[Pension Asset Polarization](3) Even Easing the Tilt Toward Deposits Can Narrow the Pension Gap

Current retirement pension income replacement rate stands at just 13%
Even a 5% return could raise it to 20%
Default options, with 85% concentrated in deposits, need an overhaul
Introduce fund-based plans... Redesign each model to fit its purpose

Despite the domestic retirement pension market’s growth to more than 500 trillion won, disparities in participation by income and employment type, along with polarization in investment approaches, are threatening the foundations of the multi-pillar old-age income security system. With South Korea entering a super-aged society and concerns growing over the depletion of the National Pension Fund, experts say comprehensive reforms spanning every stage—from enrollment and contributions to investment and benefit withdrawals—are urgently needed for retirement pensions to function as a genuine safety net in old age.

Subsidies and other support for low-income earners; tighten requirements for early withdrawals and IRP closures

According to the Korea Capital Market Institute, the effective income replacement rate of retirement pensions under the current system is estimated to remain at around 13.2%.

Nam Jaewoo, a senior research fellow at the Korea Capital Market Institute, said, "Under the current system, the income replacement rate remains in the 13% range. But even if the annual return reaches just 5% by preventing early withdrawals and improving investment efficiency, the contribution to income replacement would exceed 20%, and at a 7% return, it could rise to nearly 30%." He added, "Given that the National Pension's effective income replacement rate is around 30%, it is urgent to restore the role of retirement pensions in the multi-pillar old-age income security system."

First, preventing poverty in old age requires lowering barriers to entry for vulnerable groups and helping them maintain their enrollment. A "matching support" program has been proposed as a way to improve the low participation rate among low-income workers. Jeong Seunghee, a research fellow at the Hana Institute of Finance, said, "To expand pension participation itself, it would be effective to introduce a matching system that provides additional support when vulnerable groups contribute a certain amount to a pension account." She added, "Developed countries such as the United States and Germany actively use various types of matching programs—including employer matching, government matching, and flat-rate subsidies—to encourage voluntary pension participation among vulnerable groups."

Hong Kyungsik, president of the Korea Retirement Pension Development Institute, said, "Employees at small and medium-sized enterprises tend to change jobs frequently, and their immediate financial difficulties make it hard for them to keep their pension savings until retirement." He stressed, "Beyond the current level of reduced operating costs under programs such as Pureun Seed, the government needs to provide substantial subsidies and tax benefits for low-income workers and employees at small and medium-sized enterprises."

Institutional measures are also needed to prevent pension assets from leaking out of the system. Each year, 17.2 trillion won flows out of pensions through early withdrawals for housing costs and the closure of individual retirement pension (IRP) accounts when workers change jobs. Some are therefore calling for the introduction of a "flexible contribution system," which would allow contributions to be adjusted when people need cash urgently, as well as tighter requirements for early withdrawals, which are currently considered excessively lenient.

Jeong Changryul, a professor in the Department of Social Welfare at Dankook University, said, "In South Korea, withdrawals are so unrestricted that retirement benefits transferred to an IRP when someone changes jobs can effectively be withdrawn without any constraints." He added, "For retirement pensions to accumulate as genuine assets for old age, requirements should be tightened gradually not only for early withdrawals but also for indiscriminate closure of IRP accounts when workers change jobs."

Default options dominated by deposits need a complete overhaul... Make use of TDFs 

At the investment stage, a key priority is reforming the designated investment system, or default option, which has become ineffective. According to the Korea Capital Market Institute, 85.4% of the 53.3 trillion won in default-option assets was concentrated in conservative products that guarantee principal and interest, resulting in an annual return of just 3.69%. Critics attribute this to the "opt-in" structure, which requires participants to choose a default product themselves, and to the inclusion of principal-and-interest-guaranteed products.

Hong said, "Including principal-and-interest-guaranteed products in default options is itself inconsistent with global standards." He added, "We need to move away from lists of products shaped by financial institutions' interests and actively use target-date funds (TDFs), which automatically adjust exposure to risky assets according to retirement dates, as default options to encourage long-term diversified investment."

Nam also said, "The effectiveness of default options does not lie in giving participants more choices. It lies in ensuring that, even if participants make no choice, their assets are not left in low-return products but are invested in diversified portfolios." He stressed, "We need to redefine the criteria for approving, changing, and canceling products through post-implementation evaluation and oversight so that the default-option system leads to higher returns."

Establishing fund-based plans is key... The effectiveness of all three models is essential

Introducing fund-based plans is essential to overcoming the limitations faced by individual workers with insufficient information and investment expertise. The fund-based models agreed upon through the 2026 tripartite social compromise among labor, management, and the government are being developed in parallel with the existing contract-based model, in three forms: public, nonprofit consortium, and open-access financial institution models.

Nam said, "The essence of introducing fund-based governance is not simply changing products, but changing the accountability structure for asset management through independent decision-making and fiduciary responsibility." He added, "We need to build a system in which fund-based and contract-based governance structures compete on the basis of their respective strengths, improve long-term investment performance through professional asset allocation and fiduciary responsibility, and convert those results into stable pension benefits."

There are also concerns that leaving too many options open during legislative discussions could undermine the system's effectiveness. Professor Jeong said, "Activating fund-based retirement pensions or default options is important to address the problem of low returns." He added, "A half-hearted approach that leaves every option open to individual workplaces and workers could amount to little more than a token measure. A strong policy push is needed to structurally address return disparities among workers, including through a blanket transition at the workplace level."

Hong added, "Safety measures such as an initial minimum guaranteed rate of return should be put in place so that very small businesses with fewer than 30 employees can participate in fund-based plans with confidence. At the same time, efforts should be made to improve the provision of pension information and restore the quality of participant education, which has deteriorated over more than 20 years."

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