Boosting returns, encouraging annuity payouts over lump sums ... Overhaul of default options, move to allow pension-backed loans

[Financial News] The government moved on the 29th to overhaul the Act on the Guarantee of Employees' Retirement Benefits on a scale approaching a full revision, judging that the current legal framework has limited ability to raise the adoption rate and returns of retirement pensions.
Beyond simply introducing a fund-based model, the government will also ease the risk-investment limit for individual retirement pension accounts (IRPs) under the existing contract-based system and shift evaluation criteria from qualitative to quantitative measures. It also plans to improve the system to encourage pension payouts instead of early withdrawals or termination.
The government's latest plan to strengthen retirement pension functions centers on boosting returns. The government says the fund-based model will shake up returns that have become stuck in conservative investments, while institutional changes to refocus existing contract-based defined contribution (DC) default-option products on returns will support an overall increase in pension returns.
The fund-based model, due to be introduced in 2028, will be prepared to ensure stability and profitability through review by an authorization committee comprising labor, management and government representatives; disclosure of trustee corporations' performance evaluation results; regulation of excessive fees; and oversight based on expertise.
Improvements to the existing contract-based retirement pension system will also proceed. The current 70% limit on investments in risky assets by IRPs will be eased in stages, and the range of investable products available to DC plans, IRPs and the Small Business Retirement Pension Fund will be expanded. A Labor Ministry official said, “We plan to make a decision after considering market volatility and market demand, among other factors.”
The current DC default options will be reorganized to focus on returns, with low-quality products removed through product evaluations. The notification and application of default options will be moved up from after maturity to before maturity and on the maturity date, shortening the period in which funds remain in interim investments.
Measures will also be introduced to encourage people to receive retirement pensions as annuity payouts rather than lump sums, in a move to strengthen old-age security. The government will first begin revising the system to enable the launch of retirement-pension-secured loan products that can be used instead of early termination or withdrawal of retirement pensions. Although current law provides a legal basis for loans backed by retirement pensions, it does not allow the collateral to be subject to seizure, preventing providers from issuing such loans. A Labor Ministry official explained, “For loans backed by retirement pensions to be possible, the law must be amended to allow collateral for these loans to be seized.”
The limit on the amount that can be pledged as collateral will also be raised from the current 50% to 70%. The government will also consider introducing an opt-out system under which annuity payouts would automatically apply when the time to receive benefits arrives, unless the beneficiary expresses a different preference.

[email protected] Kim Jun-hyeok Reporter