South Korea to introduce fund-type retirement pension, expand investment options

South Korea will introduce a "fund-type" retirement pension scheme under which professional trustees pool and manage workers' accumulated reserves on their behalf, rather than leaving individual members to pick their own investment products. The new option is aimed at workers who find product selection difficult or feel burdened by managing long-term assets.

To improve overall returns, the government also plans to ease the 70 percent cap on risky-asset investment in individual retirement pension (IRP) accounts in stages, and to expand the range of products available under defined-contribution (DC) and IRP plans.

Default-option products with poor returns will be reorganized, and measures will be pursued to shorten the period during which funds sit idle after a product matures.

The Ministry of Employment and Labor and related ministries unveiled the measures Thursday as part of a "retirement pension enhancement plan."

Under the existing contract-type system, employers sign agreements with financial institutions, and DC or IRP members typically choose their own investment products from a set menu. Principal-guaranteed products such as deposits carry relatively low risk but may yield modest returns, while performance-based products fluctuate with market conditions. Workers who find it hard to compare risk and return across products, or who lack the time to manage investments actively, may hesitate to pursue more aggressive strategies.

The fund-type scheme is designed to ease that burden. A qualified third-party trustee pools the reserves of multiple members and manages them collectively; any gains or losses flow back to the individual members. Instead of selecting individual products, members choose which fund-type plan or trustee to join. Professional asset management is expected to improve long-term returns, though actual performance will depend on investment strategy and market conditions.

Notably, the fund-type scheme is not intended to replace the existing contract-type system.

The government plans to apply the fund-type option to DC and IRP plans while allowing it to coexist with the contract-type system. Workplaces will be able to offer both types simultaneously, and setting up multiple fund-type plans at a single workplace will also be permitted. With the consent of worker representatives, a specific fund-type plan may be designated as the default option.

Depending on how each workplace sets up its plan and what individual workers prefer, employees will be able to stay with the contract-type system or switch to a fund-type plan — giving those who prefer to pick their own products and those who want professional management the freedom to choose differently.

The government has divided fund-type plans into three categories based on who establishes the trustee: a "financial institution open type," in which one or more financial companies form a separate trustee — alone or as a consortium — to pool and manage reserves from multiple workplaces; a "federation type," in which multiple employers join together to manage their workers' reserves, or national-level labor-management bodies establish a separate entity; and a "public institution open type," operated by public institutions such as the small and medium-sized enterprise retirement pension fund.

The introduction of these categories does not mean anyone can set up a trustee and manage retirement reserves freely. To prevent an unregulated proliferation of funds and to strengthen member protection, the government will establish a licensing process. Applicants must pass review by a licensing committee composed of labor and management representatives, experts and government officials, and then obtain approval from the Minister of Employment and Labor. A two-stage process — preliminary approval followed by full approval — will apply.

Alongside this, the government is pursuing a phased relaxation of the current 70 percent cap on risky-asset investment in IRP accounts.

Under the current rules, no more than 70 percent of accumulated reserves may be invested in risky assets — anything other than safe instruments such as deposits. The government plans to adjust the cap in stages, taking into account the size of the retirement pension market and market volatility. The specific increase and timing will be determined through further review.

Because a higher allocation to risky assets raises the risk of reserve losses during market downturns, the government intends to ease the restriction gradually rather than abolish it outright, weighing market conditions and member demand. Whether to extend investment-ratio limits to DC plans as well has been left for future consideration.

The government is also pursuing an expansion of the investment products available to DC plans, IRP accounts and the small and medium-sized enterprise retirement pension fund. Under consideration is adding to the DC and IRP investment menu both IMA accounts — which guarantee principal repayment at maturity with interest linked to investment returns — and short-term notes with maturities of up to one year issued on the credit of comprehensive financial investment business operators. The aim is to move beyond the current deposit-heavy approach and give members access to a broader range of products.

Expanding the investment scope of the small and medium-sized enterprise retirement pension fund is also part of the plan. The government intends to allow the fund to invest in the Ministry of SMEs and Startups' LP growth fund. The arrangement would involve co-forming a mother fund with the government's fund of funds, with risk-mitigation measures including a first-loss provision and put options provided through the fund of funds.

Alongside the product expansion, the government will also work to weed out underperforming products. It is reviewing a plan to evaluate and reorganize default-option products — those applied when DC members and others give no separate investment instructions — based primarily on returns and risk-adjusted performance. The government also plans to move up the point at which the default option kicks in: under the current structure, members are notified of an impending default-option application only after four weeks have passed since a product's maturity; this would change to two weeks before maturity, so members can review their options in advance and reduce the time their funds sit in low-yield holding status after maturity.

The evaluation framework for retirement pension providers will also be revamped. The government plans to move away from the current qualitative-assessment-centered approach and redesign the criteria around quantitative indicators — including returns, membership growth, long-term retention and annuity uptake — with results to be disclosed transparently. Previously, only the top 10 percent of providers within each sector were made public; going forward, results will be released more objectively and openly to encourage competition among providers.