• ■Shin Hwa-yeon, a research fellow of KIHASA who led a study on public pension financial evaluation indicators, said, “Public pensions such as the National Pension Scheme are fast becoming a main source of old-age income for retired Koreans. To accommodate such change, there is a need to manage the old-age income security system in a more stable fashion with a long-term perspective,” adding that there is a need to develop more financial evaluation indicators to refer to in adjusting the benefit and contribution levels of public pensions and in assessing their long-term financial conditions.

The following is the summary of her study:

• ■It is required to check the financial balance of public pensions through regular financial reviews, but since in practice such reviews have focused only on the projected depletion year of a fund and the deficit size, it is hard to say they were proper financial evaluations. 
  - As public pensions such as the National Pension have become a major source of old-age income for Korean retirees, it is important to manage the public pension system, in response to the rapidly changing socioeconomic conditions, in a more stable manner with a long-term perspective.
  - The key role of the public pension financial review is to evaluate public pension funds’ financial status and to provide evidence based on which to redesign the benefit-contribution structure. 
  - There is a need to check if the current financial review is doing what it is supposed to and to see what can be adjusted and complemented to enhance its role.
  
  

• ■Public pensions in Korea are conducting regular financial reviews, but in the law there is no specific stipulation that defines what financial balance is. 
  - Each pension law stipulates that its financial goal is to secure its long-term financial balance by checking it through regular financial reviews.
  - In particular, Article four of the National Pension Act on ‘Financial Accounting of the National Pension Scheme and Securing Long-term Financial Balance’ makes it clear in Section 3 that its financial goal is to adjust the pension premiums, benefits to be paid, etc. in accordance with any significant change in socioeconomic conditions to secure long-term financial balance.
  - However, financial reviews conducted so far have focused only on such things as fund depletion that it is hard to say that there have been proper financial evaluations to check the stability of the pension funds.
  
  

• ■There is a need to set up standards for evaluating public pension schemes, such as those of funding methods, financial goals, and financial evaluation. 
  - As there are no specific stipulations for Korea’s public pension schemes about long-term financing methods and financial goals, decisions on such things are made case by case through regular financial reviews, or the debate of the relevant committees. 
  - Public pensions in the US, Canada, and Japan have clearly defined their financing methods and financial goals. 
  - Canadian Pension Plan (CPP) is operated as a partially funded system with its financial goal of keeping its funding ratios constant over a certain valuation period. 
  - Japan’s public pension system is based on a pay-as-you-go plan, with its long-run financial goal of keeping its financial equilibrium by achieving a funding ratio of 1 for the next 100 years. 
  - The US Old-age, Survivors, and Disability Insurance (OASDI), a pay-as-you-go pension plan, sets  as its financial goal a funding equilibrium, with its valuation periods being long-term 75 years and short-term 10 years. 
  - Korea, after every funding review, has gone through difficult processes of discussion and negotiation to determine a funding method and financial goal; now is the time to clearly define a funding method and financial goal like those foreign public pension schemes.
  
  

• ■In the case of the CPP, regular funding reviews are carried out to check if the funding ratio can be maintained with the current contribution rate and to estimate a minimum contribution rate that satisfies the conditions that are required to keep the funding ratio constant. 
  - If the minimum contribution rate is lower than the current contribution rate, it means the fund has the ability to pay out benefits owed, but if the reverse is the case, the fund is required to review the current contribution rate or the income replacement rate for possible adjustments. 
  - Japan’s public pension system assesses if the financial equilibrium is maintained under the fixed contribution rate for the next 100 years, and if the benefit level remains at a replacement rate of over 50%. 
  - The US OASDI considers a funding ratio of 1 or above over a valuation period as an indicator that proves the fund’s ability to pay out benefits promised. If the funding review shows that the fund is not able to achieve its 10-year financial goal, the Congress is required to take immediate action. If the fund is unable to meet its 75-year financial target, the trust committee is required to give advice on measures to improve the fund’s financial stability. 
  - Korea’s public pension schemes need to set specific financial goals and standards for financial evaluation to make long-term financial plans and to assess the need for any reform in its funding review.
  
  

• ■This study suggests additional public pension financial evaluation indicators based on cases on public pension funding reviews at home and abroad. 
  - First, it analyzed indicators drawn from cash-flow based balance sheets according to the format for presenting financial projection results. 
  - It made a financial projection of Korea’s public pension schemes as they stand, using indicators such as pension revenues, pension expenditures, and financial balance. 
  - It compared the current financial evaluation indicators with those that reflect ideas for improvement.
  
  

• ■This study analyzed Korea’s public pensions using indicators drawn from the pension fund’s balance sheet that are related to benefit obligations. 
  - Like the CPP and Japan’s public pension system, Korea’s public pensions were analyzed of their contribution rates using the funding ratios. 
  - The study calculated the required contribution rates for Korea’s public pensions assuming they are targeting at certain funding ratios at the end of a valuation period.
  
  

• ■This study analyzed unfunded liabilities and acturial balance of Korea’s public pensions. 
  - As a result, when the current benefit-contribution structure is to be maintained, the required contribution rate is twice the level of the current contribution rate of 9 %. 
  - This is well above OASDI’s 4.6 percentage points gap between its contribution rate and the required one.
  
  

• ■This study suggests additional public pension financial evaluation indicators that can be added to the existing ones in assessing the long-term health of Korea’s public pension schemes. 
  - The system old-age dependency ratio, which is the ratio of the number of pensioners to the number of active contributors, can be used for indicating the maturity of the system. 
  - Yearly revenue, expenditure, financial balance, actuarial balance, funding method cost ratios, etc. can be used for indicating financial balance. 
  - Yearly accumulated fund size and fund ratios can be used for indicating the projected time of the fund depletion, or the maximum size or timing of the accumulated fund.
  
  

• ■Research is required on pension liabilities, the funding ratio, and inter-generational equity.