Korea needs to raise lower pension yields, industry experts suggest

The participants who attended 2023 Capital Market Discussion conference held by Maeil Media Group at the Korea Exchange pose for a photo on June 22. [Photo by Kim Ho-young]

South Korea needs to raise the average yield of retirement pensions to break a global tendency that South Korean companies have suffered lower valuations than their global peers, according to market insiders.

The suggestions came from participants who attended a conference held by Maeil Media Group at the Korea Exchange on Thursday. The conference, titled 2023 Capital Market Discussion, was attended by 200 participants, including 40 chief executive officers from the financial industry in South Korea. They shared a vision that the Korea’s capital market should get higher recognition from the world‘s investors while discussing how to achieve that goal.

“Based on our scenarios, the balance of pension funds will stand at 1,300 trillion won ($1 trillion) in 2032, nearly half of the country’s gross domestic product,” said Choi Jong-jin, a high-ranking official from Mirae Asset Securities Co. “Just one percent rise in the average pension yield can generate an additional income of 13 trillion won for retirees.”

There was consensus among participants that South Korea need to raise its lower pension yields to a level comparable with other advanced economies. “Unlike the U.S., where as much as 70 percent of the defined contribution (DC) pension plans are stocks or securities, South Korea has only 10 percent of such types of assets in its DC pension schemes,” said Truston Asset Management Co CEO Kang Chang-hee.

In South Korea, the yields on DC pensions stood at 2.73 percent on average, much lower than those of the U.S. and Japan, which came at 8 percent and 3.8 percent, respectively.

“As much as 80 percent of assets owned by people aged 55 and older were real-estates,” said Shin Jin-young, chief of the Korea Capital Market Institute (KCMI). “Most households in retirement are put at a high risk of falling into poverty due to lack of disposable income,” citing that private and public pension contributions in South Korea account for only 10 to 20 percent of the total retirement income for retirees. “Replacement rates will rise up to 22.7 percent if pensioners benefit from financial securities and mortgage pension.”