into ETFs investing in riskier assets. TDFs automatically adjust their mix of risky and safer assets as an investor approaches retirement.
Large firms such as Mirae Asset and Samsung Asset Management, which offer extensive ETF lineups, tend to favor removing the cap, according to sources. Smaller firms are concerned about losing inflows into TDFs, bond funds and other safer-asset products.
“Removing the cap entirely could accelerate the shift into ETFs and lead to greater concentration of assets at large asset managers,” a pension industry official said.
The Financial Supervisory Service emphasized the importance of long-term asset allocation amid market volatility.
“Greater market volatility makes it more important to encourage investors to use long-term asset allocation products such as TDFs rather than trade individual assets themselves,” an FSS official said.
The regulator also plans changes to the default option system and stronger disclosure requirements to encourage long-term investing.
Fund-type reform faces further delays
The proposed fund-type retirement pension system faces separate disagreements over the National Pension Service’s participation and the liability of entities entrusted with managing pension assets.
A meeting between government officials and major pension providers was initially scheduled for Sept. 2, then moved to Sept. 15 and Oct. 2 before being postponed again, according to government and industry sources.
Employment and Labor Minister Kim Young-hoon, FSS Gov. Lee Chan-jin and the CEOs of providers including KB Kookmin Bank, Shinhan Bank, Mirae Asset Securities and Hanwha Life Insurance were expected to attend.
“Major financial company CEOs had cleared their schedules and prepared for the meeting after the authorities specifically requested their direct attendance,” a financial industry official said. “With the meeting postponed three times, uncertainty is growing over the next schedule and the timing of the system’s introduction.”
Industry officials question whether NPS participation would necessarily improve returns, given differences between national pension funds and retirement pension assets.
“If the NPS ultimately outsources asset management to private asset managers again, it could simply add another layer to the existing structure,” the official said.
Providers also want liability rules to distinguish losses caused by market fluctuations from those arising from operational failures.
“Investment losses caused by market conditions must be clearly distinguished from operational errors caused by problems with processes or systems,” another industry official said.
“If the two are not clearly separated and the burden of proof is shifted to financial companies, providers could end up having to compensate investors for losses caused by market fluctuations.”
The meeting is expected after mid-October, following the National Assembly’s annual audit of government agencies.
By Choi Yeon-jae (ch0221@heraldcorp.com)
