Fund-Type Retirement Pensions to Be Introduced... Asset Managers: "A Massive Market Is Opening, but So Is Our Responsibility"

IRP 70% Cap on Risky Assets to Be Gradually Eased
IMA and Promissory Notes to Be Allowed, Raising Hopes for a "Money Move"
Asset Managers Face Greater Burdens, Including the Burden of Proving Liability for Damages

The government's comprehensive measures to overhaul the 500 trillion won retirement pension market have prompted financial investment firms to reassess the potential gains and losses. The measures create new opportunities for market growth, including allowing private financial companies to establish fund-type trustee corporations and easing the rule limiting investment of individual retirement pension (IRP) assets in risky assets to 70%. At the same time, however, they introduce stringent new fiduciary regulations, including shifting the burden of proving liability for damages to financial firms and requiring them to set aside operational risk reserves.

On October 29, the government announced its "Plan to Strengthen the Functions of Retirement Pensions" jointly with relevant ministries. The plan's key measure is the full-scale introduction of fund-type retirement pensions. Depending on who establishes the trustee corporation, the funds will fall into three categories: ▲ open-ended financial institution funds (for-profit corporations); ▲ association-type funds (nonprofit corporations formed by multiple companies and labor-management organizations); and ▲ open-ended public institution funds, such as the SME Retirement Pension Fund. The system will initially apply to defined contribution (DC) plans and individual retirement pensions (IRPs.

The new system is expected to further expand the business opportunities available to financial investment firms. Private financial companies will be able to establish separate for-profit corporations as trustee entities, either independently or as part of a consortium, and directly manage pooled contributions from an unspecified number of workplaces. Association-type funds, which will be established as nonprofits, are also seen as an opportunity. Under the government's plan, association-type trustee corporations can fully outsource asset management to private-sector specialists to make up for any gaps in expertise. As a result, financial firms can enter the market not only by establishing their own trustee corporations, but also by managing large discretionary assets as outsourced chief investment officers (OCIOs) for large companies' suppliers or industry-wide association funds. In addition, the government will require the outsourcing of asset custody (trust services), calculation of net asset values (fund administration), and investment performance evaluation to external specialists, potentially creating business opportunities across financial infrastructure, including trust companies and fund evaluators.

Youngju Nielsen, a professor at Sungkyunkwan University and CEO of Korea Retirement Pension Data, said of the introduction of fund-type retirement pensions, "Pooling contributions from multiple workplaces and managing them professionally can reduce costs through economies of scale and make it possible to provide asset allocation and risk management that individual workers would find difficult to handle on their own." She added, "This is particularly significant for employees of small and medium-sized enterprises that lack the capacity to manage their own pension plans."

Investment regulations will also be eased. The government has decided to gradually relax the current 70% cap on the share of IRP assets that can be invested in risky assets. It will also allow comprehensive investment accounts (IMAs) and promissory notes, which yield around 3% annually, as investment options for DC plans and IRPs. These are key products offered by large securities firms that provide higher returns than principal- and interest-guaranteed deposits and savings accounts while remaining stable. This is expected to fuel a "money move," as tens of trillions of won currently held in bank deposits shift to securities firms' investment products, whose returns are linked to performance.

A securities firm official said, "Because the limit on risky asset investments was artificially capped at 70%, there were clear constraints on making active asset allocations tailored to investors' preferences and market conditions." The official added, "Easing the cap and allowing promissory notes and IMAs will help meet investors' demand for higher actual returns."

However, alongside market expansion, the standards for oversight and management and the requirements for fiduciary responsibility imposed on financial firms will be significantly tightened. To prevent an uncontrolled proliferation of funds, the government has set the minimum capital requirement for open-ended financial institution trustee corporations at 12 billion won and made it mandatory to set aside an "operational risk reserve" equivalent to 0.25% of contributions to cover subscriber losses and other costs. The issue causing the greatest concern in the industry is the "shift in the burden of proving liability for damages." If losses occur during fund management, or if conflicts of interest or violations of disclosure obligations come to light, the trustee corporation can avoid liability for damages only by proving that it was not negligent or at fault, or that there was no causal link.

An asset management company official said, "While professional trustees are naturally expected to fulfill their fiduciary duties, placing the entire burden of proving the absence of negligence on financial firms in lawsuits is a considerable burden." The official added, "Clear standards for exemption from liability and guidelines need to be established promptly to prevent firms from becoming excessively conservative and defensive in their investment management out of concern about potential lawsuits after the fact."

Nam Jaewoo, a senior research fellow at the Korea Capital Market Institute, said, "These institutional changes will bring fundamental shifts to the competitive landscape for retirement pension providers and the asset management industry." He added, "Competition in the retirement pension market is likely to shift away from product sales and short-term returns and toward governance, asset allocation, risk management, costs, and long-term investment performance." He continued, "Financial institutions need to transition from being mere product providers to trustees with real responsibility for managing subscribers' pension assets, and to do so, they need to strengthen their asset allocation and risk management capabilities."

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