The governance structure of Korea's retirement pension market, which has grown to 500 trillion won, will be overhauled. The government is pushing to establish a trustee corporation as an external independent body to expand the current contract-type retirement pension system to a fund-type system in the form of a pension fund.
According to the financial investment industry on the 13th, the Ministry of Employment and Labor (MOEL) is expected to officially announce as early as late Aug. a draft amendment to the Act on the Guarantee of Employees' Retirement Benefits reflecting these details.
The amendment was prepared to break away from the chronic low-yield structure of private pensions centered on principal and interest guarantees. While maintaining the existing contract-type retirement pension, the key is to newly add fund-type retirement pension schemes in the form of external independent bodies: the "financial institution open type" and the "union type."
The core is to establish a "fund specialist trustee corporation," an independent asset management and trustee body, in the form of a joint-stock company. To this end, it also sets qualifications and establishment standards (approval by the Minister of the Ministry of Employment and Labor (MOEL), equity capital requirements, etc.) for private asset management and trustee service providers that will operate and be entrusted with management.
To that end, the Ministry of Employment and Labor (MOEL) commissioned a research project to the Korea Employment Welfare and Pension Institute in Nov. last year. The research report prepared in Apr. this year and obtained by ChosunBiz includes allowing collective investment business entities and discretionary investment business entities under the Financial Investment Services and Capital Markets Act to participate in the trustee corporation's work. The prevailing view is that the amendment will be drafted based on a partial amendment bill that compares the new and old provisions of the Act on the Guarantee of Employees' Retirement Benefits.
◇ "It is an asset management domain"… concerns over monopolies by large firms and exclusion of managers
In the industry, concerns are emerging that the amendment may include strict equity capital requirements and liability for damages.
This is because the OCIO and trustee domains, which efficiently allocate and manage retirement pension assets, are originally the core specialty areas of asset managers. Even so, due to high equity capital requirements and excessive risk burdens, there is criticism that asset management companies with true management expertise may not even be able to enter the market, which could be reorganized into a monopolistic cartel centered on large banks, securities, and insurers with capital strength.
An official in the financial investment industry said, "Allocating and managing retirement pension assets over the long term is a core specialty area of asset management companies," adding, "If the market forms mainly around some large financial companies with the capital to bear loss risk and the ability to respond to legal risks, participation by small and midsize firms with management expertise could be limited."
◇ "No-fault burden of proof" poison pill… defeats the purpose of boosting returns
The clause on a "no-fault burden of proof" applicable to damages has also come under scrutiny. The research report states that if the trustee corporation violates its duties and causes damage, it must fully compensate for the loss unless it directly proves that there was no intent or negligence.
The financial investment industry notes that this shift in the burden of proof could severely shrink even normal management activities. In a structure where damages must be paid unless no-fault is proven when a loss occurs, there is no choice but to shun investments in performance-based products with higher risk (stocks, bonds, etc.). Critics also say this could create a contradiction in which the system reverts to a conservative principal-and-interest guarantee focus, contrary to the original purpose of the fund-type scheme to "boost returns."
There are also concerns that, compared with overseas cases such as the United States and Australia, the level of fiduciary responsibility could become excessively high. In Australia, as part of operational risk financial requirements (ORFR), only a certain level of resources (0.175%–0.25% of assets) is set aside as a preemptive buffer, and trustees are not punitively held to a "no-fault burden of proof" for outcome-based investment losses beyond duties of care and loyalty.