Retirement pension savings in Korea nears $16 bn in Q2

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Nearly 4 trillion won ($3.13 billion) in funds have flowed into individual retirement pension (IRP) accounts at brokerage houses in South Korea this year on rising stock market and growing demand for retirement pension plans.

According to data from the Financial Supervisory Service on Sunday, the outstanding balance in IRP accounts at securities firms stood at 19.58 trillion won in the second quarter.

The balance is projected to have surpassed the 20 trillion won mark at the end of July, up more than 1 trillion won from 18.4 trillion won in the first quarter this year.

It is also up 3.7 trillion won from 15.9 trillion won at the end of December last year. The entire value of IRP investments at all financial companies, including banks and insurance companies, also increased by more than 10 trillion won to 67.7 trillion won from 57.6 trillion won at the end of last year.

A rebound in IRP account returns, which were significantly lower last year, appear to have driven the latest rise in the account value. The benchmark Kospi Index rose 17 percent and the U.S. Standard and Poor‘s 500 20 percent this year.

In the second quarter, the average return of non-principal guaranteed products such as equity funds outperformed that of principal-guaranteed products including savings accounts.

The average return on non-principal guaranteed products was minus 6.4 percent in the first quarter, significantly lower than 2.9 percent of the principal guaranteed products, but was 6.5 percent in the second quarter, three percentage points higher than 3.7 percent of principal guaranteed products.

Returns on non-principal guaranteed products plummeted to as much as minus 17 percent at the end of last year but have completely recovered in six months.

Recently, the growth rate of non-principal protected investments in IRP accounts at brokerage firms has already surpassed that of principal protected investments.

Principal-guaranteed investments grew by just 4.3 percent to 10.9 trillion won in the second quarter from 10.45 trillion won in the previous quarter.

In contrast, non-principal guaranteed investments grew twice as fast at 8.8 percent to 8.68 trillion.

IRPs, unlike defined benefit (DB) pensions, allow subscribers to manage their own savings. They can invest in a variety of products, including exchange-traded funds (ETFs), target-date funds (TDFs), real estate investment trusts (REITs), principal-guaranteed equity-linked bonds (ELBs), and equity-linked securities (ELSs), not just principal protected products.

“Dividend yielding products that can be invested in IRP accounts have become much more diverse than in the early days of the system,” said Park Young-ho, general manager at the Mirae Asset Investment and Pension Center. “IRP accounts are in greater use as employees are required to use them to transfer their retirement benefits when they change jobs or retire.”

The steady influx of funds into retirement pension accounts also comes on the growing demand for long-term investments to prepare for old age.

The annual tax deduction limit for investing in pension accounts such as IRPs has been expanded to 9 million won from 7 million won starting this year.

An investment of 9 million won in an IRP account leads to a tax return of 16.5 percent, or 1.48 million won, for those with earned income below 55 million won and 13.2 percent, or 1.18 million won, for those with earned income above 55 million won through tax settlement at the end of the year.

Among the 14 securities firms that operate retirement pension plans, Mirae Asset Securities Co. had the largest IRP value of 6.93 trillion won as of the second quarter this year, followed by Samsung Securities Co. at 3.85 trillion won, Korea Investment & Securities Co. at 2.46 trillion won, NH Investment & Securities Co. at 1.48 trillion won, and Hyundai Motor Securities Co. at 1.41 trillion won.

The amount of IRP investments at Mirae Asset Securities has increased about 1.3 trillion won this year alone.

In the second quarter this year, Yuanta Securities Co. had the highest yields on non-principal guaranteed products at 8.32 percent, followed by Samsung Securities at 8.12 percent.