Of the 229 Trillion Won in DB Retirement Pensions, 92% Are Principal-Guaranteed Products... "Returns Must Exceed Wage Growth"

[Financial News] The government has begun encouraging higher returns on defined benefit (DB) retirement pensions, which account for more than 45% of all retirement pension assets. It said DB plans, which are paid out based on a worker's average wage and years of service at retirement, need to be managed so that returns exceed workers' wage growth.
As of last year, about 92% of DB plans were concentrated in principal-guaranteed products, and their annual return remained sluggish at around 3.5%. Over the past five years, workers' wage growth of 18.9% has outpaced the cumulative DB return of 15.9%.
The Ministry of Employment and Labor (MOEL) and the Financial Supervisory Service explained on the 26th measures to improve the return on DB retirement pension reserve management.
Last year, the total size of the retirement pension market stood at about 501.4 trillion won. Of that, DB plans accounted for about 228.9 trillion won, or 45.7%, the largest share. However, their annual return last year was just 3.5%, the lowest among the major types, compared with 8.5% for defined contribution (DC) plans and 9.5% for Individual Retirement Pensions (IRP). The weak performance was attributed to the fact that 91.9% of DB assets were concentrated in principal-guaranteed products.
The government argues that higher returns are needed to ease the additional reserve burden on companies that choose DB plans. Under a DB plan, retirement benefits are paid in a lump sum according to a method agreed in advance by labor and management. The amount is calculated by multiplying the worker's average monthly wage at retirement by years of service. This is the key difference from DC plans, in which companies make periodic contributions and workers manage the assets directly.
If DB returns fail to keep pace with wage growth, companies must make additional reserve contributions. MOEL explained, "If returns on DB reserves do not match wage growth, the employer must pay the difference as an additional contribution. Therefore, employers should set the target return on DB reserves at a level above the wage growth of their employees."
Over the past five years, cumulative DB returns reached 15.9%, falling 3 percentage points short of cumulative wage growth of 18.9%. Under these figures, employers must cover the gap through additional reserve payments beyond the new retirement benefits generated each year.
The government also said asset investment periods and structures need to be aligned with the timing of retirement benefit payments. As of last year, the average worker's length of service was 7.1 years.
MOEL and the Financial Supervisory Service urged employers to make active use of advice and support from retirement pension providers to set target returns for DB plans and close the gap between retirement benefit assets and liabilities. Companies with 300 or more employees must prepare and operate a reserve asset management plan (IPS) that includes details such as the target return for DB plans and reserve management methods. Smaller employers, which are not required to prepare an IPS, may request support such as consulting from retirement pension providers.
The government plans to use both incentives and penalties to improve the stability and returns of DB retirement pensions.
MOEL plans to select and reward model employers for DB management later this year. It will also impose sanctions, including regular inspections and fines, on workplaces that fail to meet reserve requirements. The Financial Supervisory Service will encourage retirement pension providers to take a more active advisory role. MOEL and the Financial Supervisory Service said, "We will continue our supervisory efforts for the systematic management of DB plans to help ensure workers' stable retirement lives."

[email protected] Kim Jun-hyeok Reporter