Ⅲ. The Retirement Pension Plan

1. Concept

Before December 2005, there were only two types of retirement payments stipulated in the Labor Standards Act: the Statutory Severance Pay Plan, to be paid upon resignation, and the Interim Severance Pay Plan, which could be paid while the employee was still employed. However, in December 2005, the Employee Retirement Benefit Security Act(hereinafter referred to as the ERBS Act) was enacted and introduced something new: the Retirement Pension Plan, which can take the form of either a Severance Pay System or a Retirement Pension Plan. The Retirement Pension Plan is also further broken down into three types: the Defined Benefit Plan, the Defined Contribution Plan and the Individual Retirement Plan. Under these plans and upon retirement, employees can receive gains made from investment of their pension funds, either as a lump sum or monthly pension from an outside financial agency.
The ERBS Act, revised July 26, 2012, strengthened the Retirement Benefit Plan to ensure the retirement benefit is used as income during old age, rather than extra income before retirement. Interim severance payments are now restricted, and at least one of only seven reasons must exist. The Individual Retirement Plan has also been introduced. In cases where retirement pension holders resign before retirement, opening of an IRP is mandatory, and funds are transferred as a lump sum from the previous employer to either the new employer’s pension plan, or an IRP account. The accumulated retirement benefit in this IRP account will, by law, be kept and managed until the employee is 55.

2. Differences between the Severance Pay System and the Retirement Pension Plan

The differences between the Retirement Pension Plan and the Severance Pay System are as follows.

1) Under the Retirement Pension Plan, the company deposits the retirement contributions with an outside financial agency, and the employee receives a retirement benefit from the financial agency upon resignation. Under the Severance Pay System, the employer pays a pre-determined amount in severance pay upon employee resignation.
2) The Defined Benefit Plan is the same as the severance pay system, with the amount calculated in the same way: multiplying the average wage for each of the most recent three months by the years of service. The Defined Contribution Plan requires a deposit of 1/12 of the employee’s annual salary every year, with the individual retirement benefit varying according to performance of fund investments.
3) In cases where an employee receives a lump sum from the Retirement Pension Plan, he/she shall receive it into an IRP. However, under the Severance Pay System, the employee can still receive a lump sum as before, as there is no obligation to transfer to an IRP in the Severance Pay System. However, the employee can open an IRP account and receive payment there if He/she wishes.
4) The Retirement Pension Plan guarantees the principal funds contributed, as they are managed by an outside agency. Under the Defined Benefit Plan also, the principal deposited outside is guaranteed. However, the Severance Pay System has a weakness in that should the company go bankrupt, the funds may not be available, since they were deposited within the company.
5) The Retirement Pension Plan requires regular retirement contributions to an outside agency, which can reduce the company’s financial burden as it does not have to pay out large amounts upon resignation, contrary to the severance pay system. As the severance pay should be paid in full as a lump sum upon retirement, the company will have a heavier financial burden.

3. Necessity for and concept of the Retirement Pension Plan

(1) Necessity for the Retirement Pension Plan

From the employee’s perspective, the reasons necessitating the Retirement Pension Plan are as follows: Firstly, it is necessary to supplement the social welfare system. Currently, most people depend on the National Pension only. However, this is not enough for necessities. With three levels of social security(National Pension, Retirement Pension, and Individual Pension), the employee will be far better prepared. Secondly, it is necessary to protect the right for employees to secure their retirement benefits. If the company goes bankrupt, the employee will most likely not receive wages of any kind. To ensure benefits do not remain unpaid, companies shall deposit their contributions at an outside financial agency through the Retirement Pension Plan. From the employer’s perspective, the reasons necessitating the Retirement Pension Plan are as follows: Firstly, companies can reduce corporate tax through the Retirement Pension Plan. Only 20% of the retirement benefit reserve each year can be considered business expenses, and each year this percentage will be reduced 5% until 2016, when there will be no tax benefit at all. However, 100% of retirement reserve for the Retirement Pension Plan can be claimed as a tax deduction each year. Secondly, the Defined Benefit Plan aids in reducing company debt, as the retirement pension deposit is deducted from the retirement reserve. The Defined Contribution plan allows the total amount the company has paid into the retirement benefit each fiscal year to be regarded as actual retirement payout, thereby reducing company debt. Thirdly, companies introducing the Retirement Pension Plan can also save from a reduction in wage claim premiums: 50% of the premiums multiplied by the guaranteed rate covered by the Defined Contribution retirement benefit.

(2) Introduction of the Retirement Pension Plan

The employer shall establish pension regulations and obtain consent from the employee representative and permission from the Ministry of Employment and Labor before introducing the Retirement Pension Plan. Upon employee retirement, the financial agency shall pay out a lump sum or a regular pension from the retirement fund the employer deposited. The retirement pension company(trustee) will be a financial agency such as a bank, insurance company, or securities firm, and perform operational management and asset management. Operational management includes design of the retirement pension, operational method of the assets, and administration. Asset management includes such tasks as depositing contributions and paying out retirement benefits, maintaining and managing assets, establishing and managing/operating the account.

