Announcement of National Pension Fund Estimate
- Regdate2023-02-01 10:44
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ANNOUNCEMENT OF NATIONAL PENSION FUND FINANCIAL ESTIMATE
On January 27, the National Pension Fund Financial Estimate Expert Committee (Commissioner: Jeon Byung-Mok, Senior Research Fellow, Korea Institute of Public Finance) announced its financial estimate.
Since 2003, the National Pension Service(NPS) has conducted financial calculation on a five-year basis to generate long-term financial estimate, which serve as the basis for the Comprehensive National Pension Fund Management Plan.
The 5th estimate, building on the 4th one from 2018, has been spearheaded by the Financial Estimate Expert Committee, established in August 2022, and the Fund Management Development Expert Committee, as well as the Financial Calculation Committee, which were subsequently formed.
In response to the request made by the Civil Advisory Council under the Special Committee on Pension Reform of the National Assembly, the Financial Estimate Expert Committee released the financial projections two months earlier than the original timeline (March 2023) to facilitate discussions on pension reform.
The announced estimate is the pension benefits and contributions preliminarily calculated based on the projections of population, economic growth, and institutional variables that had been set through 16 times of meeting of the Financial Estimate Expert Committee.
Sensitivity analyses on different scenarios and other detailed projections will be included in the final estimate report that will be announced in March 2023.
The financials of the National Pension has been taken a hit from low fertility rate and population aging, and economic downturns, among other changes in the macroeconomic environment.
Pension contributions are expected to fall while pension benefits increase because of the decrease in the number of subscribers and rise in the number of beneficiaries* caused by declining total fertility rate and increasing life expectancy
* The percentage of senior pension beneficiaries aged 65 and above is expected to increase from 44.0% in 2023 to 84.2% in 2070
While macroeconomic variables such as real economic growth and real wage growth are expected to put downward pressure on total pension contributions, the decline in the share of individual subscribers and persons exempt from pension payments is expected to boost the national pension fund’s financials.
According to the estimate, if the current scheme of the National Pension Fund is maintained as is, the revenue would outweigh expenditure for the next two decades until 2041, when the scheme would begin to run a deficit owing to low fertility rate, population aging, and economic slowdown, seeing the fund depleted by 2055.
Compared to the 4th estimate, the deficit and fund depletion have been accelerated by one year and two years, respectively.
< Balance Sheet Projection >
| Category | Peak Contribution | Deficit* | Depletion |
|---|---|---|---|
| 5thEstimate | 2040 (1,755 tn KRW) | 2041 | 2055 (△47 tn KRW) |
| 4th Estimate | 2041 (1,778 tn KRW) | 2042 | 2057 (△124 tn KRW) |
| * The deficit year refers to the point when expenditure exceeds total revenue (contribution revenue + investment income). Values indicated within parentheses refer to pension reserves | |||
As such, the report set out various financial targets geared towards stabilizing the fund and suggests required increase in contribution rates to meet those targets when relying solely on its adjustment.
The report suggests that delays in pension reform have further increased the necessary contribution rate set out in the 4th estimate. For each target scenario, the necessary contribution rate growth has increased by roughly 1.66%p to 1.84%p in the 5th estimate compared to the 4th.
This is a testament to the importance of pension reform, as the burden on youths and future generations will only mount the further pension reform is put off.
< Contribution Rate Required to Meet Financial Targets >
| Timeline for Contribution Rate Increase1 | Financial Target (as of the end of the forecast period2) Scenarios | |||||
|---|---|---|---|---|---|---|
| Reserve Ratio x1 | Reserve Ratio x2 | Reserve Ratio x5 | No Deficit | Maintaining a Consistent Reserve Ratio (Reserve Ratio) | ||
| 5th | 2025 | 17.86% | 18.08% | 18.71% | 19.57% | 20.77% (14.8) |
| 2035 | 20.73% | 21.01% | 21.85% | 22.54% | 23.73% (11.7) | |
| 4th | 2020 | 16.02% | 16.28% | 17.05% | 18.20% | 20.20% (17.3) |
| 2030 | 17.95% | 18.27% | 19.25% | 20.22% | 22.20% (14.0) | |
Meanwhile, the overall pay-as-you-go cost rate has been increased as the pension dependency ratio (number of beneficiaries divided by the number of subscribers) that hinges heavily on demographic structure rose.
The pay-as-you-go cost rate refers to the contribution rate required to balance expenditure and revenue of the pertinent year and therefore is affected by demographic variables, less relevant with the pension reform.
| Category | 2023 | 2030 | 2040 | 2050 | 2060 | 2070 | 2080 | 2088 | 2093 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Pension Dependency Ratio (%) | 5th | 24.0 | 36.4 | 62.9 | 95.6 | 125.4 | 138.3 | 143.1 | 128.1 | 119.6 |
| 4th | 23.0 | 35.0 | 62.7 | 91.0 | 116.0 | 123.6 | 121.9 | 118.6 | ||
| Pay-As-You-Go Cost Rate (%) | 5th | 6.0 | 9.2 | 15.1 | 22.7 | 29.8 | 33.4 | 34.9 | 31.7 | 29.7 |
| 4th | 6.3 | 9.0 | 14.9 | 20.8 | 26.8 | 29.7 | 29.5 | 28.8 | ||
Commissioner Jeon Byung-Mok stated that “the national pension estimate are projections based on business-as-usual assumptions without adjusting for changes in the contribution rate, income replacement ratio, and participation and beneficiary age, among other details pertinent to the national pension scheme.”
He underscored that “Rather than maintaining focus on the time the fund will be depleted, emphasis should be placed on using this estimate for discussions about pension reform currently ongoing at the national assembly as well as a basis for the Comprehensive National Pension Management Plan.”
230131_(MOHW) Announcement of National Pension Fund Financial Estimate.pdf