South Korea to Introduce Corporate Pension Plans to Boost Returns and Ensure Retirement Security

The Yeouido financial district in Seoul is buzzing with news of South Korea’s plans to introduce corporate pension plans to all workplaces in stages starting next year. This move comes alongside the mandatory contributions to the National Pension Service (NPS), the world’s third-largest pension fund.

To boost returns on corporate pensions, the government is considering involving public pensions such as the NPS in their management. In addition, to motivate small and medium-sized companies to implement retirement plans, the government is looking to offer subsidies while imposing fines on business owners that fail to adopt the pension plans.

Under the current law, companies established after 2012 must implement retirement pensions, while those established before can operate either severance pay systems or retirement pensions. However, the subscription rate for retirement pensions remains low, with only 26.8% of workplaces in the country having adopted them as of the end of 2022.

The government is considering first introducing retirement pension plans to workplaces with more than 100 employees from next year, then expanding the system to smaller companies with 30 or more employees within two years. Companies with less than five full-time workers will be subject to the mandatory pension scheme within six years after the law comes into force.

To incentivize small and medium-sized companies to adopt employees’ pension plans, South Korea is considering providing subsidies, waiving pension management fees for a certain period, and involving public pension schemes such as the NPS to manage pension plans on their behalf.

The introduction of corporate pension plans aims to guarantee workers’ retirement pay even in the event of a company’s financial difficulties, such as bankruptcy. This move comes after the Asia financial crisis in the late 1990s, which saw many companies go bankrupt and fail to pay severance.

Despite the benefits of retirement pensions, poor returns have made some hesitant to adopt them. The average annual rate of return on retirement pensions over the past five years stands at only 2.35%, compared to the NPS’ 7.63% return over the same period. To address this issue, the government is considering involving public institutions such as the NPS in managing corporate pensions.

Overall, the introduction of corporate pension plans in South Korea’s Yeouido financial district is a significant step towards ensuring financial security for workers and promoting long-term financial stability in the country.