The Reality Revealed by Ministry of Employment and Labor & Financial Supervisory Service Statistics

Retirement pensions may seem like “money that rolls on its own,” but in Korea, “automatic” generally means “money that automatically flows into deposits.” The numbers tell this story. According to statistics jointly released by these agencies, retirement pension reserves at the end of 2023 totaled approximately 382 trillion won, with principal-protected products accounting for about 87% and performance-based products around 13%. In other words, most of the money was sitting in a “retirement waiting” state rather than being used for “retirement investment.”

What’s important here is understanding why the intuition that “deposits are safe anyway” keeps swallowing up retirement pensions. Reality is hectic. When people are busy, decisions get delayed, and when decisions are delayed, they default to the baseline. The baseline for retirement pensions is often principal-protected products. Add to this the moral pressure that “pensions should be handled carefully,” and you’re even less likely to take action. The result is familiar: reserves grow, but the management feels dormant.

Ironically, though, performance-based products performed quite well that very year. The same data shows that the overall annual return for 2023 was around 5%, and when comparing principal-protected and performance-based products, the performance-based ones significantly outperformed. Of course, reading these numbers as “this will happen every year going forward” would be a mistake, but it does tell us at least one thing: the ‘investment’ function isn’t broken—people just barely used it.

The mood is gradually shifting. As of the end of 2024, retirement pension reserves exceeded 400 trillion won, and government joint data shows that investment amounts in performance-based products like funds and ETFs increased significantly year-over-year. The phrase “from savings to investment” even appears in official documents.

Understanding this trend is important because the risk asset limit rule is designed not as “don’t invest” but rather as “even when investing, do it in a pension-appropriate manner.” And when you properly understand this rule, a path begins to emerge for busy people to manage their funds ‘in a relaxed way.’

How Risk Asset Limit Rules Work

Many people memorize the sentence “retirement pensions allow up to 70% in risk assets” like a mantra. The problem is that the next sentence is missing. “Then what exactly are risk assets, what happens if you exceed them, and what do I need to do?”

The framework of the rule goes like this: For Defined Contribution (DC) and Individual Retirement Pension (IRP) plans, the total investment limit for non-principal-protected assets (commonly referred to as risk assets) was raised from the previous 40% to 70%, and many of the complex ‘individual asset-specific sub-limits’ were eliminated. The main direction was “keep only the total limit and simplify sub-limits.”

While simplifying, they maintained a prohibited list of “too risky for pensions.” For example, unlisted stocks, non-investment grade bonds, privately issued derivatives securities, and derivatives securities with large maximum loss rates are organized as prohibited investments.

Here, we need to clear up one key misunderstanding. In pension regulations, ‘risk’ isn’t determined solely by “stocks or bonds.” The regulatory framework has a major axis of “principal-protected/non-principal-protected,” and within that, assets considered relatively low-risk are treated more like ’non-risk assets’ with looser limits. For instance, bond funds and bond-mixed funds (with low equity allocation), BBB-grade or higher corporate bonds, and derivatives securities with limited loss structures are mentioned as such examples. What the rules are saying is closer to “the problem in pensions isn’t that stocks are absolutely evil, but rather excessive and complex loss structures.”

There’s another practical point. Just because you receive a limit breach notification doesn’t mean ‘forced liquidation’ kicks in. The system design already includes provisions to the effect that “if the limit is exceeded due to market value fluctuations, it’s considered compliant” (at least for certain types), so ‘breach notifications’ are generally more like warning lights.

However, a warning light means “in this state, it’s difficult to buy additional risk assets.” Practically, this often translates to new purchase orders being restricted or additional purchases on the risk asset side being blocked, requiring rebalancing. So a ‘breach notification’ isn’t a panic message—it’s closer to a signal saying “now decide where to allocate additional funds.”

Finally, while the rules seem fixed, there are quite a few exceptions. Products with verified diversification structures (notably qualified TDFs) or government-introduced default options are designed to allow “full allocation.” For busy people, this is almost a cheat code.

Automating Management with Default Options and TDFs

Investment strategies for busy people generally end in one line: “Reducing the number of decisions makes it last longer.” Retirement pensions are particularly well-suited to this principle. Money comes in monthly, life is busy monthly, and tomorrow’s version of you is likely to be even more reluctant than today’s. Then there’s one answer: design with the assumption of a future where you’ll become more reluctant.

That’s why the default option system was created. The name sounds rough, but the function is simple: if a member doesn’t give management instructions, the reserves are automatically managed according to a pre-designated method. Similar systems have been operating overseas for a long time, and they’ve been introduced in Korea for DC and IRP plans.

An important aspect of this system design is “why full allocation was necessary.” In the existing framework, products like equity funds could only be allocated up to 70% of reserves. Then the remaining 30% of idle reserves would easily remain in low-interest deposits and savings. For the default option to work properly, the portfolio that automatically rolls needs to be ‘complete’ in itself. That’s why regulations were announced and promoted to “allow default option products to be fully allocated.”

