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Pension Investments Reeling from Sluggish Stocks

Posted August. 20, 2008 07:32,   


The decline of the domestic stock market has office workers who have invested their pension funds in stocks jittery.

Those who invested in stocks in late October or early November last year, when the stock market peaked, have been hit the hardest in seeing their principal eaten away.

The government introduced in Dec. 2005 a retirement pension plan to protect employees from bankruptcy and help them secure funds for retirement by allowing outside financial firms to manage their contributions. Though businesses with more than five employees are subject to the new plan, they can either stick to the old retirement allowance system or shift to the new system under agreement with labor.

Unlike a defined contribution plan in which employers must set aside a certain amount of money for their employees, the new system has employees choosing the way their pension funds are managed. A bullish stock market helps their funds to balloon, but a bearish market can do the opposite, and often erode their principal.

Due to these risks, workers on the defined contribution plan are not allowed to directly invest in stocks. If they invest their contributions in stocks indirectly, the share of stocks in their portfolios should be under 40 percent.

A senior member of a mid-size company who joined the retirement pension plan in May last year received retirement funds of 6.69 million won from his company this May. He invested the entire amount in stocks and lost 210,000 won, or 3.1 percent. “Had I put the money in a bank on fixed deposit, I would’ve earned about five percent of profit. If opportunity cost is considered, I suffered a 10-percent loss,” he said.

Under the defined benefit plan, employers promise their employees a specified monthly benefit at retirement. Business owners also have the right to manage funds and are responsible for losses. Therefore, employees are not affected by their employer’s fund management, but continued bad performance can lead to bankruptcy.

A mid-sized company using the defined benefit plan lost 112.18 million won since it invested one billion of retirement funds in stocks in October last year.

In the United States, which lacks regulations on stock management, companies often sustain big losses while investing pension funds in stocks.

In 2002, General Motors suffered a pension deficit of 19.3 billion dollars. To make up for the loss, it issued bonds worth 17 billion dollars the following year.

Those who invested their retirement pensions in stocks before August 2006 saw their profits rise between 11.68 and 53.64 percent over the past two years. “As the stock market plunges, people have learned a hard lesson,” said Kang Seong-mo, chief of retirement funds at Korea Investment & Securities.

“People should use this difficult period as an opportunity to make a concrete, long-term plan considering their own investment tendencies.”

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