A New Korean Defined Contribution Plan Framework to Enhance Retirement Income Security: Combining Lifecycle Funds with Compulsory Annuitisation

Kyonghee Lee () and Jooho Sung ()
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Kyonghee Lee: Korea Insurance Research Institute, Seoul, South Korea.
Jooho Sung: Department of Finance and Insurance, Kyung-Hee University, Seoul, South Korea.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2010, vol. 35, issue S1, S50-S67

Abstract: In this paper, the intension is to construct a new Korean defined contribution operation structure that better meets retirement income security by integrating accumulation and payout phases. For this, two approaches are compared: a lump sum withdrawal programme supported by a principal preservation fund (i.e. current approach), and the combination of compulsory annuitisation with lifecycle funds (i.e. alternative approach). We set benchmark incomes, annuity incomes from the immediate life annuity policy, purchasable at retirement with the accumulated assets of lifecycle funds. The above two approaches are then assessed in terms of the probability of shortfall employed here to measure the longevity risk, at a Value-at-Risk of 50, 75 and 95 per cent, respectively. Consequently, it is shown that the alternative approach provides better retirement income security than the current approach.

Date: 2010
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