The Korean government passed a bill mandating all companies established in South Korea contribute to a compulsory corporate pension plan, including defined contribution, defined benefit and individual retirement pension plans. The new law is expected to enter into force in several phases based on company size starting in 2020. The exact implementation date of the bill has not been set by the Korean government yet.
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.
The new bill is amending the ERBSA to introduce the same requirement for companies established prior to 2012 in order to improve income among senior citizens in the long term.
The new law would apply to all companies established in South Korea, regardless of their size.
While most large employers established before 2012 already do provide their employees with corporate pension plans, 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 to 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 expense in profit and loss statements.
Starting in 2020, all employers will be mandated to provide retirement pension plans to their employees. However, it is unclear whether the Korean government will establish fines for noncompliance with the new requirement.
Employers are advised to seek the advice of a local professional to determine the right policy to choose, as there are around 153 financial providers (banks, insurance companies and securities firms) that can sell corporate pension plans in South Korea.
Companies established prior to 2012 that are not already contributing to a corporate pension plan can keep the SPS until more details on the implementation date are provided.
Employers should monitor the implementation timeline of the new bill and ensure timely compliance with the upcoming reform.