South Korea is exploring the possibility of allowing retirement pension accounts to hold private investment Treasury bonds, a move aimed at boosting the returns on these pensions. The average annual return on Korean retirement pensions has stagnated at 2.86%, barely keeping pace with the average annual consumer price increase of 2.8%. This near-zero real yield has prompted investors to seek higher-return options.

The ministry of Strategy and Finance has commissioned the Capital Market Research Institute to study ways to revitalize government bond investment for national retirement income. Currently, individual government bonds are only available through personal accounts at Mirae Asset securities. A government official stated, “It is a suggestion that financial companies, including securities firms and other financial companies, will have a personal government bond that can be included in the retirement pension.”

This review comes as retirement pensions struggle to provide substantial returns. At the end of last year, retirement pension reserves reached a record high of 49.3 trillion won, a 12.9% increase year-over-year. However, the yield has been lackluster, with an average of 2.86% per year over the last five years and 2.31% per year over the last 10 years. This is largely due to the fact that 82.6% of domestic retirement pension reserves are held in deposits.

Compounding the issue, the Bank of Korea‘s interest rate cuts have further depressed savings rates. The average interest rate for deposit banks in June fell to 2.71% per year, with commercial bank deposit rates recently dropping to between 2.05% and 2.55% per year.

Potential Benefits of Government Bond Investment

Personal government bonds offer a potentially more attractive return. As of this month, five-year private government bonds yield 3.22% per year,factoring in welfare benefits. The 10-year and 20-year personal government bond yields, also reflecting welfare benefits, reach 3.95% and 4.95% per year, respectively. These rates significantly exceed current monthly deposit rates and the recent 5/10-year yields of retirement pensions.

For example, an investment of 200 million won in individual government bonds through retirement pensions could generate an interest income of 32.19 million won after five years.

“It is a suggestion that financial companies, including securities firms and other financial companies, will have a personal government bond that can be included in the retirement pension.”

Expanding government bond demand could also alleviate the government’s interest burden. Interest expenses on government-issued bonds have risen from 18.6 trillion won in 2020 to 28.2 trillion won last year and are projected to exceed 30 trillion won this year. Widening the retirement pension account to include these bonds could stabilize the demand base.

Challenges and Considerations

Though, integrating personal bonds into retirement pensions presents challenges. It would require amendments to multiple relevant laws, including the government bond law to expand the targets for purchasing personal bonds and adjustments to the retirement benefit guarantee method. Furthermore,related computer systems would need to be updated to ensure seamless information linkage between the retirement pension system and the Korea Securities Depository System.