Retirement Pension ETFs: Trusting "100% Investment Limit" Could Backfire... FSS Pushes to Display Risk Ratings Alongside

"Check Risk Ratings in Addition to Investment Limits"
Risk Ratings to Be Displayed Alongside Investment Limits Starting in January 2027

Even exchange-traded funds (ETFs) marked as having a 100% investment limit for retirement pensions carry the risk of principal loss, prompting a warning to investors. The Financial Supervisory Service (FSS) found that some retirement pension providers displayed only investment limits without disclosing products' risk ratings, potentially leading subscribers to mistake them for principal- and interest-guaranteed products. Starting in January 2027, the FSS will require investment limits and risk ratings to be displayed together on trading screens and in product proposals.

According to the FSS on October 27, ETF investments among return-based products in retirement pension accounts totaled KRW 99.8 trillion at the end of the first half of this year, accounting for 50.4% of the total. The amount invested in ETFs surged more than tenfold in just over two years, from KRW 9 trillion at the end of 2023. Over the same period, the total value of return-based products more than tripled, from KRW 49.1 trillion to KRW 198 trillion.

The problem, the FSS found, is that some retirement pension providers display only investment limits, without disclosing product risk ratings, on mobile and online trading screens, even though ETF risk ratings range from "very high risk" (Grade 1) to "very low risk" (Grade 6). The FSS believes this could lead investors to mistakenly regard return-based products, which carry the possibility of principal loss, as being as safe as principal- and interest-guaranteed products such as deposits.

An FSS official pointed out, "'100% investment limit' does not indicate that a product guarantees principal and interest. Even 'lower-risk investment products (ETFs)' that meet conditions such as having less than 50% of their assets invested in stocks are described only as having a '100% investment limit,' just like principal- and interest-guaranteed products such as deposits. This could lead retirement pension subscribers to mistake them for guaranteed products."

Under the current system, not only principal- and interest-guaranteed products but also "lower-risk investment products" that meet certain requirements, such as having less than 50% of their assets invested in stocks, may account for up to 100% of pension reserves. By contrast, the investment limit for riskier products is 70% of reserves.

ETFs classified as lower-risk investment products may also be assigned a different risk rating. When first established, these products are classified as Grade 4 or lower, but after three years they may be reclassified to a higher risk grade depending on factors such as changes in returns. An active ETF investing in 30-year Korean Treasury bonds, which was eligible for investment of up to 100% of reserves, was reclassified from Grade 5 in August 2022 to Grade 3 in August 2026.

In response, the FSS plans to revise its disclosure system so investors can check risk levels from the time they trade a product through the period they hold it. Starting in January 2027, investment limits and risk ratings will be displayed together on trading screens and on screens for searching tradable products. Risk ratings will also be included in product proposals provided by retirement pension providers. The form of the pension reserve management status report will be revised so subscribers can check the risk ratings of products they hold. Some providers plan to implement the changes during the first half of 2027, depending on their IT development schedules.

The FSS also urged investors not to judge products solely by their investment limits and to check the risk ratings in product proposals provided by their retirement pension providers. This is because principal- and interest-guaranteed products are listed in order of interest rate, while return-based products are listed in the order of products the provider considers superior. The FSS emphasized that investors should also check the risk ratings of their holdings regularly, review the risk level of their overall portfolios, and adjust the allocation to products if necessary.

An FSS official said, "Through these improvements, we will provide subscribers with timely information on product risks. We also plan to support subscribers in managing their assets stably over the medium to long term by publishing a 'Retirement Pension Guidebook' in November and providing information suited to each stage of life."

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