"When to Switch Between DB and DC for Higher Severance Pay: Retirement Pension Investment Strategy ④"

Interview with Hyosun Jang, Head of Pension Division at Samsung Securities

"If you expect your wage to peak, switch to DC; in a rising phase, stay with DB"

Consider tax benefits of pension savings and IRP, and link with ISA

"If you expect your salary to rise and then drop sharply due to policies such as the wage peak system, you should consider switching from a defined benefit (DB) pension to a defined contribution (DC) pension before that happens."

Hyosun Jang, Executive Director and Head of the Pension Division at Samsung Securities, recently stated in an interview with The Asia Business Daily, "Since the DB retirement benefit is determined based on your salary in the final three months, if your wage growth rate levels off at around 1 to 2 percent, it is better to transfer to a DC plan early."

Hyosun Jang, Executive Director and Head of the Pension Division at Samsung Securities. Samsung Securities

Recently, there has been a trend of shifting from DB plans, where the company is responsible for fund management, to DC plans, where employees manage their own funds. In this context, it is important to consider factors such as wage growth rates and interest rates when contemplating a switch. Jang explained, "DC plans also offer principal and interest-guaranteed products, and even in these cases, you can get interest rates of around 3 to 4 percent, so if that is higher than your wage growth rate, it makes sense to move to a DC plan."

On the other hand, if steep wage increases are expected, Jang advised that maintaining a DB plan may be a viable option, taking into account market volatility. She said, "For example, if you expect your salary to increase by more than 20 percent per year, it is better to opt for a DB plan. Although one might expect higher returns from DC plans during a period of rapid market growth, the market is always unpredictable."

Regarding individual retirement pensions (IRP) and pension savings accounts, Jang suggested utilizing them in connection with an individual savings account (ISA). She explained, "Since you can receive a tax deduction for up to 6 million won for pension savings and up to 3 million won for IRP, for a total limit of 9 million won per year, it is better to contribute separately. In addition, you can contribute up to 20 million won per year to an ISA for up to five years, and if you transfer the matured funds to your pension savings or IRP upon maturity, you will not only receive tax benefits, but you can also contribute more than the annual limit of 18 million won for pension savings or IRP."

Jang analyzed that the trend in pension investing is shifting rapidly from deposits and bonds to exchange-traded funds (ETFs) in a short period of time. She said, "Just five years ago, demand for principal and interest-protected products such as deposits and bonds accounted for 80 to 90 percent, but now, ETFs make up as much as 50 percent of balances in DC and IRP accounts. In general investment accounts, themed ETFs have a high proportion, whereas in pension accounts, passive ETFs and index-tracking ETFs have a higher share."

In particular, she noted that even within pension accounts, there has been a significant inflow of funds into domestic index ETFs, rather than overseas ETFs that offer greater tax benefits. Jang said, "In the past, there was a strong perception that domestic ETFs were for general accounts and overseas ETFs were exclusively for pensions. Recently, however, domestic ETFs have delivered much better returns, so regardless of tax considerations, we have significantly increased the weight of domestic equity ETFs in our portfolio."

In this context, demand is also rising for target date funds (TDFs), which can bypass the 70 percent cap on risky assets within retirement pensions. Jang said, "TDFs have a fairly high equity allocation, but they are not subject to the risky asset limit. As a result, investors are increasingly using strategies such as allocating 70 percent to semiconductor ETFs and 30 percent to TDFs within their pension accounts."

Nevertheless, Jang stressed that retirement pensions should be viewed from the perspective of 'long-term investing.' She said, "For ordinary accounts in a favorable market, it might make sense to say, 'Increase your allocation and sell when prices rise,' but retirement pensions are a completely different concept. Even if there are sharp short-term gains, I do not recommend trying to move in and out based on market predictions." She added, "The right way is to build up your funds regularly, allocating between stable and performance-based products, for example, 50:50 or 70:30, according to your risk preference."

As of the end of the first quarter this year, the size of Samsung Securities' retirement pension reserves exceeded 23 trillion won, ranking second in the securities industry. That is an increase of about 7 trillion won over the past year. Jang cited 'brand power' and 'differentiated services' as the driving forces behind this growth. She said, "With ordinary investment accounts, you might feel there is little difference no matter which securities firm you use, but retirement pensions are assets that must be held for decades. I believe that even after 10 or 20 years, the Samsung brand will remain," she said. She also mentioned that Samsung Securities was the first in the industry to introduce a pension-specialized private banker (PB) center and to develop an automated ETF accumulation system.

Jang expressed her ambition, saying, "Although Samsung Securities is currently a 'top two' player in the retirement pension market within the securities industry, our long-term goal is to become a market leader across all financial sectors."

This content was produced with the assistance of AI translation services.