Several amendments to the Act on the Guarantee of Employees’ Retirement Benefits (the “Act”) became effective on April 14, 2022. The key changes to the Act are as follows:
1. Mandatory transfer of statutory severance pay into Individual Retirement Plan (“IRP”) accounts
Previously, only retirement benefits for employees who had subscribed to retirement pension schemes (Defined Benefit or Defined Contribution) were legally required to be paid into their IRP accounts. However, as of April 14, 2022, statutory severance pay must also be deposited into the employees’ IRP accounts and paid on a pre-tax basis without withholding income tax.
2. Failure to meet the minimum funding target for a Defined Benefit (DB) plan shall be subject to administrative fines
Before the recent amendments to the Act, employers with DB plans who had not met at least the minimum funding requirement (which funds are be deposited with a qualified third party plan administrator) were required to prepare a financial stabilization plan and notify the employee representative of such plan. No sanctions were imposed even in cases where employers failed to meet the necessary funding requirements. However, as of April 14, 2022, employers will be subject to an administrative fine of up to KRW 10 million if, within 1 year, they fail to make up for the shortfall by meeting at least 1/3 of the required minimum funded status target.
In other words, once an employer receives notification from the financial institution that serves as the pension provider that it has failed to maintain the minimum funding ratio, such shortage shall be resolved within one year from the end of the immediately preceding fiscal year, not from the time the employer is notified of the results of the financial verification.
3. Employers with at least 300 employees must introduce a DB retirement pension scheme and establish an asset investment committee
Companies with 300 or more employees that operate a DB plan must form an investment committee. Previously, employers were allowed to independently determine how to invest DB plan assets. However, because of problems such as a decline in the rate of return due to the operation of principal and interest guarantee products, this pension plan was introduced to allow for a more reasonable investment of funds.
The investment committee must consist of five (5) to seven (7) members and hold a committee meeting at least once a year. Further, investment strategies such as investment return targets and distribution of assets as well as an asset investment plan and financial stabilization plan are to be reviewed and decided by the investment committee. For employers that do not meet the minimum funding ratios, at least one (1) employee representative, one (1) department head related to retirement pensions, and one (1) retirement pension expert shall be included in the investment committee.
Failure to organize the investment committee or to prepare an asset investment plan may result in an administrative fine of up to KRW 5 million.
4. Implementation of the Small and Medium-sized Enterprises Retirement Pension Fund Plan
As a retirement pension plan for Small and Medium-sized Enterprises (“SME”) with 30 or less employees, the Small and Medium Enterprise Retirement Pension Fund Plan creates and operates a joint fund with contributions paid by two (2) or more employers and workers of SMEs. Similar to a DC plan, the employer pays at least one-twelfth (1/12) of an employee's total annual wage to the employee's retirement pension account annually and upon retirement or separation from the company, the employee will receive these retirement benefits from his/her retirement pension account.
The difference between the SME Retire Pension Fund Plan and existing DC plan is that the DC plan allows the employees to directly manage their own pension assets, while the SME Retirement Pension Fund Plan allows the Korea Workers' Compensation & Welfare Services and external professional agencies to manage the assets, and if the size of the funds being managed increases as the number of subscribers increases, the employees will benefit from higher returns and lower management fees.
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