Here, questions like “so does that mean default options guarantee high returns?” pop up, but that’s an optical illusion. Default options aren’t a mechanism that guarantees returns—they’re a mechanism to reduce low-return structures caused by neglect. In other words, they reduce the ‘risk of not managing.’

TDFs are another axis of this automation strategy. Target Date Funds have a structure that automatically adjusts the ratio of stocks and bonds according to the expected retirement date. It’s a product that directly acknowledges human nature’s “I’m too lazy to rebalance,” making it well-suited for busy people. The government’s regulatory adjustments to allow 100% investment of retirement pension assets in TDFs that meet qualification requirements also fit this context. Examples mention criteria like “stock investment ratio within a certain range during the membership period, lower after retirement.”

Then the question returns to square one: “What should I fill within the risk asset limit?”

For busy people, the most realistic answer comes in two branches.

First, complete all-in-one approach. Using qualified TDFs or approved default options (or equivalent portfolio-type products)—products with built-in asset allocation—as the core. What you need to do here isn’t about the product’s name, but answering big questions like “when is my retirement date approximately, can I handle high risk?” It’s a method of setting direction while reducing details.

Second, simple block assembly. Matching 70-30 with just large blocks like equity-type (domestic/international diversification) and bond-type (government bonds/high-grade bonds), and rebalancing only once a year. Regulations actually encourage this method. Why? Because direct investment in individual stocks is prohibited (especially a direction maintained policy-wise in DC plans for a long time), so equity exposure ends up being taken through indirect investment forms like funds and ETFs.

Here remains the question “then why aren’t individual stocks allowed?” The gist is volatility. With retirement funds, once they’re significantly damaged, recovery time is long, and that time disappears faster than you think. So the system design has flowed toward reducing ‘individual company risk’ in pension accounts. However, discussions continue on whether to loosen this rule, and differences in perspective among ministries have been publicly revealed. Right now it’s closer to “discussions exist but rules remain in place.”

Understanding ELS Leads Back to Simplicity

Now we need to get into the ELS discussion. The moment you ask “how to fill the risk asset limit in retirement pensions,” someone always brings up ELS. I understand why. When you see the phrase ‘annual coupon of a few percent,’ your mind gets comfortable. Deposits are too bland, equity funds are too volatile, and ELS seems to sit somewhere in between.

The problem is that ELS isn’t in the middle. ELS is often designed so that “when conditions break, losses spike significantly.” Simply put, ELS isn’t a product where you receive interest—it’s a product where you buy structure.

Organized from official explanations, it goes like this: Derivatives securities are broadly divided into non-principal-protected (ELS/DLS) and principal-protected (ELB/DLB) types. ELS is the representative of the non-principal-protected type. And it has a profit/loss structure linked to movements of underlying assets (stocks, stock indexes, etc.).

Another risk that many investors instinctively overlook is issuer credit risk. ELS/DLS are issued unsecured and uncollateralized, making issuer credit an important factor, and guidance that early redemption may result in unfavorable redemption prices is common. Additionally, repeated notices that they’re not deposits and thus not covered by deposit protection.

So what’s a “knock-in”? The shape is simple: if the underlying asset falls below a certain range during the operation period, the condition that activates losses at maturity gets triggered. But the real problem is that ‘one touch’ lingers long. People often think “it just needs to recover by maturity,” but in many structures, the knock-in cuts off that hope. So ELS can be calm normally, but once it shakes significantly, recovery can be designed to be difficult.

There’s also more uncomfortable talk. The impact ELS has on the market, particularly the ‘concentration’ and ‘unwinding’ risk during the hedging process. Supervisory authority explanations include the gist that before entering the knock-in range, hedging demand may work to prevent underlying asset price declines, but upon entering knock-in, it may instead become selling pressure on underlying assets, expanding price declines and increasing investor losses. This has implications for individuals too: “when my product breaks down, the market structure may not be favorable to me either.”

The Hong Kong H-Index incident was an event that publicly imprinted this logic. In policy video materials, they organize that as the Hong Kong Hang Seng Index series dropped significantly from its peak, ELS investors linked to it suffered massive losses, and it was revealed that sales processes at banks occurred without sufficient explanation. Specific figures like the number of loss-confirmed accounts and principal/loss amounts were also presented.

After this incident, the system got stricter. Banks can no longer sell ELS at just any counter—regulations were announced to restrict sales only to hub branches equipped with consumer protection mechanisms. They went in the direction of institutionally writing “this is not a deposit” in big letters, including requiring labeling like ‘high-complexity financial investment product’ next to product names.

Coming back to the retirement pension question here, the conclusion becomes quite simple. Retirement pensions are ‘slow money.’ They come in like a salary and go out like retirement. When you attach complex structures to slow money, understanding costs don’t compound. Rather, the time you hold it without understanding gets longer, making accidents bigger. For busy people to manage in a relaxed way, they need to create a structure that ‘doesn’t use complexity,’ not a method to ‘do complexity well.’

