Half of Korea's retirement pension funds sit in DB plans — but returns lag at 3.5%

91.9% of DB-type reserves locked in principal-guaranteed products

Last year's 3.5% return far trails DC-type's 8.5% and IRP's 9.4%

DB cumulative return of 15.9% over five years falls short of 18.9% wage growth

Labor Ministry, FSS to reward top-performing firms, tighten oversight of underfunded workplaces

Defined-benefit retirement pension plans, which account for the largest share of South Korea's retirement pension market, posted a return of just 3.5% last year — less than half the gains recorded by defined-contribution and individual retirement pension accounts. The persistently conservative practice of parking more than 90% of DB-type reserves in principal-guaranteed products such as bank deposits and savings accounts has been identified as the main cause.

The government has concluded that low DB-type returns increase the contribution burden on companies and could affect workers' entitlement to retirement benefits, and has decided to push for improvements in fund management. The plan is to encourage companies to set target returns at or above the rate of wage growth and to align investment asset allocation with the maturity of future retirement benefit liabilities.

According to the Ministry of Employment and Labor and the Financial Supervisory Service, total retirement pension reserves stood at 501.4 trillion won ($363 billion) at the end of last year, of which DB-type plans accounted for 228.9 trillion won, or 45.7%.

Under a DB-type plan, the benefit a worker receives upon retirement is fixed in advance, and the company bears responsibility for managing the reserves. While investment performance does not directly change the amount a worker receives, lower returns mean the company must contribute more to cover the shortfall in funding retirement payouts.

The core problem is the DB type's weak returns. Last year's annual return of 3.5% fell well short of the 8.5% posted by DC-type plans and the 9.4% by individual retirement pension accounts. The gap has persisted for years: in 2023, DB-type plans returned 4.5%, compared with 5.8% for DC-type and 6.6% for IRP, and in 2024 the figures were 4.0%, 5.2% and 5.9%, respectively.

Over the longer term, DB-type returns have also failed to keep pace with wage growth. The compound cumulative return on DB-type plans from 2021 to 2025 was 15.9%, while wages rose 18.9% over the same period — a gap of roughly 3 percentage points.

The persistent underperformance stems from an asset allocation heavily skewed toward principal-guaranteed products. At the end of last year, such products made up 91.9% of DB-type reserves, compared with 67.0% for DC-type plans and 44.3% for IRP accounts.

Because DB-type participants receive a payout equal to their final salary multiplied by years of service, rising wages automatically increase the retirement benefit a company must pay. When reserve returns fall below the rate of wage growth, companies must top up the shortfall with additional contributions.

To illustrate: if a worker earning 3 million won a month receives a 10% pay rise over seven years, bringing their salary to 3.3 million won, the total funds needed to cover their retirement benefit come to 23.1 million won. Even if the 18 million won accumulated over six years generates 900,000 won in investment income at a 5% annual return, the company would still need to make additional contributions to cover the extra liability created by the wage increase.

In response, the government plans to encourage companies to set target returns for DB-type pension funds at a minimum equal to the rate of wage growth.

The government is also emphasizing asset-liability management — matching the duration of investment assets to that of future retirement benefit liabilities. The approach involves aligning the duration of the "retirement benefit liability," which represents the present value of future payouts, with that of the assets set aside to fund them, thereby reducing exposure to interest rate fluctuations.

The current asset structure of DB-type plans diverges significantly from this principle. Last year, the average worker tenure was 7.1 years, implying a retirement benefit liability duration of roughly 7.1 years. Yet 83% of the principal-guaranteed products held by DB-type plans had maturities of three years or less — with one-year maturities accounting for the largest share at 41%, followed by three-year maturities at 34%, maturities between one and three years at 6%, and maturities under one year at 2%.

The government plans to encourage companies to make greater use of professional investment advisory services from pension providers. Workplaces with 300 or more full-time employees are already required to establish a reserve management committee and prepare a reserve management plan, but smaller workplaces can also request consulting from pension providers to help set target returns and determine asset allocation.

One company that took advisory services and diversified its portfolio away from principal-guaranteed products into bonds, funds and equity-linked securities saw its DB-type one-year return climb from 5.9% before the consultation to 7.4%, and later to 25.5%.

Government oversight will also be strengthened. The Ministry of Employment and Labor plans to select and commend employers and pension providers that have managed DB-type reserves with distinction at year-end, and starting next year will conduct regular inspections of DB-type pension workplaces that fail to meet the legally required minimum reserve level.

The Financial Supervisory Service will encourage pension providers to more actively advise DB-type client companies on improving fund management. Financial regulators plan to require that the management guidance pension providers give to companies include information on setting target returns and managing assets and liabilities.

"The investment performance of DB-type reserves is a key factor in reducing the contribution burden on companies while also protecting workers' retirement benefit entitlements and enhancing the sustainability of the system," a government official said. "With mandatory enrollment in retirement pensions on the horizon, we will continue to strengthen oversight to ensure systematic reserve management."

fact0514@heraldcorp.com