Banks, brokerages jockey for edge in pension shake-up

South Korea's major financial groups are gearing up for a new battle over retirement savings as the government prepares to introduce a fund-based pension system that could reshape competition among banks, securities firms, asset managers and insurers.

Banks enter the race with large customer bases and established pension businesses, but securities and asset management firms could gain ground as investment performance becomes increasingly important. A proposal to allow asset managers to hold stakes in pension trustee entities could further shift the competitive balance.

Financial groups are stepping up preparations ahead of the expected selection of operators by year-end, industry sources said Thursday.

"Selecting operators for the new pension fund system has become a major year-end priority for the industry," an asset management industry official said. "We have formed a task force and are developing strategies, including product offerings, to improve our chances of being selected."

Major financial groups are bringing together their banking, securities, insurance and asset management affiliates to compete for a foothold in the emerging market.

NH NongHyup Financial Group has established a business strategy council and made the new system a priority for next year. Its task force, led by the holding company's business strategy division, includes representatives from its banking, securities and asset management units.

KB Financial Group and Woori Financial Group have also formed cross-affiliate working groups. Hana Financial Group has studied pension systems in Australia and the United Kingdom and is sharing its findings across affiliates; Shinhan Financial Group plans to launch a dedicated task force as government plans take shape.

Hanwha's financial affiliates are pursuing a similar strategy: Hanwha Life Insurance, Hanwha General Insurance, Hanwha Investment & Securities and Hanwha Asset Management held a joint event earlier this month to discuss long-term pension strategies.

The four companies plan to strengthen investment management, governance and internal controls while expanding their product and digital offerings. They also explored a Korean-style pension fund model with input from UK-based consultancy WTW.

Under the proposed system, separate trustee entities would pool retirement savings from multiple employers and invest them on behalf of participants, who would bear the resulting investment gains and losses.

The government envisions three types of funds: open funds involving financial institutions, consortium-based funds involving labor unions and nonprofit organizations, and funds established by public institutions.

Financial firms could establish trustee entities independently or through consortia, while asset managers would be permitted to take equity stakes in them.

The Financial Supervisory Service and the Ministry of Employment and Labor have held briefings with executives from major banks, insurers and securities firms to explain the proposed changes and gather feedback.

The new structure could alter the balance of power in a market traditionally dominated by banks.

While lenders have an advantage through their large pension asset bases and customer networks, the fund-based model places greater emphasis on asset allocation, investment strategy and long-term returns — areas where securities and asset management affiliates could play a larger role.

Securities affiliates are already expanding their presence in the retirement pension market.

Combined defined contribution and individual retirement pension assets at the five major financial groups reached 174.14 trillion won ($130.9 billion), up 15.5 percent from the end of last year.

Assets managed by their securities affiliates surged 36.4 percent over the same period, more than twice the overall growth rate, lifting their share of the groups' combined pension assets to 13.2 percent from 11.2 percent.

The balance varies considerably among groups. Securities affiliates account for about 35 percent of NH NongHyup Financial Group's pension assets and around 14 percent at KB Financial Group and Shinhan Financial Group. Their shares at Hana Financial Group and Woori Financial Group remain in the single digits.

However, the competitive landscape remains uncertain as authorities finalize eligibility requirements for trustee entities and rules governing investment management responsibilities.

"The fund-based model is essentially about creating a massive investment fund," a financial industry official said. "Which affiliate takes the lead, whether a bank or a securities firm, will depend on each financial group's strengths and business structure."

The official added that trustee governance and the scope of investment authority would ultimately determine how competition unfolds.

Despite the growing industry rivalry, experts caution that the reform's success should be measured by improved retirement income rather than the size of funds established.

"The success of fund-based retirement pensions should not be judged by how many trillion-won funds are established, but by how much additional monthly income they deliver to retirees," Min Ju-young, executive director of the Pension Business Division at Shinyoung Securities, wrote in a recent column.