Since July 2004, companies in Korea employing more than five workers are now required to establish retirement pension systems for their employees. The new retirement pension systems will operate separately from the national pension system. The legislation was submitted to the Korean National Assembly in October 2003. The law is expected to influence companies to move away from current severance payment systems utilized in most firms in Korea. Severance payments are made to retiring workers in a lump sum approximately equal to one month´s salary for every year the employee worked at the company.
The government is providing tax incentives to companies to move away from the severance payment system. Instead, the government is promoting the adoption of two plans for retirement pension: 1) a defined benefit plan, and 2) a defined contribution plan. Under the defined benefit plan, pension payments would be received upon retirement and would depend on the age of the employee and the number of years he/she worked at the company. With the defined contribution plan, employers would contribute regular payments to an employee´s retirement plan and the employee can choose to match the employer´s contribution through payroll deductions. The retirement money would then be invested and payments would be made after retirement based on the value of the accumulated funds.
The new retirement pension program is expected to affect more than 8.3 million wage earners in South Korea.
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