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Jun 29, 2011
- Comprehensive Measures on Household Debt
- PROGRESS BRIEFThe government has responded to household debt problems with a series of policy measures in order to enhance the soundness of household debt and financial institutions and at the same time to ensure low-income households’ access to loans.- The application of debt-to-income (DTI) limits for mortgage loans, which had been temporarily eased until last March, was reinstated starting April.- Measures to Encourage Sound Competition among Credit Card Companies (Feb. 9); Measures to Curb Credit Card Companies from Excessively Expanding Their Businesses (June 7)- Measures to Ensure Low-Income Households’ Access to Loans (April 15)DIAGNOSIS OF THE CURRENT HOUSEHOLD DEBT LEVELSAs of end-March 2011, Korea’s household debt reached KRW 801.4 trillion with an annual growth rate of 13% on average since the Asian financial crisis, exceeding the nominal GDP growth rate of 7.3% over the same period.The growth of household debt during the post-crisis period is attributed to the combination of various factors such as low interest rates, abundant liquidity, expectations about rise in real estate prices, and excessive lending by financial institutions.With all the conditions – the soundness of household debt, the proportions of loans extended to borrowers with good credit ratings, loss-absorbing capacity of financial institutions, and household asset holdings – taken into account, we see the current levels of household debt still “broadly manageable.”However, we cannot rule out a possibility that household debt problems would turn into threats to Korea’s economy and financial markets unless we take preemptive measures; therefore, the government came up with a package of measures to contain potential risks of household debt.FINANCIAL POLICY MEASURES ON HOUSEHOLD DEBT1. Measures to keep household debt growth at a manageable paceA. For the banking sector- Apply higher BIS risk weights to high-risk mortgage loans or excessive loans disproportionately concentrated
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Jun 15, 2011
- Revision of Loan-loss Reserve Requirements on Credit Card Assets
- The Financial Services Commission (FSC) made a resolution at the eleventh meeting held on15 June 2011 to revise the Regulation on Supervision of Specialized Credit Financial Business and the Regulation on Supervision of Banking Business on loan-loss reserve requirements for credit card assets.BACKGROUNDThe ratio for provisioning varies depending on the classification of the loans in question.* Applying equal loan-loss provisioning ratio for sales on credit and card debts (card loans, cash advance, revolving), which differ in delinquency ratio** and loss ratio, could be potentially problematic.*Loan loss provisioning ratio: Pass- 1.5%, precautionary- 15%, substandard- 20% doubtful- 60%, estimatedloss- 100%** Delinquency ratio as of 2010: credit sales (0.9%)/ card loans (2.2%)Total outstanding credit card debt at the end of 2010 marked a sharp increase of 19% from a year earlier, far more than a 6.3% increase in total household debt over the same period. This brings about the need for stronger risk management of credit card assets by differentiating the criteria for loan loss provisioning by card asset.REVISIONConsidering higher loss ratio on card debts than credit card sales, different ratios of loan loss provisioning will apply for each type of assets.Loan loss provisioning ratio will significantly rise for credit sales excluding pass class of assets and card debts, reflecting expected loss ratio.Revised loan loss reserve requirements (Unit: %) Classification # of months delinquent Current Revised Credit sale Credit loan Credit sale Credit loan Pass 1 1.5 1.1 2.5 Precautionary 1~3 15 40 50 Substandard 3 20 60 65 Doubtful 3~6 60 75 75 Estimated loss 6 100 100 100 The FSC expects the revision to effectively enhance credit card companies’ ability to absorb losses and prevent excessive competition to expand card debts as the burden of loan loss provisioning for card debts increases*.* According to an analysis of top five credit card companies, additional loan-loss res
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Jun 08, 2011
- Progress Report on the Private Equity Funds Market in Korea
- BACKGROUNDPrivate Equity Funds (PEFs)* were introduced to Korea’s capital markets with the amendments to the Indirect Investment Asset Management Business Act (integrated into Financial Investment Services Capital Markets Act in 2007) on December 6, 2004 in order to promote corporate restructuring, MAs and to diversify investment instruments.* A private equity fund, structured as limited partnerships, typically makes investments in companies, funded with the capital raised from a few investors, and sells companies for high returns after value improvement.The domestic PEF market has gone through its introductory period from 2004 to 2007 and is now in its take-off stage. As of end-2010, there were 148 PEFs registered with a total of KRW 26.6 trillion in committed capital.