Public and Private Pension Plans: A Combined Income Replacement Approach to Policy options for Old-Age Income Security

Abstract

Korea's retirement pension was introduced in 2005 with the intention to protect workers' rights to their accumulated pension benefits and to shift away from the traditional severance pay scheme to annuity‐based retirement programs. A decade on, the mandatory retirement pension is a success in that now a worker's accumulated retirement benefits have become an actual asset set aside in an external fund, not just a number in an account book. Yet, it remains a failed attempt when it comes to annuitization: an estimated over 95 percent of those in retirement pension still choose a lump sum distribution. Of all retirement pension reserves as of the 3rd quarter of 2014, defined benefit plans accounted for 68 percent, of which 98 percent were invested in principal‐protected, depositbased products, leaving little room for market returns. Moreover, over 80 percent of the investment made in principal‐protected products were concentrated in short‐term products with a maturity of less than one year. This to a great extent is because Korean employers need to ensure sufficient liquidity to meet the demand of their retiring employees for lump sum payouts.