KB News Desk
Proposed 60:40 investment model raises concerns over age-based risk and trustee liability
South Korea is preparing to overhaul its 500 trillion won ($341.7 billion) retirement pension market to lift chronically low returns through professional fund management. But industry officials warn that the emerging design could place all workers in a single portfolio, regardless of their age or proximity to retirement.
A portfolio invested 60 percent in stocks and 40 percent in bonds has emerged as the leading option in discussions, according to industry sources familiar with the discussions Tuesday. Critics say it could expose workers nearing retirement to excessive risk while offering younger participants too little growth potential.
The approach would contrast with retirement systems in major overseas markets, where target date funds and glide paths typically reduce stock exposure as participants approach retirement.
One portfolio for every worker?
Under the proposed system, retirement savings would be pooled into separate funds. Trustee companies would administer and oversee them, while professional asset managers would make investment decisions.
The government expects economies of scale and professional management to deliver better long-term returns than the existing contract-based system, in which individual employers choose financial institutions to manage workers’ plans.
But industry officials say the task force appears likely to adopt a standardized portfolio rather than offer strategies tailored to participants’ risk tolerance and retirement dates.
“A 60 percent allocation to stocks and 40 percent to bonds is among the options under review,” an industry official said on condition of anonymity.
Target date funds, or TDFs, are widely used in overseas pension markets. They follow a path that gradually reduces exposure to stocks and other risky assets as retirement approaches, helping protect workers from a market downturn shortly before they begin withdrawing their savings.
“Overseas retirement pension systems commonly use TDFs and glide paths to protect workers from sharp market declines right before retirement,” he said. “But the fund-based structure currently under discussion lacks a mechanism to adjust investments according to retirement timing.”
The official added that a uniform allocation would be poorly suited to workers at both ends of their careers.
“A 60 percent stock allocation would carry excessive risk for someone retiring next month, while it would not be aggressive enough for a young worker,” he said. “A uniform 60:40 portfolio cannot be viewed as a solution tailored to workers’ needs.”
Trustee liability emerges as sticking point
A separate dispute centers on how much responsibility trustee companies should bear when funds lose money.
The Labor Ministry has argued that trustees should be required to demonstrate that they were not at fault when losses occur, according to sources.
It is also considering a three-layer loss-protection mechanism that could include higher capital requirements, mandatory reserves funded with part of trustees’ fees and joint liability for parent companies such as banks and financial holding companies.
Financial firms argue that the measures would blur the distinction between oversight and investment performance. Under the proposed structure, trustees would handle administration and supervision, while asset managers would make investment decisions.
“If trustees are expected to compensate for losses caused by market movements, they will inevitably favor safer assets,” one official working at an asset management firm said.
That could frustrate the government’s attempt to move retirement savings beyond deposits and into investments offering stronger long-term returns.
Tougher liability requirements could also favor the National Pension Service and major banks with stronger balance sheets over securities firms and asset managers with greater investment expertise.
Broader liability could also increase costs and legal disputes. When losses occur, workers may seek compensation while trustees argue that their oversight and investment instructions were appropriate.
Competition could suffer
Financial firms say the reform’s success will depend on offering portfolios suited to different ages and risk tolerances while clearly separating trustees’ supervisory duties from asset managers’ investment responsibilities.
They also warn that competition and innovation will be limited if multiple trustees offer essentially the same portfolio.
“The goal should not simply be to increase the number of participating institutions,” said another industry official who asked to be unnamed. “It should be to provide workers with better professional investment services.”
About 80 percent of Korea’s retirement pension assets remain in principal-protected products, with only 20 percent invested for higher returns. While the government hopes professional fund management will improve retirement outcomes, industry officials warn that limited choice and excessive trustee liability could instead encourage conservative investment and higher fees.
A tripartite task force comprising the Labor Ministry, labor unions and business groups is finalizing the plan, with a legislative proposal now expected in August.