*As of end-May 2011, the number of PEF firms rose to 167 with KRW28.9 trillion in investment commitments.REVIEW OF THE PAST SIX YEARS1. Fund raisingThe number of PEFs has been on the steady rise since its introduction in 2004 and reached 148 as of end-2010.In particular, for the past three years after the global financial crisis, the number of PEFs grew by 104, up 236% compared to end-2007, as more companies determined it to be the right time for investments.Their capital commitments and actual investments also increased to KRW26.6 trillion and KRW16.7 trillion at the end of 2010, up 197% and 234%, respectively, from 2007.- Capital Commitment: Investors’ obligation to provide a certain amount of capital to a PEF for investments at the time of fund formation- Actual Investment: The sum of investments into the target made through equity financing and debt financing- Capital Drawdown: The portion of capital committed to a fund that is drawn down over time2. InvestmentsPEFs expanded their investments from Korean manufacturing companies (212) to foreign companies, which totaled 25 as of end- 2010. They are also diversifying overseas investments*, shifting their focus away from the United States and ind
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Jun 07, 2011
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May 27, 2011
- Additional Measures to Improve the Soundness of ELW Market
- BACKGROUNDAs Korea’s ELW market has rapidly grown in a short period of time, problems such as overheated investment and soaring investment losses have surfaced; therefore, the FSC introduced some measures (e.g., introduction of mandatory investor orientation course, stricter assessment of LP performance and preventive measures against potential unfair trading practices) in November 2010 to create a sound market environment for ELW trading.Since the implementation of the measures above mentioned, the trading values of ELWs declined somewhat as shown below:* KRW 1.7 trillion (Aug 2010) → KRW 1.9 trillion (Sep 2010) → KRW 2.0 trillion (Oct. 2010) → KRW 1.6 trillion (Nov. 2010) → KRW 1.4 trillion (Dec 2010) → KRW 1.3 trillion (Mar 2011)* Daily average number of suspicious trading: 0.84 cases (Oct 1, 2011 ~ Dec 10, 2010) → 0.13 cases (Dec 13, 2010 ~ Feb 28, 2011)However, despite these measures, as a result of some securities companies giving a preferential treatment to scalpers (the prosecutor pointed out that some scalpers bribed the securities companies so that they could have access to dedicated lines to route their orders faster than others), concerns about the soundness of ELW market have resurfaced. Against this backdrop, and we plan to adopt the following measures.PLANS TO IMPROVE CURRENT PRACTICES RELATED TO ELW MARKET AND ORDER ROUTING SPEED◈ Basic deposit requirement will be introduced as an entry barrier to ELW market investment and existing market practices will be revised to help investors easily compare ELW prices.◈ In regard with speed of order routing, brokerages will be allowed to provide only a reasonable range of service to make sure all investors can have a stable and equal access to trading system.I. SOUNDER MARKET ENVIRONMENT FOR ELWS1. Stronger Protection for Investors A. Basic Deposit RequirementIn most of derivatives trading, investors are required to make basic deposits in addition to margins.* However, for ELWs and buying opti
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May 19, 2011
- Korea to Chair FSB T/F on EMDE Issues
- BACKGROUNDThe G20 leaders at the Seoul Summit held in November 2010 agreed to put financial regulatory reform issues viewed from the perspectives of emerging countries on G20 agenda ,and asked the FSB, IMF and World Bank to submit a progress report prior to G20 Cannes Summit in November 2011.Recognizing that G20 discussions had been mainly focused on how to overcome financial crises in advanced countries, Korea proposed that financial issues relevant to emerging countries need to be more actively discussed at the G20 meetings.TASK FORCE FOR EMERGING MARKET AND DEVELOPING ECONOMIES (EMDES)Against this backdrop, the FSB created a task force to deal with EMDE-specific issues in March 2011. The T/F is to select financial regulatory issues from the perspectives of EMDEs and make relevant policy recommendations.Groups of technical experts will be created within the T/F to conduct in-depth reviews on specific issues.** management of capital flows and foreign exchange risks, prudential oversight on global financial institutions, supervisory cooperation between home and host countries, implementation of international standards, development of capital markets, etc.The T/F is composed of international organizations (IMF, World Bank, BCBS, IAIS, IOSCO, BIS, ECB); and FSB members (Korea, the U.S., Canada, Japan, China, India, Brazil, Indonesia, Mexico, Russia, Saudi Arabia, Spain, North Africa, Argentina, etc)Korea’s FSC was appointed as chair of the T/F in May 2011, and FSC Standing Commissioner Sangche Lee will be representing Korea and preside over discussions in the T/F.The T/F is scheduled to submit an interim report to FSB Plenary Meeting on July 19, 2011. The report will be circulated to FSB regional consultative groups for review by September, and the final report will be completed prior to G20 finance ministers’ meeting in October and G20 Summit in November.*Please read the attached file for details.
