The number of South Korean workers who switched their retirement pension plans from defined benefit to defined contribution rose sharply in the first half of this year as stocks surged, according to regulatory data.
But the market tumbled soon after the KOSPI peaked, leaving some of those savers with losses of more than 10% in just two months.
Switches Clustered at the KOSPI Peak
A total of 149,710 savers completed a switch from defined benefit (DB) to defined contribution (DC) plans in June and July, up 181.2% from 53,242 in the same period a year earlier, according to data submitted by the Financial Supervisory Service to Rep. Park Sung-hoon of the People Power Party, a member of the National Assembly's National Policy Committee, on the 6th.
The monthly figures more than doubled in a single month, from 43,974 in June to 105,736 in July. Cumulative switches from January through July reached 340,156, up 118.1% from 155,947 a year earlier, with 44.0% of them concentrated in June and July.
Because a switch typically takes about a month from application to completion, many of those who completed the move in July likely made the decision around June, when the KOSPI hit a record high. The index climbed to 9,385.59 in intraday trading on June 19.
"Applications to switch ran above normal levels this year as share prices rose," an FSS official said. "Savers who applied to move to DC plans have already made their investment decisions, so in many cases the money is invested as soon as it arrives."
Returns Slumped Right After the Peak
The market reversed sharply after the money moved into DC accounts. Savers who switched from DB to DC plans between April and June posted simple period returns of minus 10.7% at Mirae Asset Securities and minus 10.2% at Korea Investment & Securities over July and August.
Those figures cover only the savers who switched at the two brokerages and do not represent returns for all savers who moved to DC plans.
The bigger problem is that moving the money back to a DB plan is effectively impossible once it has been transferred. Under the Ministry of Employment and Labor's current administrative interpretation, savings transferred into a DC plan cannot be moved back to a DB plan, because retirement benefits for past years of service are settled and moved into the DC account in the process.
A company that runs both DB and DC plans can, if labor and management set the relevant rules, keep existing DC savings in place while applying a DB plan to future years of service. Even then, the DB plan starts from zero rather than restoring the earlier period of participation.
Industry officials said savers with many years of service left should not decide to switch based on short-term market moves alone.
The DB-to-DC switching process generally does not include a separate cooling-off period in which savers can reconsider the decision. That has prompted calls to strengthen safeguards such as risk disclosures, investor education and a reconsideration period to curb market-driven herding and support more careful decisions.
"This is a critical choice that changes the fate of a person's retirement savings, yet the government effectively left unchecked the rush of switches driven by a rising market," Park said. "Risk disclosures and investor education must be strengthened, and real safeguards such as a reconsideration period must be put in place immediately, so that hasty switches driven by short-term returns are not repeated."
