Government Seeks to Boost DB Retirement Pension Returns Above Wage Growth Rate

The government has decided to raise the investment returns of defined benefit (DB) retirement pensions above the wage growth rate to alleviate corporate financial burdens and protect workers' rights to receive severance benefits.

The plan encourages diversifying the heavy reliance on principal-and-interest guaranteed products toward performance-based products and extending the maturity of retirement benefit liabilities to generate long-term returns.

The Ministry of Employment and Labor and the Financial Supervisory Service announced today the "Government Support Measures to Enhance Investment Returns on DB Retirement Pension Reserves" containing these details.

The DB-type retirement pension is a system where a company selects a retirement pension provider to manage the reserves.

While the employer bears the operational responsibility and investment gains or losses belong to the company in a DB plan, the assets required to pay retirement benefits are accumulated externally to stably protect workers' receipt rights.

As of the end of last year, out of 501.4 trillion won in retirement pension reserves, DB plans accounted for nearly half at 228.9 trillion won (45.7%).

The problem is the rate of return.

With 91.9% of DB reserves concentrated in principal-and-interest guaranteed products, a conservative management practice has been prevalent.

As a result, last year's annual return for DB plans stood at 3.5%, lower than defined contribution (DC) plans at 8.5% and individual retirement pensions (IRP) at 9.4%.

The cumulative return of DB plans over the past five years was 15.9%, lower than the wage growth rate (18.9%) over the same period.

Low returns lead to financial burdens for companies.

For DB plans, companies must externally accumulate financial resources at the minimum reserve level mandated by law.

If returns are low, employers must make additional contributions for the shortfall in existing reserves in addition to the new retirement benefits generated every year.

For instance, when an employee whose monthly salary rose from 3 million won to 3.3 million won in their seventh year retires, the company must pay 23.1 million won in severance benefits (3.3 million won × 7 years).

If the investment return on the existing 18 million won reserve stops at 5% (900,000 won in profit), it falls short of the 10% wage growth rate (target return of 1.8 million won), requiring the employer to additionally cover the 900,000 won shortfall.

To reduce the resulting burden on companies and protect workers' rights to receive retirement benefits, the government has decided to set the target return on DB reserves at or above the minimum wage growth rate.

To this end, it plans to support the diversification of assets from primarily principal-and-interest guaranteed products to performance-based ones.

Employers will be encouraged to actively utilize advisory services from retirement pension providers in managing DB reserves.

Workplaces with fewer than 300 employees, which are not obligated to prepare a reserve operation plan, can receive consulting on setting target returns and asset allocation investment through retirement pension providers.

In addition, strategies to match the duration (remaining maturity) of retirement benefit liabilities and DB operating assets will be pursued.

This method designs the investment period and structure of assets in line with the timing when retirement benefits must be paid.

Retirement benefit liabilities, which convert future retirement benefits into present value, increase or decrease depending on changes in the discount rate (interest rate).

Matching the duration of assets and liabilities results in similar ranges of fluctuation, thereby reducing the risk of additional reserve contributions caused by discount rate changes.

For example, if the average tenure of workers last year was 7.1 years and retirement benefits must be paid 7.1 years later, the liability duration becomes 7.1 years.

On the other hand, 83% of the principal-and-interest guaranteed products in which DB plans are invested mature within three years, resulting in an asset duration of only 2 to 3 years.

The government plans to alleviate companies' additional reserve burdens caused by interest rate fluctuations by encouraging them to extend asset durations to match the liability period.

Furthermore, the Ministry of Labor plans to conduct regular inspections starting this year on DB retirement pension workplaces that fail to meet minimum reserves, alongside sanctions such as imposing fines.
※ Please note: This article was translated by AI and may contain errors.