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May 17, 2011
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May 17, 2011
- Internal Rules on Corporate Governance in Banks
- BACKGROUNDCorporate governance in banks can have a significant impact on the interests of shareholders and customers; therefore, banks’ governance rules need to be made public.In order to enhance the transparency of banks’ corporate governance, the FSC has revised the Banking Act on November 18, 2010 to require banks to establish and publicize their internal rules on corporate governance. Banks are required to have internal governance rules in place by May 17, 2011 and make a public notice on their websites and the Korea Federation of Bank’s.MAIN CONTENTS OF INTERNAL GOVERNANCE RULESBanks are given discretion to stipulate more details about what they are mandated under the Banking Act (Article 23-4) and the Enforcement Decree (Article 17-4) of the Banking Act.1. Executives(mandatory) qualifications for executives, principles and procedures for appointment and retirement of executives, training programs for executives and candidates, performance evaluation(optional) qualifications for key executive members of banks e.g. president, vice president, and auditor *; developing a “management succession program”***Given that the mandatory introduction of age limits for executives might undermine the autonomy of banks’ management and basic rights of executives, whether to introduce age limitations for executives is left to the discretion of each bank. For consecutive terms, however, stricter standards based upon performance evaluation during preceding terms will be applied to candidates’ qualifications to be reappointed.** The succession program will include how to elect substitutes or successor in the absence of executives; how to select candidates for executives; and how to utilize results of training and performance evaluation, etc.2. Composition and operation of board of directors(mandatory) composition of the board, qualifications for directors, standards and procedures for appointment and retirement of directors, evaluation of performance of the board(opt
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May 02, 2011
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Apr 18, 2011
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Apr 06, 2011
- Korean Financial Market Update
- 1. Recent trends in the stock marketThe KOSPI index, which once fell to a low point of 1,923.30 on March 15 after the Japanese earthquake, has rebounded to a record-high of 2130.43 on April 5, renewing the highest point of 2,115.69 prior to the earthquake.The recent recovery in stock prices is mainly attributed to foreigners’ net buying based on their optimism that the Korean economy is relatively stable amid ongoing external uncertainties such as Japan’s earthquake and political turmoil in the Middle East.2. Foreign investors’ movement in Korean stock exchangeForeigners sold KRW 3.5 trillion in February, the biggest net sale by monthly basis since May 2010, but made net buying of KRW 1.2 trillion in March: notably, net buying of KRW 2.8 trillion after the Japanese earthquake.(By country)Starting this year, there has been a continued outflow of European funds (including the U.K), reflecting ongoing uncertainties in the European region. By contrasts inflows of funds from the U.S. and Asian region have been increasing since March.*As of March, the U.S made a net purchase of KRW 1.3 trillion, Singapore of KRW 0.7 trillion, China of KRW 0.2 trillion*Despite our concern of Japanese capital being pulled back, Japanese made a net purchase of KRW 155 billion instead(By fund-type)In February, all foreign investors except for Asian sovereign funds were net sellers. Starting March, however, the U.S. funds began to make net buying in large volume. Net buying by foreign investors was mostly made after Japan’s earthquake, and European investors (excluding European funds) also turned net buyers of Korean stocks.(By investment period)It has turned out more than half of foreign net buying made after the Japanese earthquake was made by short-term investors. (i.e. investment banks)*Short-term: IB with investment turnover ratio over 500%3. Grounds for foreign investors’ net buyingWithout wider spread of risk from the recent Japanese earthquake and the regional conflict in the
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Mar 30, 2011
- Monitoring Results of Domestic Banks' Foreign Currency Financing
