Retirement pension ETFs: A “100% investment limit” does not guarantee principal; risk ratings to be displayed next year

[Financial News] Financial authorities warned that “100% investment limit,” displayed for retirement pension products, should not be taken to mean that the product is safe and guarantees the principal. From next year, investment limits and risk ratings will be displayed together on trading screens for retirement pension exchange-traded funds (ETFs).
The Financial Supervisory Service said on the 28th that it would strengthen risk-rating guidance so retirement pension subscribers can invest with the risks of products in mind.
Retirement pension assets totaled 558.3 trillion won at the end of the first half of this year. Principal-and-interest-guaranteed products accounted for 360.3 trillion won, while products with returns tied to investment performance accounted for 198 trillion won. ETFs made up 99.8 trillion won, or 50.4%, of investments in the latter category. That was more than ten times the 9 trillion won recorded at the end of 2023.
Investment limits for retirement pensions vary by product type. Up to 100% of pension assets can be invested in principal-and-interest-guaranteed products such as time deposits, and in “lower-investment-risk products” such as ETFs with an equity allocation of less than 50%. The investment limit for riskier products, including ordinary publicly offered funds and ETFs, is 70%.
The problem is that some retirement pension providers display only investment limits without providing information about product risk. Critics say that displaying “100% investment limit” for ETFs that can incur principal losses, just as for deposits, could lead subscribers to mistake them for principal-and-interest-guaranteed products.
Even ETFs classified as lower-investment-risk products can receive higher risk ratings as returns fluctuate after three years from their launch. One 30-year Korean Treasury bond ETF, in which the entire pension balance can be invested, was rated Level 5 in August 2022 but was upgraded to Level 3 this August. ETF risk ratings range from Level 1, “very high risk,” to Level 6, “very low risk.”
The Financial Supervisory Service plans to display investment limits and risk ratings together on retirement pension trading screens and product search screens from January next year. Risk ratings will also be added to product proposals provided by retirement pension providers and to subscribers’ reports on the management of their pension assets. However, some providers that need to develop their IT systems are scheduled to implement the changes during the first half of next year.
The Financial Supervisory Service urged subscribers, saying, “A 100% investment limit means only that there is no restriction on the investment limit under the law; it does not mean that the principal is guaranteed or that returns are assured,” and, “You should check the product’s risk rating along with its investment limit.”
[email protected] Lee Jeong-hwa Reporter