Developing a More Targeted Approach for Korea’s Retirement Savers

A combination of factors in the Korean retirement plans marketplace has created an environment for self-directed retirement saving not seen in this market before. In recent years, favorable legislation and product innovation have come together to significantly improve the retirement savings avenues available to Korean investors.

Let’s start with legislation. Korean regulators, recognizing that the life expectancy of the Korean population is rising while the availability of corporate and public pension plans is declining, have taken steps to help Koreans better plan and save for their own retirement. Following its increase in permitted equity fund allocations for target date retirement funds in 2018 to 80%, Korea’s Department of Labor earlier this year introduced target date funds as a default option within defined contribution plans. The implementation of these funds, which have dominated US 401(k) plan flows for more than a decade, in Korea is expected to significantly increase asset flows into target date strategies in this country and could spur similar developments in other Asian markets.

This legislation has also raised the demand for the target date funds in Korea that will serve as default options in these plans. As a result, Korean asset managers have been looking for help in developing tailored target date approaches to implement within retirement plans. A number of global asset managers have or are expected to enter this market with new products, but not all target date fund approaches may be fit for purpose. Most of the target date funds introduced in Korea are variations of “off-the-shelf” US-based global multi-asset concepts. In other words, the majority of existing approaches have used US Treasuries as the “safe-asset” within the fund, potentially exposing Korean investors to foreign exchange risk and other foreign macroeconomic risks outside of Korea (e.g., interest rate risk and inflation risk).

Having helped investors with index-based target retirement approaches since we introduced the Morningstar Lifetime Allocation Indexes, a series of target date indexes for US investors, in 2009 we were confident we could address this growing investor demand in Korea. However, for our Morningstar Korea Lifetime Allocation Indexes we knew that we needed to take a different tack than the standard products that were being brought to market. We first worked with our Morningstar Investment Management team in Asia to develop a target date asset allocation glide path for the strategy, drawing on asset allocation methodologies developed and maintained by Ibbotson Associates (a Morningstar company since 2006, now part of Morningstar Investment Management).

What underpins the asset allocation glidepath is our Total Wealth Approach, which is a data driven approach specific to the Korean investor. Korean government household statistics on income, savings and wealth are input into our investment models. In an investor’s early years, the Korean investor has the greatest ability to earn and save for retirement, which we call the accumulation phase. In these years the investor can take on greater allocations to equity to build wealth needed for retirement. In the investor’s later years, wealth - also known as financial capital, has been built and the investor nears retirement, the percentage in equities reduces over time and gets allocated to bonds which are considered safer assets. We look at these factors at each age to determine the appropriate asset allocation.

The asset allocation developed for the recently launched Morningstar® Korea Lifetime Allocation Indexes was built on five core asset classes using Morningstar Indexes as the underlying building blocks. Exposures to Developed and Emerging markets equity alongside a suite of sovereign bond indexes, including Global, Korean and emerging markets treasuries, were combined to represent an efficient investment frontier. The index series includes four target date index strategies in the moderate risk tolerance, which appeals to the Korean investor’s preference to balance investment growth without taking on too much risk.Notably, the indexes use the Korean Treasury bond as the “safe asset,” so investors are less exposed to foreign exchange risk, a key difference relative to other target date strategies in market. Every year we review and adjust the asset allocation to ensure that the glidepath will support the investor as he/she nears retirement.

Target date investment approaches are inherently personal given they are designed to address a myriad of retirement needs across a range of objectives, age ranges and financial circumstances. We have also found that these approaches must be unique to the market they serve. A target date fund range in the US, for example, won’t necessarily fit a target date fund range in Korea. This is not a “one size fits all” market. Keeping the end investor and the market where they reside top of mind is critical to designing a target maturity approach fit for purpose. In the case of our Morningstar experience, this mindset let us to a more innovative approach to benefit Korean investors.