- OverviewThe Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have been operating an Emergency Financial Situation Room and holding Joint Financial Check-up Meetings as the need arose to monitor the effects of external risk factors such as earthquakes in Japan, unrest in the Middle East and European sovereign risk on domestic financial markets including foreign currency funding and management of domestic banking industry and foreign exchange market*.*Refer to the press release dated 13 March 2011, “Result of Emergency Financial Check-up Meeting in relation to earthquakes in Japan”Foreign currency funding in the wake of earthquakes in JapanAs of March 20, 2011, domestic banks including foreign bank branches operating in Korea raised U$248.8 billion through foreign currency borrowings and deposits, etc. They had U$214.5 billion in foreign currency-denominated assets under management in the forms of foreign currency loans, trade financing and foreign currency securities, etc.Since earthquakes in Japan on 11 March 2011, foreign currency funding*, mostly through foreign currency borrowings, increased by U$1 billion and foreign currency management** increased by U $2.6 billion. The increase of U$1 billion in foreign currency funding since March 11 mostly resulted from domestic banks raising more foreign currency funds.* U$1.8 billion up in foreign currency borrowings, U$800 million down in foreign currency deposits **U$1 billion up in foreign currency loans, U$1 billion up in trade financing, U$600 million up in foreign currency securitiesAn FSS survey of domestic banks and foreign bank branches conducted immediately after the earthquakes broke out in Japan found that there were no signs of capital outflows. Instead, borrowings from headquarters by domestic branches of four Japanese banks increased U$940 million from March 14 to 25 even after the breakout of earthquakes.In addition, funding conditions for domestic banks remained stable af
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Mar 22, 2011
- Financial Measures to Support Normalization of Housing Transactions
- BackgroundIn order to stimulate the depressed housing market last year, the government announced the Aug. 29 measures including the temporary easing of the application of debt-to-income (DTI) ratio for mortgage loans. Since the implementation of the Aug. 29 measures, housing transactions have rebounded while household debt including mortgage loans continuously increased.*apartment transaction volume in Seoul metropolitan area (in thousands): 9.0 (Sept 2010)→12.4 (Oct)→17.5 (Nov)→20. 2 (Dec)→16.0 (Jan 2011)→19.0 (Feb)*mortgage lending (KRW in trillions): 2.6 (average from Jan to Aug 2010)→3.3 (Sept)→3.5 (Oct)→4.4 (Nov)→5.3(Dec)→1.8 (Jan 2011)→2.8 (Feb)Key Contents1. The temporary easing of the application of DTI ratio for mortgage loans will be expired at the end of March as scheduled, and the previously-imposed DTI limit* will be reinstated starting April.*the DTI ratio: 40% for speculative area, 50% for non-speculative area in Seoul, 60% for Incheon and Gyeonggi Province.2. The FSC has also come up with complementary measures to support non-speculative housing transactions.1) The raised cap for microcredit loans (from KRW50 million to KRW100 million), exempted from the DTI regulation, will be maintained to make sure that low-income households have no difficulties financing their housing purchase.2) Preferential treatment of higher lending limit using the DTI ratio will be given towards non-grace-period repayment loans along with fixed-rate loans and principal and interest installment loans.*non-grace-period loans: +5%p*fixed-rate loans: +5%p*principal and interest installment loans: +5%p※For example, for non-speculative Seoul area with 50% DTI application, if a mortgage is given out without a grace period and with fixed-rate principal and interest installments, 65% DTI will be applied.Expected EffectsBy reinstating the DTI regulation, the FSC aims to prevent borrowers from borrowing above their means. With the DTI limit back in place, we exp
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Mar 17, 2011
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Mar 11, 2011
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Feb 23, 2011
- Unfair Trading Investigation Results and Penalties
- Violation of prohibition on market manipulation through the link between spot and futures by KOSPI200 stocks and derivatives trading on November 11, 2010, a KOSPI200 options’ expiry dateCase OverviewAccording to investigation results, AAA1), who is head of Absolute Strategy Group (ASG)- Asia of Deutsche Bank AG Hong Kong Branch, DDD, who is in charge of ASG - Global of New York Deutsche Bank Securities Inc., etc. conspired with EEE, who is managing director of Global Equity Derivatives (GED) at Deutsche Securities Korea, Deutsche Bank AG’s South Korean securities unit, to manipulate market prices in Korean capital markets.They had constructed speculative derivatives positions in advance through the combination of short synthetic futures and long put options. In order