Labor ministry warns firms over low returns on defined benefit pensions

The labor ministry said Wednesday that companies managing defined benefit pension plans must set target returns above wage growth rates to avoid additional financial burdens. Over the past five years, cumulative fund returns fell 3 percentage points short of cumulative wage increases.

Under the defined benefit system, employers bear the investment risk and must cover any shortfall if fund returns fail to match rising wage obligations. Wages rose 18.9 percent in the period while pension assets generated only 15.9 percent, forcing companies to make extra contributions beyond regular annual payments.

The gap stems from a conservative approach placing 91.9 percent of assets in principal-guaranteed products with maturities of three years or less. This creates a mismatch between liabilities, which average 7.1 years based on employee tenure, and assets lasting just two to three years.

The ministry advised businesses to consult with pension operators to diversify portfolios into performance-linked products and align asset durations more closely with their liability profiles.

One workplace that shifted from bond-heavy holdings to a mix of performance-linked and principal-guaranteed products saw annual returns improve from 5.9 percent to 25.5 percent following operator consultation.

In 2025, the annual return for defined benefit plans was 3.5 percent, trailing the 8.5 percent earned by defined contribution plans and the 9.4 percent recorded for individual retirement accounts. Defined benefit funds accounted for 228.9 trillion won of the 501.4 trillion won total retirement pension asset pool at year-end.

Starting in 2026, the ministry and the Financial Supervisory Service will begin regular inspections of workplaces failing to meet minimum funding requirements, with fines for violations. Authorities also intend to include detailed guidance on asset allocation in an updated retirement pension handbook scheduled for release in October.