Korea’s pension funds to take higher-risk products with default options

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A mass transfer of retirement pension assets is likely in Korea, from savings deposits to investment products, as pension participants are willing to take higher risks for potentially higher returns over the long term.

This shift follows the introduction of pre-determined investment options, also known as default options, which will come into effect on Wednesday.

According to a survey by the Maeil Business Newspaper on Sunday of 210 members of a defined contribution retirement pension plan at Mirae Asset Securities Co., seven out of ten participants stated that they have adjusted their estimated return from their pensions to 5 percent or higher with the default option.

Among the respondents, an annual return of 5 to 7 percent was the most common, accounting for 47.1 percent, and 16.2 percent of the respondents expected a return of 10 percent or higher. While investors generally set higher target returns when investing in riskier assets, the responses from the survey offer a glimpse of the potential shift in investment practices for pension assets, which were previously focused mainly on savings deposits with a 2 percent return.

“With the introduction of the default option, pension members are showing a preference for higher-risk products over ultra-low-risk products, likely based on the idea of seeking returns that surpass the inflation rate through investments in performance dividend products,” said Choi Jong-jin, the head of the pension department at Mirae Asset Securities.

When a monthly pension of 500,000 won is invested for 30 years with an annualized return of 2 percent, the total amount of principal and return, compounded with interest, amounts to about 246 million won ($189,000). However, an active invest of the pension in funds with an annual return of 5 percent, as is the case in many advanced economies, can increase the amount significantly to 417 million won. In major economies like the U.S., the U.K. and Australia, where retirement pensions are primarily managed through funds, the average long-term returns for pensions range from 7 to 9 percent per year, which is three to four times higher than those in Korea.

At the end of the first quarter, Korea’s domestic retirement pension reserves reached 338 trillion won, with the returns of these pensions currently standing in the range of 2 percent.