to gain profit from these speculative positions, they sold KRW2.4424 trillion (US$ 2.2 billion) worth of stocks listed in the KOSPI200, which they had purchased through index arbitrage trading and held during the last year (2010), in the last ten minutes before the market closed on Nov. 11, 2010, an expiry date for KOSPI200 options.Due to these massive manipulative orders, KOSPI200 index plunged 2.79% (254.62p → 247.51p) and they gained illegal profits of KRW44.87 billion (US$ 40.5 million) from market manipulation through the link between spot and futures (options) transaction.Investigation Activities and Enforcement ProcessA joint investigation team by the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) was organized to commence an investigation on Nov. 12, 2010, the next day on which the incident occurred.- Investigation team members: five staffs in Special Investigation Team of the FSS, two staffs in Review Team 3 of the KRX- In-depth investigations were carried out for about two months from Nov. 12, 2010 to Jan. 21, 2011 which included interviews with involved persons and collecting evidences at the Deutsche Bank AG Hong Kong Branch, which placed massive orders to sell, and D
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Feb 21, 2011
- Further Actions Taken on MSB and Support Measures
- The Financial Services Commission (FSC) held a provisional meeting on Saturday, February 19, and decided to suspend operations of four additional savings banks: Busan Central Savings Bank; Busan 2 Savings Bank; Jeonju Savings Bank; and Bohae Savings Bank.Liquidity conditions of these four savings banks were not as bad as the two previously suspended banks (Busan Savings Bank and Daejeon Savings Bank); however, there have been massive deposit withdrawals following the announc ment of the two banks being suspended on February 17, so it became evident that these four savings banks would soon become incapable of paying back their customers’ deposits.An emergency meeting chaired by FSC Chairman Kim Seok-Dong convened this morning in Busan with relevant officials and institutions to discuss plans to minimize the impact of savings banks suspensions on depositors and SMEs in the region, and to provide sufficient liquidity for other savings banks.Participants of the meeting: FSC Chairman, Busan City Mayor, FSS Senior Deputy Governor, KDIC President, KIBO CEO, KODIT CEO, Busan Credit Guarantee Federation CEO, Korea Federation of Savings Banks CEO, IBK CEO, Kookmin Bank CEO, Busan Bank CEO, Nonghyup Credit Agency CEO, Busan Chamber of Commerce Deputy CEO and nine other CEOs of mutual savings banks in the region.Support Measures1. For Savings Banks and DepositorsTo minimize inconveniences of suspended savings banks’ depositors,(1) The government will make sure that depositors can receive provisional payments, a portion of deposits protected by the KDIC, in two weeks of suspensions, a week earlier than the standard procedure.(2) In order to meet depositors’ urgent needs for cash before provisional payments, the government will help them get a deposit-backed loan up to KRW 15 million per person from four commercial banks (Kookmin, NH, IBK and Busan Banks). (3) The government will raise a ceiling on deposit-backed loans up to 80% of deposits to meet additional needs for liqu
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Feb 17, 2011
- Actions Taken for Mutual Savings Banks
- The Financial Services Commission (FSC) held a provisional meeting today and decided to impose 6-month business suspensions for Busan Savings Bank and Daejeon Savings Bank.Busan Savings Bank is affiliated with four other banks: Busan Central Savings Bank; Busan 2 Savings Bank; Daejeon Savings Bank; and Jeonju Savings Bank.Following the outbreak of the financial crisis in 2008 and subsequent real estate recession, financial health of the five savings banks has deteriorated, and as of end-December 2010, Busan Savings Bank’s BIS ratio has fallen to 5.13% while the outstanding liabilities surpass total assets by KRW 21.6 billion resulting in negative equity. Daejeon Savings Bank’s current BIS ratio is -3.18% and its liabilities surpass its assets by KRW 32.3 billion.Daejeon Savings Bank has experienced continued withdrawals of its deposits since D cember2010 and after judging that it is no longer able to payout anymore deposits, it has submitted a formal request for a business suspension to the FSC on February 16, 2011.The FSS plans to start a full investigation today on the suspended savings banks, and actions will be taken to normalize their operations.According to the Act on the Structural Improvement of the Financial Industry, following actions are to be taken for mutual savings banks that failed to meet the 5% BIS requirement.- Below 5% - Business Improvement Recommendation- Below 3% - Business Improvement Request- Below 1% - Business Improvement OrderAside from the two suspended banks, there are five other savings banks that fall short of the 5% BIS requirement: Bohae Savings Bank; Domin Savings Bank; Woori Savings Bank; Saenuri Savings Bank; and Yes Savings Bank, of which three of them: Woori and Saenuri (state-owned) and Yes (held by KDIC) have no difficulties financially. The other two: Bohae and Domin have submitted their business normalization plans and they are making progress. Out of 104 mutual savings banks in operation, apart from the five affiliated
