Update: While the proposed bill was passed into law on 24 March 2021, the provisions requiring mandatory pension plans were removed. To support the economy and alleviate businesses’ financial hardship due to COVID-19, the Korean government has decided to postpone the pension plan reform. Therefore, companies established prior to 2012 will not be mandated to contribute to a corporate pension plan until a new bill is introduced and implemented.
The proposed bill was introduced on 11 June 2019, and is currently under review by the relevant standing committee at the Korean National Assembly before being referred back to the whole Assembly for a vote. If approved, the proposed bill would enter into force beginning from December 2020 and be implemented in several phases, based on company size, through December 2026.
Background
Currently, Article 5 of the Employee Retirement Benefit Security Act (ERBSA) mandates companies established after 26 July 2012, should contribute to a corporate pension plan (DB, DC or IRP) within one year of their establishment. While companies established after July 2012 have the obligation to contribute to a corporate pension, companies established before 2012 are still allowed to maintain their Severance Pay System SPS in lieu of instituting a corporate pension.
However, many large employers established before 2012 already provide their employees with corporate pension plans while smaller employers are still using the Severance Pay System (SPS). Unlike retirement pension plans, under the SPS, employers are not required to make periodic contributions. Since the SPS provides a lump sum payout that fails to provide the security of steady income to senior citizens, the government has been actively trying the phase-out the SPS for all companies since 2012. In this regard, in 2016, employers were no longer entitled to a tax deduction for severance pay expenses in profit and loss statements.
Key details
The proposed bill would amend ERBSA to introduce the same contributory pension requirement for companies established prior to 2012 in order to improve income among senior citizens in the long term. The corporate pension requirement would apply to all companies established in South Korea, and regardless of their size.
If passed, the proposed bill would enter into force as follows:
- 31 December 2020: Employers with 100 or more employees.
- 30 June 2022: Employers with 30 to 99 employees.
- 31 December 2023: Employers with 10 to 29 employees.
- 30 June 2025: Employers with 5 to 9 employees.
- 31 December 2026: Employers with less than 5 employees.
If the bill is passed by the National Assembly, all employers will be mandated to provide retirement pension plans to their employees, including defined contribution, defined benefit or individual retirement pension plans. Only companies fewer than 10 employees have the option to provide an individual retirement pension plan.
Penalties
Currently, many employers established after July 2012 have not complied with the ERBSA mandate because of the lack of enforcement and the absence of penalties. In contrast, the proposed Bill would, if passed, make corporate pension plans mandatory for all employers established before and after 2012 and impose a fine not exceeding KRW 30,000,000 for any breach thereof.
Next steps
Employers should monitor the proposal process and ensure timely compliance if the bill passes. If passed, employers should seek the advice of a local professional to determine the right plan to choose, as there are approximately 153 financial providers (banks, insurance companies and securities firms) that will be able to sell corporate pensions plans in South Korea.
Companies established prior to 2012 that are not already contributing to a corporate pension plan can maintain their SPS until the bill passes.
