South Korea must fix its underperforming retirement pensions

South Korea is preparing its first major overhaul of the retirement pension system in 21 years, according to a commentary published by Dong-A Ilbo, as the fund's assets have grown to 500 trillion won. The article argues that retirement pensions, one of the three pillars of retirement security alongside the National Pension and private pensions, have delivered returns far below those of other pension funds, and that many workers still withdraw benefits as lump sums rather than preserving them as retirement income.

The government and the ruling Democratic Party of Korea unveiled a reform plan at a policy meeting on Oct. 29. A central element is a fund-based system that would pool retirement contributions from multiple companies and place them under professional management to improve investment returns. The government also plans to require all companies to deposit workers' retirement benefits with external institutions by 2030, reducing the risk that employees are left without money they are owed.

The current system, introduced in 2005, lets employees either leave management of their benefits to employers or choose investment products themselves. The fund-based model already exists for employees of small and midsize businesses through a dedicated retirement pension fund, and expanding it would give workers nationwide the option of entrusting savings to professional managers.

Performance is the central challenge. Over the past decade, retirement pensions earned an average annual return of 2.07%, a result widely attributed to an overly cautious investment approach. Returns rose to 6.47% last year, still roughly one-third of the National Pension Service's 18.82% return. In Australia, where fund-based retirement pensions are widely used, annual returns have been around 8%. The government has identified financial institutions, labor-management alliances and public institutions as potential fund operators. The article stresses that safeguards against conflicts of interest are essential, including preventing managers from steering investments toward affiliated companies or unsuitable products, or inflating fees, and that poorly performing operators must be identified and excluded. Because participants would bear both gains and losses, it also calls for robust beneficiary protections, citing Japan's AIJ pension scandal, which wiped out retirement savings of 880,000 people.

The government plans to draft amendments to the Employee Retirement Benefit Security Act next month and seek National Assembly passage before the end of the year. The Ministry of Employment and Labor would hold authority to approve and sanction fund operators, and the article says the ministry must first demonstrate it has the expertise to supervise them, with the National Assembly required to rigorously assess this. Safeguards must also prevent retirement funds from being used to prop up stock prices or defend the won.