Korean corporate pension assets tipped for strong growth

Korean corporate pension assets more than doubled in 2010 to about $26 billion, with inflows of $13.5 billion during the year. This increase was the highest level in the past five years, according to Towers Watson.

Jayne Bok, director of investment consulting at Towers Watson in Seoul, says 2010 can be considered the key year for plan adoption, as existing tax benefits on legacy severance pay schemes were phased out.

“This encouraged companies to set up funded schemes with service providers,” she says, “and if this trend continues, we expect corporate pension assets to grow to between $36-45 billion by the end of this year.” 

A report by the regulator, the Financial Supervisory Service (FSS), reveals that in December 2010 alone there was an increase of about $6.1 billion, mainly by big local companies such as Hyundai Motor Group, LG Chemicals and GS Caltex. The FSS also predicts that the market size will reach up to $45 billion by the end of 2011.

Towers Watson calculates that around 24,000 local companies adopted funded corporate pension plans last year as a result of the Employee Retirement Benefit Security Act. This brings the total number of companies which have made the change to around 94,000, although this represents only 6.6% of total registered companies.

This implies many more companies will adopt a corporate pension scheme soon, given the lack of tax incentives around the legacy scheme, but the uncertainty also explains Towers Watson’s large range of estimation.

Around 70% of existing Korean pension assets are structured as defined benefit. Bok attributes this phenomenon to the fact that larger companies, where labour unions are strongest, tend to be DB adopters.

The top four service providers in Korea are Samsung Life (largest market share leader), followed by Kookmin Bank, Shinhan Bank and Woori Bank.

The FSS study confirms that banks hold the largest pension market share (49.6%), followed by life insurance (26.1%), securities (16.2%), and non-life insurance (8.1%).

The largest service providers in each of these industry groups are Samsung Life (15.6%), Kookmin Bank (9.7%), HMC Securities (4.3%), and Samsung Fire & Marine (3.7%).

The FSS says that the market share of the life insurance industry decreased, while the securities industry has gained the most, mainly due to HMC Securities’ business with Hyundai Motor Group.

Bok expects that local pension admin fees will become an increasingly important factor for sponsors to consider when selecting a service provider.