For Kofia, pensions hold the key to growing funds

The Korea Financial Investment Association (Kofia), a self-regulatory organisation representing Korean and foreign financial institutions, is lobbying the government to support long-term investments in order to revitalise the mutual-funds industry, says managing director Kim Cheol-Bae.

Kim is in charge of Kofia’s collective investment service division, which looks after four industry lines: funds, discretionary investments, trusts and advisory services. That means it represents units of both buy-side and sell-side institutions, which usually have conflicting agendas.

That can often blunt the voice of asset managers within Kofia, but one area where there is little controversy is the desire to expand opportunities to manage pension money.

Kim says the goal of the industry should be to uncover or create more long-term investors. The funds industry enjoyed healthy growth from 2005-2008, with equity fund assets rising from Won8 trillion ($7.5 billion) to W144 trillion, thanks in part to the proliferation of regular savings plans, usually involving monthly instalments over three-year periods. But the financial crisis undermined confidence, and RSP accounts and assets have stalled.

Therefore new ways to engender longer-term investing must be encouraged, and the most obvious are to steer savings for retirement and education to long-term investment vehicles.

Kim notes Korea faces an acute need for such vehicles. The demographics of low fertility and longevity are creating an aging problem as severe as anywhere in the developed world, while tuition fees for students are becoming a crippling burden for middle-class families.

One idea Kofia is pushing to the government is to give tax support to investment funds for tuition. There does exist a year-end tax deduction of up to W9 million for families with a child attending university, but it’s only for parents with a job. More people marry later now, Kim notes, and there is a rising number of retirees also trying to put children through university who are ineligible for this tax break.

Kofia has forwarded a plan in which people who start investing in a long-term vehicle for tuition purposes can enjoy tax protection for instalments committed over a period of 10 years.

This may be just rhetoric, however: Kim admits the tax authorities are not prepared to support such an initiative. In lieu of that, Kofia says it is using its advertising budget to promote the idea of investing from an early age to finance a child’s education.

Secondly, Kofia is lobbying the government, including the Ministry of Health, Labour and Welfare, to further liberalise its six-year-old law on corporate pensions, to encourage more companies to shift to defined-contribution schemes (via tax support) and allow portfolios to allocate up to 100% to domestic equities.

DC assets can now be invested up to 40% in equities, and the National Assembly has recently passed an increase in tax support for individuals from W3 million to W4 million a year.

Kofia’s proposal is to increase tax sheltering for DC assets up to W6 million a year, split evenly between employers and members. However, there is no sign for now that tax authorities are willing to consider this.

Thirdly, Kofia would like to see individuals have the ability to apply for tax breaks when they buy pension-type investment products on the cash market, including bank products, insurance products and funds. Such measures would encourage financial services providers to promote more pension-type offerings, Kim says.

The ultimate goal is to introduce a system similar to Australia’s superannuation regime, with automatic or mandatory subscriptions, deregulated investment rules and tax benefits. But the government faces budgetary constraints, which sets the tax bureau against such ideas; and labour unions tend to oppose anything that favours DC at the expense of defined-benefit plans. Nor are corporations lining up to pay mandatory pension contributions.

So while Kofia may have set out goals for growing the asset pie that all of its internal members – fund managers, brokers and banks – can agree on, its lobbying is unlikely to yield results in the near term.