Korea tightens risk labelling on pension ETFs

South Korea’s Financial Supervisory Service (FSS) will tighten disclosure for retirement pension exchange-traded funds from January by requiring risk grades to be shown alongside investment limits. The change is designed to prevent savers from mistaking ETFs that can be held up to 100% of retirement assets for principal-guaranteed products. Some providers will implement the new display requirements during the first half of next year if technology work is delayed, but the rules are scheduled to take effect from January.

Under the new framework, any ETF that may account for up to 100% of a saver’s retirement assets will display a risk grade next to the investment cap. The FSS emphasises that a 100% investment limit merely means there is no legal ceiling on allocation and does not imply that principal is protected or that returns are assured.

The new rules follow rapid growth in ETF use within Korea’s retirement pension system. At the end of the first half of this year, total retirement pension assets stood at 558.3 trillion won, of which 198 trillion won were in performance-based products. ETFs accounted for 99.8 trillion won, representing 50.4% of performance-based retirement pension assets.

The FSS judged that existing disclosure practices had not kept pace with this growth, prompting the push to strengthen risk information for savers.

An FSS review found that some mobile and online trading screens showed only the investment cap for ETFs, without any indication of risk level. Defined contribution and individual retirement pension plans typically allow up to 70% of assets to be placed in risky products, while products classified as lower risk, such as ETFs with less than 50% equity exposure, can be allocated up to 100% of assets.

These lower-risk ETFs can still suffer principal losses, but the wording “investment limit 100%” is the same as that used for deposits and other principal-guaranteed products. The FSS is concerned that savers may assume such ETFs are capital-protected when only the investment cap is shown, which the regulator states is not the case.

ETF risk grades in Korea range from Grade 1, defined as very high risk, to Grade 6, defined as very low risk. From January, pension providers will need to present both the investment cap and the current risk grade on trading screens and on product search screens. Product proposals supplied to savers will also include the risk grade alongside information such as past returns and fees.

The FSS will add a risk grade column to the asset management status reports given to retirement pension savers so they can check the risk levels of their holdings after investing. Savers are encouraged to review these risk grades regularly and adjust product weights if needed to manage overall portfolio risk.

Risk classifications are not static. Three years after a fund is launched, its risk grade is recalculated using past return volatility, and asset managers reassess grades annually and adjust them if needed. One actively managed ETF holding 30-year Korean treasury bonds, which can be held up to 100% of assets, was reclassified to Grade 3, or somewhat high risk, in August this year from Grade 5, or low risk, in August 2022.

The FSS also plans to support savers’ longer-term decision-making with additional materials. In November, it intends to publish a retirement pension guidebook containing information tailored to different life stages to support stable, long-term asset management.