Goals-based Investing and Contributing Strategies for an Income Replacement Rate in the DC Occupational Pension Scheme of Korea

This paper derives the optimal asset allocation and contributing strategies in the DC occupational pension scheme of Korea using a goals-based investing approach. Essential and aspirational goals are defined as minimum and target income replacement rates in a DC occupational pension scheme, respectively. The key findings are 1) the optimal equity investment weights remain at the ceiling of 70% until age of 47 and then gradually decline to 49% at retirement, 2) the optimal contribution rate is 13.8% at which the representative employee secures the minimum income replacement rate with the probability of 99% and 3) higher income replacement rates can be attained with lower downside risk if there is no equity ceiling of 70%. DC pension subscribers could use IRP accounts to contribute the additional 5.47% of an annual salary to meet the optimal contribution rate. It is worthy to discuss whether the 70% ceiling could be lifted especially for young subscribers given that they can invest more than 70% of the assets in risky assets while respecting the 70% regulatory ceiling by investing in the qualified TDFs or in 70% in equity funds and 30% in bond hybrid funds. This paper assumes one risky asset but can be extended to the case of multiple risky assets.