Retirement Pension: Current Status and Countermeasures of FSC
2011/04/26 3 Comments
Brief introduction on retirement pension system of Korea
Retirement pension has been introduced into Korea after December, 2005 based on Employment Retirement Benefit Security Act. The retirement pension system is mainly for preparing for the population ageing of Korean society and to complement current severance payment system which has limitations to cover and protect employees. Unlike National Pension, the retirement pension is not mandatory so far and can have effectiveness under consent between employer and employees.
Retirement pension has three types; DB(Defined Benefit), DC(Defined contribution), IRA(Individual Retirement Account). DB type is literary ensuring the monetary benefits to employee. Reserves from employees has to be managed by employer so that risks come from operating funds are on employers’ responsibility. On the other hands, type DC does not ensure benefit and profitability to employees since the management of reserves that employees has stacked in to the funds is under employees’ control. In other words, employees who choose type DC have responsibility on any loss and benefit from operating the retirement pension program. This type is quite risky but comparing to type DB, more aggressive investment is possible. Type IRA is almost same as type DC in that employees can direct the way of investing their reserves by choosing financial products for enlarging earnings from retirement benefit. Most significant difference from type DC program is that it is just ‘account’ employees can file their retirement benefit from their former jobs. This system is for people who are regularly change their jobs and then get retirement benefit from the workplace they had worked for. Employees can open IRA by themselves unlike DB and DC type retirement pension program where employers make contract with asset management institute. IRA can be used in business where there are few employees. Owner of small business can open IRA at the financial institutes and be able to manage employees’ retirement benefit thorough IRA as well. This is called corporation IRA
Current status of the retirement pension market.
Entire reserves of the retirement pension is 29.1 trillion KRW on December, 2010. Banks takes reserves of 14.6 trillion won and it is 49.6% of entire reserves size. insurance companies(34.2%) and securities(16.2%) are also belonged to retirement pension market. Size of the market has been enlarged rapidly since the end of 2006 from 0.8 trillion won to the end of 2010, 14 trillion won. The graph below shows how fast it has been developed.
Currently, retirement pension providers(employers) are generally choose type DB program reflecting their employees’ preference. Data below shows that type DB is popular type of retirement pension products. It takes 3/4 of total retirement pension market. And it is also recognized that mostly retirement pension products are managed quite conservatively. DB, DC and IRA includes rarely performance-based dividend paying products such as equity funds into their portfolio. Most of the pension products consists of principles guarantying products such as deposits, insurances, ELS, etc
Competition among retirement pension operators has been very intensified since for those participants, the pension is recognized as their future growth-engine. As competition has been deepened, some illegal business practices have been occurred.
1. Limitation on inclusion of operators’ own principle ensuring products into the product pool
Most of retirement pension operators(banks, insurance companies and securities) have include most of their own products into principle ensuring products so that customers from pension providers to employees could not choose diverse products. It is known that banks use savings and deposit products and insurance companies include their own insurance products for investors. Securities mostly put ELS(Equity Linked Securities) as well.
FSC intends to restrict those operators from including huge amount of their products into the pool of principal ensuring products since it has been criticized that the current practices tend to intensifying market completion abnormally such as offering non-affordable interest to pension holders. Under the new regulation, the operators have to keep the proportion of inclusion of their products below 70%. Henceforward, the weight would be lessen by stages. But if retirement pension products which are below certain level of asset size (type DB; below total asset size of 20 hundred million KRW, type DC and IRA; below total asset size of 50 million KRW) would not be affected by the new regulation.
2. Tighten rules on public announcement up
At present, as operators are announcing their earning rate of retirement pension program, the rate of performance based dividend products and the earning rate of principal ensuring products are not presented independently so that even though the earnings from one products deeply decreased, overall pension program’s earning rate might be able to be disguised as stable if another rate is increased sharply. This might be able to fraud customers to misunderstand announced earning rate.
The new rule on retirement pension would let operators state earning rate in different way comparing to the present. When they are announcing earning rate of the pension, they have to show detail rates of both performance based dividend products and principal ensuring products separately. And public announcement should be done monthly under the new regulation so that customers could get timely and accurate earning rate information.
3. Regulating Illegal sales practices
Current Employee Retirement Benefit Security Act prohibits operators from forcing pension providers and contractors to conclude contract and also operators should not offer exclusive monetary benefit to pension providers. However, the act does not have detail criteria for sorting and judging illegal practices.
For operators, pushing pension providers up to make contract by using superior status from economic transactions such as shareholding and loans, offering economic disadvantages reflecting pension providers’ and individual contractors’ economic distress would be defined as forcing contract practices under the new regulation. Furthermore, bearing expenses, offering tangible & intangible monetary benefit and suggesting profitable transaction conditions to pension providers are going to be recognized as offering exclusive monetary benefit practice under the new supervisory rules. To be prepared for occurrences of new illegal practices, the new regulation would entrust chief executive of Financial Supervisory Service to set more detail rules on regulating illegal sales.