An amendment to the Employee Retirement Benefit Security Act, 2005 (ERBSA) was issued in June 2011. The amendment is the first significant amendment to the ERBSA and will take effect on July 2012. The amendment restricts severance pay scheme (SPS) withdrawals, and enhances individual retirement products, which together should increase demand for pre-funded retirement plans.
Restrictions on Withdrawals
Traditional SPS has always been the main type of retirement plan in South Korea. Under the ERBSA, employers have the option to implement a pre-funded employer-sponsored plan to replace SPSs. However, the adoption of such prefunded plans are not high, potentially due to the disparity between the SPS withdraw provisions and those of funded-defined contribution retirement plans. The SPS provisions allow withdrawal flexibility, and for this reason it was attractive to workers. But the problem with it is that it undermines the SPS’ effectiveness as a retirement income plan.
Under the amendment, SPS withdrawals will be similar to the withdrawal requirements under funded defined contribution retirement plans: new home purchases, medical expenses over a given period or national disasters. Thus the amendment should significantly slow down SPS withdrawals. Pre-funded retirement plans are now on a more equal footing with SPSs, because the ability to make withdrawals has been equalized. The government hopes that the changes will facilitate the growth of pre-funded employer-sponsored plans.
Implications
The new law is expected to encourage employers to set up pre-funded retirement plans to replace SPS’. It is expected that more employers will make the transition now that the withdrawal flexibility is equalized. The expected growth of prefunded retirement plans and the encouragement IRPs should together increase the security of retirement savings. Swiss Life Network Partner Korea Life is fully prepared to support employers under the change.
Traditional SPS has always been the main type of retirement plan in South Korea. Under the ERBSA, employers have the option to implement a pre-funded employer-sponsored plan to replace SPSs. However, the adoption of such prefunded plans are not high, potentially due to the disparity between the SPS withdraw provisions and those of funded-defined contribution retirement plans. The SPS provisions allow withdrawal flexibility, and for this reason it was attractive to workers. But the problem with it is that it undermines the SPS’ effectiveness as a retirement income plan.
Under the amendment, SPS withdrawals will be similar to the withdrawal requirements under funded defined contribution retirement plans: new home purchases, medical expenses over a given period or national disasters. Thus the amendment should significantly slow down SPS withdrawals. Pre-funded retirement plans are now on a more equal footing with SPSs, because the ability to make withdrawals has been equalized. The government hopes that the changes will facilitate the growth of pre-funded employer-sponsored plans.
Implications
The new law is expected to encourage employers to set up pre-funded retirement plans to replace SPS’. It is expected that more employers will make the transition now that the withdrawal flexibility is equalized. The expected growth of prefunded retirement plans and the encouragement IRPs should together increase the security of retirement savings. Swiss Life Network Partner Korea Life is fully prepared to support employers under the change.