A U.S. pension expert urges Korea to protect retirement assets from policy pressure as it pushes pooled funds and a broader system overhaul.
[INTERVIEW]
Korea must keep retirement pension funds independent of government policy goals and resist using them to prop up domestic stocks, a U.S. pension expert said, as the country prepares to overhaul its retirement pension system.
“The most important protection is investment independence,” said Alicia Munnell, senior advisor at the Center for Retirement Research at Boston College, in a written interview. “Pension managers should not be pressured to support domestic stock prices or pursue government policy objectives.”
The remarks come as Korea seeks to curb the systemic risk of unpaid retirement benefits and strengthen income security for retirees by requiring all employers to externally fund retirement benefits by 2030.
The government has also proposed pooled retirement funds, under which independent, professional trustees would pool contributions from multiple companies and manage the assets collectively. But discussions remain ongoing over who should oversee the funds and what role the National Pension Service should play, with labor, business and government divided over the scope of its participation.
Munnell, who previously served as a member of the Council of Economic Advisers under President Bill Clinton, said the primary goal of retirement pensions is to provide adequate, secure income in retirement, adding that their success should be measured by how well they meet that objective — not by how much they contribute to stock market performance.
Below are edited excerpts from an interview with Munnell. She discusses lessons from the U.S. 401(k) system and the way forward for Korea’s retirement pension reform.
Q. What institutional safeguards are essential to ensure that investment decisions serve the best interests of pension beneficiaries?
A. Protections should follow retirement assets throughout a worker’s lifetime, including after a change of employment or retirement.
For Korea’s proposed pooled retirement funds, I would emphasize independent and professionally qualified trustees, legally enforceable fiduciary duties, transparent reporting of fees and investment performance, independent audits, and effective regulatory oversight.
Most importantly, they should be protected from pressure to support domestic stock prices or pursue other government policy objectives.
The governing principle should be that retirement savings are held exclusively for the benefit of participants and their families. Institutional arrangements should make that principle legally enforceable, rather than relying on assurances of good intentions.
Could pooled retirement funds help bring greater stability to Korea’s stock market?
Korea’s proposed reform might contribute to the development of domestic capital markets. But it doesn’t seem reasonable to make stock market stabilization an explicit objective of pension reform. That goal may be asking too much of the new system and pursuing it could compromise participants’ interests.
A stronger domestic institutional investor base may be a beneficial byproduct of retirement pension reform, but it should not be a measure of success. The appropriate measures are broader coverage, lower costs, diversified investments, and adequate retirement income, as it is intended to address genuine weaknesses in its retirement pension system.
What lessons can Korea draw from the U.S. 401(k) system?
The principal lesson for Korea is that the United States arrived at its current system largely by accident. Policymakers subsequently spent decades trying to correct weaknesses that had not been anticipated.
Korea has an opportunity to proceed more deliberately. It can establish broad coverage, appropriate default investments, low fees, strong fiduciary protections, and mechanisms for providing retirement income from the outset.
The American experience offers useful innovations, but Korea should not assume that the entire American institutional structure is worth copying.
Is there anything about Korea’s proposed pension overhaul that stands out to you as a particular concern?
One aspect of Korea’s proposal is difficult to understand from an outside perspective: why introduce pooled retirement funds alongside existing contract-based arrangements rather than plan eventually to replace the older system?
If the current arrangements have produced disappointing investment returns and excessive reliance on principal-protected products, why preserve them indefinitely?
There may be legitimate reasons for a gradual transition, including existing contractual obligations and the preferences of workers and employers. Maintaining both systems might also encourage competition.
But preserving the existing arrangements should not become an objective. The goal should be to provide adequate retirement income at reasonable cost.
What’s the priority for Korea’s retirement pension system?
As Korea already requires employers to provide retirement benefits, expanding voluntary enrollment may be less important than ensuring that required contributions are made, preserved, and invested appropriately.
I would therefore place the greatest emphasis on professionally managed default investments followed by strong protections against premature withdrawals and excessive fees.
Default portfolios should be diversified across domestic and international markets. They should not be designed primarily to direct retirement savings into Korean equities.
*A default investment refers to a professionally managed investment portfolio automatically assigned to employees who do not choose their own retirement investment options. It typically balances stocks and bonds based on the employee’s age or expected retirement date.
BY PARK YU-MI, JIN MIN-JI [jin.minji@joongang.co.kr]