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Jan 11, 2011
- Regulatory Follow-Up Measures For Nov.11 Stock Market Plunge
- BackgroundThe Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have developed measures to improve derivatives-related trading system jointly with the Korea Exchange (KRX) and the Korea Financial Investment Association (KOFIA) based on the investigation of risk management status of financial investment companies and a public hearing held on December 20, 2010 after the stock market plunged on an option expiry day, November 11, 2010.The latest regulatory measures are designed to prevent the recurrence of a similar event on expiry dates of futures and options contracts and mitigate risks arising from derivatives investment by institutional investors, seeking to keep capital markets sounder and more efficient.Regulators are thoroughly investigating and inspecting alleged acts of unfair trading and violations of asset management-related laws that caused a market plunge on the option expiry day and will take appropriate actions against any violation of laws.Investigation updates1. Investigation of alleged acts of unfair tradingThe FSS conducted an on-site investigation in Hong Kong in December 2010 and is currently working to determine if any act of violating the Capital Market and Financial Investment Business Act, including market manipulation, was involved.Any violation of laws will be punished according to laws, if found.2. Examination of Wise Asset ManagementRight after the option shock incident, examiners conducted a probe into Wise Asset Management from November 12 to December 3, 2010 to identify the cause of the incident and check the adequacy of derivatives fund operation and internal control system.Regulators will complete the analysis of the inspection results as soon as possible and proceed to impose sanctions against any violation, if found.3. Risk management in the financial investment industryThe FSS examined financial investment companies to check their risk management status and whether they were in compliance with the margin rul
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Dec 20, 2010
- Proposals to Stimulate Corporate Pension Plans
- BackgroundCorporate pension plans are one of the important financial schemes to help retirees lead a financially stable life after retirement. In order to prepare for the rapidly aging population and supplement insufficient public pension plans, it is necessary to stimulate corporate pension services in Korea. In fact, the development of Korea’s corporate pension system remains lukewarm as corporate sponsors still run a severance pay system in parallel with pension plans and they feel the burden of making contributions to a pension fund managed outside the company.The Financial Services Commission (FSC) and the Ministry of Employment and Labor (MOEL) have come up with the following proposals to reform corporate pension plans, based upon what we have discussed at a T/F, which was created on May 28, 2010 as a public-private partnership with the FSS, the industry and the academia to invigorate pension services and encourage fair competition in the market.Major Reform Plans1. Easing regulations on corporate pension fund managementFor Defined Contribution (DC) plans and Individual Retirement Accounts (IRAs), the government will revise related regulations to allow up to 40% of the pension funds to be invested in collective investment securities such as equity-type funds or hybrid funds.**Under current regulations, DC plans and IRAs are forbidden to invest in equity-type or hybrid funds.However, we have decided to continue to prohibit direct investment in equities, considering employees’ limited financial knowledge and asset management capability, and to ensure that pension assets are managed safely.For Defined Benefit (DB) plans, we will keep the current rules of investment ratio (30% for equities, 50% for equity-type or hybrid funds) as the current caps of risk asset investment are sufficient enough to ensure the safe management of the pension funds.With the revision of related regulations, we expect to give pension subscribers a broader range of choices and reflect
