Principal-guaranteed products account for 75.4% of assets... 'Shift from saving to investing needed'

Korea Capital Market Institute proposes reducing member choice in DC default options, raising provider accountability

[123RF]
[123RF]

As South Korea's retirement pension market crosses the 500 trillion won ($368 billion) threshold, a new study warns that returns will remain too low to achieve adequate pension replacement rates unless the current structure — which funnels members into low-risk, low-return products — is overhauled. The research proposes replacing the existing default option system, under which members choose their own products, with one in which retirement pension providers designate a representative product matched to each member's risk profile and automatically manage contributions when no separate investment instruction is given.

The Korea Capital Market Institute laid out the proposal in a recent study titled "Reforming the Retirement Pension System for Multi-Layered Old-Age Income in a Super-Aged Society," calling for the introduction of a fund-type structure alongside changes to how default options operate — so that even contributions from defined-contribution (DC) plan members who make no investment decisions are channeled into long-term, diversified investments.

The study's central concern is that in a super-aged society where the national pension alone cannot provide sufficient retirement income, it is critical not only to expand the role of retirement pensions but also to grow accumulated reserves over the long term.

"The management of retirement pension reserves must shift from saving to investment," said Nam Jae-woo, a senior research fellow at the Korea Capital Market Institute. "For assets to grow, the financial instrument used must change from saving to investment."

The most glaring problem with the current default option system is its heavy reliance on member choice, which keeps it anchored to principal-guaranteed products and produces poor returns. Under the current DC framework, members must select their own investment products. While a default option exists for cases where no investment instruction is given, members must still pre-select one product from a menu — and because principal-guaranteed products can be included in that menu, many members opt for the safest choice. This makes it structurally difficult to differentiate the default option from ordinary principal-guaranteed management, resulting in chronically low returns.

In practice, default option reserves are heavily skewed toward conservative products. Of the 53.3 trillion won in default option reserves at the end of 2025, 85.4 percent — or 45.5 trillion won — was held in conservative products. The annual return on conservative products stood at 2.63 percent, well below the 10.81 percent for neutral products and 14.9 percent for aggressive investment products.

To address these poor returns, the study proposes scrapping the current structure in which members pick one product from a menu of default options. The alternative would steer members toward long-term, diversified investment even without individual product selection. Under the proposed model, a member's risk profile would first be assessed, and if no separate investment instruction follows, the provider's single designated representative product for that risk category would automatically take over — eliminating the mechanical tendency to default to the lowest-risk option. By the same token, the study also proposes excluding 100-percent principal-guaranteed products from qualifying as default options.

Target date funds (TDFs) and target risk funds (TRFs) — products suited to long-term, diversified investment and evaluated on long-term returns — are identified as strong candidates under the new structure. TDFs adjust asset allocation as a member approaches retirement, while TRFs allocate assets according to the investor's risk tolerance. Because retirement pension funds are managed over extended periods, they are better suited to growing assets over the long run than to preserving principal in the short term. TDFs posted a return of 13.7 percent last year, compared with an overall retirement pension return of 6.47 percent, suggesting they could contribute meaningfully to return expansion.

Nam also projected that under a structure in which providers — rather than members — select the representative product, the performance of default options would become a direct measure of each provider's competitiveness. With providers responsible for choosing the product rather than leaving the decision to members, the quality of long-term performance products they offer will matter more, and competition will intensify as providers must prove their management capabilities through strong returns.

"How well a provider designs and offers the automatically assigned product as a default option is now the measure of their competitiveness," Nam said. "As long as product selection rests with the individual, responsibility for returns also falls on the individual — the default option system can only function properly if providers are made accountable for returns."


kacew@heraldcorp.com