An ETF Eligible for Your Entire Pension Balance Can Get a Higher Risk Rating While You Hold It
A retirement-pension saver sees “100%” on a product screen. The financial company means that the saver may put the entire pension balance into the product; the saver may read it as a sign that retirement money will be safe. On October 27, the Financial Supervisory Service (FSS) said it had found some pension providers displaying only investment limits, without risk ratings, for ETFs that can lose money. It plans to require both pieces of information from next year. Savers need to know not only how much they can invest, but also what risk of loss they are taking on. FSS announcement
In the FSS's example of an active ETF investing in 30-year Korean government bonds, the risk rating changed even though savers remained permitted to invest their full balance. The fund was rated 5, or “low risk,” in August 2022, but moved to 3, or “moderately high risk,” in August this year. Once a fund has been operating for three years, its manager reassesses risk using fluctuations in its actual returns. Savers who remember only the explanation they read when they bought it may miss the change in risk. FSS materials, p. 4, Bizwatch report
A prospectus EEJE separately examined for Samsung Asset Management's KODEX 30-Year Korean Government Bond Active ETF explains the distinction in concrete terms. Effective August 13 this year, it rates the product at 3 and describes how rising interest rates can lower bond prices and cause losses of principal. Even investors in government bonds may receive less than they paid if they sell in the market before maturity. Holding government-issued bonds does not by itself protect the value a saver sees in a pension account. Samsung Asset Management prospectus, cover and p. 25
The FSS plans to require risk ratings alongside investment limits on trading and product-search screens, as well as in the product proposals financial companies give to savers. Existing holders will see a change too: risk ratings will be added to pension investment statements that report purchase amounts, valuation gains and losses, and other information. The measure is intended to let both new investors and long-standing account holders see how their products are currently classified. The target implementation date is January 2027; some providers with different IT-development schedules are expected to implement it during the first half of that year. FSS announcement and attachment, pp. 5–8, Bizwatch
Savers can already consult the latest prospectus to check the risk rating, whether principal can be lost and why the price changes. In particular, a product appearing near the top of a provider's proposal should not automatically be taken as a safe one. According to the FSS, products guaranteeing principal and interest are listed in descending order of interest rates, while investment-linked products are ranked according to the provider's assessment of their merits. The retirement a saver wants and the provider's ranking of products require separate judgments. FSS consumer guidance
EEJE Editorial Analysis: Financial companies must make the risk of loss clear where customers press the buy button. They should not consider their responsibility discharged by putting warnings inside a prospectus. Pension savers, in particular, are preparing for their future lives with money accumulated over many years. Providers must continue explaining changes in risk after the sale so that customers can judge when, and on what terms, they can draw money for living expenses. The success of this reform will depend on more than adding a risk-rating label. It requires changes to the actual screens and advice so that customers do not confuse permission to invest all their money with a promise to preserve all of it.