Korea to ease investment limits for corporate pensions

Korean regulators see pension funds and other institutions playing a bigger role in developing the country's capital markets. To that end, the Financial Services Commission has set in motion a deregulation of how the corporate pensions industry can invest assets.

Cho In-kang outlined the plans last week at AsianInvestor's fourth annual Korea Institutional Investment Summit, held at the Grand Hyatt in Seoul.

The FSC has set up a taskforce including government officials from the Ministry of Finance and Strategy and the Ministry of Labour, as well as executives from insurers, banks and securities companies. The goal is for them to hand the FSC specific plans on how to develop the pensions industry by the end of this year, says Cho.

The taskforce is looking at three things. One is allowing defined-benefit plans to increase their exposure to equities from the current limit of 30% of total assets -- this may be raised or eliminated. Similarly, defined-contribution schemes, which can't invest in equities at all, are expected to be allowed some degree of exposure.

The second area of focus is to expand the retirement scheme system to include all workers, which means including companies that employ five or less people.

Finally, the FSC is looking for a way to blend the advantages that insurers, banks and securities companies separately offer to pension schemes to create a more comprehensive service; one that could include a measure of member choice.

Asked to clarify this last point, Cho says the FSC would like to see the creation of pension schemes that provide stable returns from a mix of providers, so that members can select some or all of their managers. Today, these schemes are decided entirely by employers. The FSC plans to visit countries such as Australia and the US to pick up ideas.

The FSC has noted how, over the past three years, Asian monetary authorities, pension schemes and other investors have for the first time started investing in neighbouring markets' bonds and stocks.

The government wants to see Korea's pension funds play a greater role in supporting the development of the country's capital markets, says Cho. Such long-term investors will reduce market volatility in periods of stress, as well as provide funding to companies to help them expand. They are also important for corporate governance, through exercising shareholder rights.

Cho calculates that the nation's pension scheme assets total W261 trillion ($217.7 billion), of which 80% is invested in bonds, 15% in equities and 5% in alternative asset classes. He says by the end of next year, the portion invested in equities will rise to 18%. Total pension assets are rising quickly and should hit W2,400 trillion by 2040.

He also believes households will devote a greater share of wealth to capital markets. In Korea, 78% of household assets are allocated to real estate, versus only 60% in Japan and 36% in the US. Of household wealth placed in financial assets, it's mostly in cash and deposits rather than stocks, bonds or insurance policies.

Cho is optimistic that the trend points to more people investing in financial securities, which will further support the development of Korea's capital markets.