Korea to prevent year-end concentration of corporate retirement pension payments

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The South Korean government will legislate the dispersion of the payment period for corporate retirement pension contributions and encourage companies to diversify the maturity dates of their retirement pension funds.

The decision, which was made during a meeting held by the Financial Services Commission (FSC) on Wednesday, comes in response to concerns that a single transfer of more than 100 trillion won ($78.65 billion) may lead to fierce competition among financial institutions and short-term liquidity crisis.

The meeting was chaired by FSC Standing Commissioner Kwon Dae-young.

Retirement pension providers usually allocate the contributions paid by companies to bonds, stocks, and other assets for management.

The problem is that the maturity of the plan period is usually annual and that corporate contributions are concentrated mainly in December. This means that a significant amount of money from maturing pension funds and new contributions, ranging from tens of trillions of won to nearly 100 trillion won could move to products that offer higher returns.

The bond market is of a particular concern, following the bond market freeze in the second half of last year due to the Legoland and Heungkuk Life Insurance Co. incidents.

If money moves, the bonds in the existing retirement pension plan must be sold, cashed out, and handed over to a company managing new products.

This means that there could be a shortage of funds in the bond market as a large amount of bonds worth tens of trillions of won would be dumped on the market within a short period of time.

According to the FSC, new contributions to defined benefit (DB) pension plans by companies this year are estimated at 38.3 trillion won. Two-thirds of this amount, or 25.6 trillion won, is expected to be paid in December.

Additionally, the accumulated funds for DB-type retirement pensions amounted to 190.8 trillion won at the end of June, out of which 71.4 trillion won, or 37.4 percent, is expected to reach maturity in December. Altogether, nearly 100 trillion won of funds could move at once.

The focus is on DB-type retirement pensions because they are the largest in scale and have most of their maturity in December.

To address this problem, the FSC first directed financial companies to pay more than 40 percent of this year’s new contributions in two installments before December.

An FSC official said that the financial authority will pursue legislation, in consultation with large companies and other ministries, to prevent the concentration of retirement pension contribution payments in December.

Moreover, financial companies were urged to diversify the operating period of retirement pension products beyond the current one-year term, such as offering options with a one-year-six-month maturity.

Additionally, the FSC plans to establish a regulatory system to prevent excessive competition over high-interest rates. Last year’s crash in the corporate bond market caused a liquidity shortage in some financial institutions, and to compensate, financial companies offered unreasonably high interest rates to attract retirement pension funds.

The FSC aims to complete the revision of the retirement pension supervision regulation in September to address this issue.