Under the Employee Retirement Benefit Security Act (the “ERBSA”), amended as of January 11, 2022, an employer is required to revise its retirement pension rules to add the terms concerning the pre-designated operation scheme, the so-called “default option.” The ERBSA requires that the Defined Contribution Retirement Pension Rules reflect the “default option” with the consent of the employee representative by July 12, 2023.
The default option is a pension operation scheme, under which a pension service provider operates the pension reserves of the defined contribution retirement pension plan (the “DC Pension Plan”) in a pre-designated operation scheme if a pension participant fails to select a particular operation scheme. There has been concern that due to the pension participants’ lack of financial expertise and interest, the pension reserves have primarily focused on principal-guaranteed products with low interest rates, and as a result, the return on investments for retirement pension plans has remained low, preventing employees from enjoying sufficient retirement benefits. To resolve this issue, the default option has been newly introduced.
Under the amended ERBSA, an employer is required to obtain consent from the employee representative representing a majority of the employees (or the labor union if it is a majority labor union) by July 12, 2023 to add the terms concerning the default option in the retirement pension rules. Accordingly, an employer who has established a DC Pension Plan should select one of the default options provided by a pension service provider and then undertake to obtain consent for amending the pension rules through the aforementioned process.
Considering that most companies have not amended their retirement pension rules, a bill was proposed and submitted to the Environment and Labor Committee of the National Assembly early June, 2023 to grant a one-year grace period for such implementation. However, the bill was not processed until July 12, the deadline for the introduction of the default option.
In principle, companies that fail to meet the deadline to revise their retirement pension rules may face administrative fines of up to KRW 5 million. The Ministry of Employment and Labor has stated that it will guide companies to comply with this requirement through corrective orders, rather than immediately imposing fines. Nevertheless, it should be noted that it is the employer’s obligation to amend the retirement pension rules under the law and that the employer should select one of the default options provided by a pension service provider and obtain the employee representative’s consent. Therefore, employers who have yet to adopt the default option need to take the necessary steps to fulfill the employer’s legal obligations.