4. Types of Retirement Pension Plan

(1) The Defined Benefit Retirement Plan (DB)

1) Concept
Under the Defined Benefit plan the company deposits 60% or more of the retirement contributions expected for the year to an outside agency, and the financial agency pays 100% of the retirement benefit within its obligation to pay. The Defined Benefit plan is characterized by a prior confirmation of the severance payment. This is calculated in the same way as in the existing Severance Pay System, and is equal to the final month’s total wage. Severance pay is calculated by multiplying the average monthly wage(over the final 3 months) before resignation/retirement by the years of service.

2) Characteristics
As the amount of retirement benefit is determined beforehand, plans for the retirement years are possible. As the company contributes to and manages the retirement reserve directly, the employee is free of those responsibilities. One disadvantage is that transferring the retirement deposits to another company is difficult. Depositing additional money or withdrawing money early is not allowed by law, but it is possible to borrow the money as a secured loan, for the following purposes: 1. First-time purchase of a house; 2. Medical treatment for 6 months or longer for the employee or his/her dependents; 3. Decision for commencement of a rehabilitation proceeding; 4. Bankruptcy; or 5. Other reasons and conditions such as natural disasters, etc., prescribed by Ordinance of the Ministry of Employment and Labor. The DB Plan is suitable for companies with job security, low turnover, and who provide high salary increases.

3) Eligibility
The employee receives retirement pension or lump sum allowance upon retirement. The retirement pension is available for those who are 55 years old or older and have subscribed to it for 10 years or more. In this case, the beneficiary period shall be 5 years or longer. The lump sum payment is paid to those who were not eligible for pension and who want to receive it as a lump sum payment. This lump sum payment means that the retirement benefit is transferred to the IRP account.

(2) The Defined Contribution Retirement Plan (DC)

1) Concept
The level of contribution the employer and employee make is predetermined by pension law, with the employee’s final retirement benefit determined by the company’s contributions and the employee’s investment gains. Investment outcomes are up to the employee and the final payment depends on the performance of his or her investments. The employer deposits 1/12 of the employee’s annual salary every year. A retirement payment is deposited every month, like an interim severance payment. Final payout is determined by performance of the employee’s investments. The employee’s retirement benefit is equal to company contributions and investment returns.

2) Characteristics
Employees can put additional money into this fund. As the fund is separately managed, it is easy to move it to another company, plus, payout can be higher than the Defined Benefit plan if the investment returns are good. However, management of the retirement funds is at the risk of each employee, who is responsible for choosing appropriate investments. The companies that are more suited to the Defined Contribution plan are ① Companies with lower salary increases and ② Companies implementing an annual salary system.

3) Eligibility
The employer deposits 1/12 of the employee’s annual salary every year. The employee manages the retirement fund, and will receive it as a monthly pension or lump sum payment upon retirement. The retirement pension is available for those who are 55 years old or older and have subscribed to for 10 years or more. In this case, the beneficiary period shall be 5 years or longer. The lump sum payment is paid to those who were not eligible for pension or who want to receive it as a lump sum payment. This lump sum payment means that the retirement benefit is transferred to the IRP account.
The Defined Contribution Plan holder can legally withdraw the deposit or borrow the money as a secured loan during employment for the following reasons: ① First-time purchase of a house; ② Medical treatment for 6 months or longer for the employee or his/her dependents; ③ Decision for commencement of a rehabilitation proceeding; ④ Bankruptcy; or ⑤ Other reasons and conditions such as natural disasters, etc., prescribed by Ordinance of the Ministry of Employment & Labor.

(3) The Individual Retirement Plan (IRP)

1) Concept
The Individual Retirement Plan can take the form of a Company IRP or an individual IRP. The Company IRP is a retirement pension plan as described in the Employee Retirement Benefit Security Act and is acceptable as a retirement benefit scheme for companies that employ 9 or fewer employees. It operates in basically the same way as the Defined Contribution plan, but companies do not have to create the pension rules. In cases where the company later employs 10 or more employees, the Defined Contribution plan shall be adopted. The Individual IRP was designed for the employee to be able to manage his or her own retirement benefit until retirement or until receiving it if resignation occurs earlier.

2) Characteristics/Eligibility
Under the Retirement Pension Plan, when the employee resigns or retires, the retirement benefit shall be transferred to an IRP. Upon reaching the age of 55, the employee can receive a regular retirement pension or lump sum payment. The IRP reserve cannot be withdrawn earlier than the required age except for the legal reasons described in Article 2 of the Enforcement Decree to the ERBS Act: Reasons for Offering Right to Receive Benefits as Collateral. However, The Retirement Pension Plan(DB, DC, Company IRP) shall be transferred to the IRP except in the following situations: ① The subscriber receives payment after age 55 upon retirement; ② The subscriber returns the borrowed money with wage collateral; ③ The retirement fund is equal to 1.5 million won or less, as stipulated by the Minister of Employment and Labor.

5. Comments

Although the Retirement Pension plans were introduced in December 2005, they have not yet been widely used due to the existing severance pay system. However, recent revisions to related law restricts interim severance payment and provides many incentives to introduce Retirement Pension plans, incentives which are expected to gradually increase use of the Retirement Pension plans. Retirement benefits have often been used as an additional bonus to normal wages. However, they should be used as retirement benefits to supplement old-age security. Accordingly, these Retirement Pension plans should be encouraged further to help people have the funds they will need, through strategic government support. Employees also need to recognize that the retirement benefit is not money to be spent on pre-retirement costs, but is to be saved as a matter of course to prepare for the golden years.