And if you really must discuss ELS in retirement pensions, it’s not because “ELS is the answer to increase returns,” but to understand “why the system and market have become sensitive to high-complexity products.” Ultimately, properly understanding ELS leads most people back to ‘simplicity.’

Portfolio Scenarios for Busy People

From here on, it’s practical. However, this isn’t personalized prescription—it’s a “framework to help busy people make fewer mistakes.” Since everyone has different income, retirement dates, other assets (housing, cash, loans), and risk tolerance, ratios should only be used as reference.

First, one big principle: The core of retirement pensions isn’t picking the right stocks, but automated asset allocation and low maintenance costs. This is also why the system empowered default options and qualified TDFs.

Scenarios are easier to divide into three.

First, fully automated. Selecting qualified TDFs or approved default options (portfolio-type) to roll reserves as essentially ‘one lump.’ The advantage of this method is almost zero decision-making. The disadvantage is that if you don’t properly examine the product’s management philosophy and costs (fees, commissions), neglect can repeat with the attitude “it’s automatic so it must be fine.” Still, for busy people, this method generally has higher winning rates. ‘Because I know I won’t rebalance.’

Second, two-block assembly. Having just two blocks—risk asset block (e.g., domestic/international equity index fund/ETF focus) and safe asset block (e.g., government bond/high-grade bond focus, or principal-protected)—and matching 70-30. The point here isn’t “what to add to fill 70” but “where not to over-concentrate the 70.” If you tilt excessively toward sector/theme/single country, perceived risk explodes even within limits. Regulations limit by ‘percentage,’ but pain comes through ‘perception.’

Third, three-block assembly. Dividing risk assets into two chunks (e.g., global equities, domestic equities) and safe assets into one chunk (e.g., bonds or principal-protected). This method is worth using when there are realistic reasons like “I want some domestic weighting/exchange rate fluctuations bother me/ETF selection range is limited.” However, as blocks increase, management becomes slightly more cumbersome. So it’s good to simply nail down the rule like this: “Restore proportions only once per year in the same month.” If this one line is executed, the rest is surprisingly uneventful.

So what do you do when you get a risk asset limit breach notification? First, not panicking is the right answer. There’s institutional intention to interpret situations where limits are temporarily exceeded due to market value fluctuations in a mitigated way, so notifications are closer to “be careful with additional purchases now” rather than “definitely sell.” Realistic responses are two. One is naturally restoring proportions by directing the next additional contribution (or new purchase) toward safe assets, the other is organizing some at the once-a-year rebalancing point you decided on. For busy people, the first is closer to automatic.

Finally, there’s a hidden premise in the question “what should I fill the 70% risk asset limit with?” The compulsion to fill 70. But the limit is the ‘maximum,’ not ‘mandatory.’ During unstable life periods (large loans, thin cash flow, large expenditures planned within a few years), lowering risk asset allocation is actually ‘relaxed management.’ Retirement pensions are ultimately a long game, and in long games, those who don’t give up win. To not give up, you need to sleep at night.

References

• Retirement pension reserve size, principal-protected ratio, performance-based ratio and returns, etc. official statistics (end of 2023 basis).
• Retirement pension reserve size increase and performance-based investment amount increase (end of 2024 basis, investment white paper summary).
• DC/IRP non-principal-protected asset total investment limit increase (40→70), prohibited investment targets (unlisted stocks, non-investment grade bonds, privately issued derivatives securities, etc.) and regulatory framework (negative conversion) explanation: Financial Services Commission press release (2015).
• Intent to consider compliance when limits exceeded due to market value fluctuations and operational regulation relaxation background (2014 regulation change notice press release).
• Default option (pre-designated operation method) introduction intent, operation method, overseas adoption cases and expected effects: Financial Services Commission press release (2022).
• Intent to allow full allocation of default option products (including problems with 70% limit structure): Financial Services Commission policy video script.
• Qualified TDF full investment allowance and example criteria (equity ratio adjustment, etc.): Financial Services Commission press release.
• ELS/DLS (non-principal-protected) and ELB/DLB (principal-protected) distinction, knock-in, concentration, hedge-related risk explanations: Financial Services Commission report video script (derivatives securities issuance status and response measures).
• Hub branch sales restriction and consumer protection enhancement following Hong Kong index-linked ELS loss cases, loss/account scale policy explanation: Financial Services Commission policy video (2025).
• Comprehensive measures to prevent incomplete sales of high-complexity financial investment products (ELS hub branch sales, etc.): Financial Services Commission press release (2025).
• ELS/DLS issuer credit risk, early redemption, principal loss possibility, etc. investor guidance (securities firm customer guide).
• Prohibition of direct stock investment in DC-type retirement pensions and intent of indirect investment limits (policy briefing press release, 2005).
• Discussion on easing retirement pension risk asset limits and departmental position differences (including official denial of limit abolition/direct investment allowance).
• Hong Kong H-Index ELS losses and maturity/loss projections, etc. (figures organized based on reports).