On December 9, 2019, the National Assembly passed an amendment to the Employee Retirement Benefit Security Act that introduced the ″Default Option″ system.
The Default Option is a system where a retirement pension provider manages retirement pensions in the method designated in advance by employees when there is no instruction on the investments from the employees regarding the defined contribution type (DC type) retirement pension and the individual retirement pension (IRP).
The reason for introducing such a system is to increase the return on retirement pensions, which has been only 1% on average over the past five years. Since its introduction in 2005, most of the reserves (approximately 80-90%) have been invested in principal-guaranteed products, and the return was inevitably low due to the long-term low interest rate trend. Therefore, the Default Option System aims to improve the return on retirement pension by allowing employees to automatically invest their reserves in a pre-designated products even if they do not give specific instructions on the type of investments.
The Default Option can be used when (i) a retirement pension provider provides an employer with the list of performance-based products such as target date funds (TDF) and principal-guaranteed products such as deposits, which are pre-approved by the Ministry of Employment and Labor, (ii) the employer stipulates the introduction of the Default Option in its retirement pension rules through a labor-management agreement, and (iii) the employee selects one of the Default Options offered by the retirement pension provider. The Default Option set up in this manner applies if the employee does not provide instructions regarding the reserve management or wishes to operate the default option.
We note that the demand for investment products such as TDF is expected to increase from retirement pensions. As the amendment is expected to take effect in June 2022 (which will take effect six months after the promulgation), employers, retirement pension providers and financial institutions need to take into account such changes in their business.
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