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Article | Global News Briefs

South Korea: Retirement plan funding and governance changes

Retirement|Health and Benefits|Total Rewards
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By Chongson An | April 30, 2021

South Korea legislative changes provide stronger funding requirements for employer-provided DB retirement plans and governance improvements.

Employer Action Code: Act

The National Assembly has passed amendments to the Employee Retirement Benefit Security Act (ERBSA) specifying the effective date of stronger funding requirements for employer-provided defined benefit (DB) retirement plans and introducing governance improvements for such plans. Unless noted otherwise below, the effective date of the amendments is April 14, 2022. Notably, the approved amendments do not address the long-standing proposal to require all companies to provide a funded retirement plan under ERBSA; ongoing discussion is expected on this issue.

Key details

  • The scheduled increase in the required funded status target for DB pension plans, from 90% to 100%, is postponed for one year, to apply as of financial year-ends on or after January 1, 2022 (January 1, 2021, was the previous target date). Existing requirements continue regarding the measurement of liabilities (greater of ongoing value and termination value) and the development of a three-year recovery plan if actual funded status is under 95% of the target (see March 2018 Global News Brief: Funding requirements for DB pension plans strengthened for more details). Fines of up to 10 million South Korean won may be imposed on the employer in the event of noncompliance with the recovery plan.
  • Companies with 300 or more employees that sponsor an ERBSA DB plan will be required to establish an investment committee to oversee plan funding and to produce an annual Investment Policy Statement (IPS) that includes details on investment strategy, target returns and investment performance (further details to follow by presidential decree).
  • Companies will be allowed to outsource employee communications to professional education organizations in addition to the pension providers. The intention is to provide employers with more resources to help their employees prepare for retirement (further details to follow by presidential decree).

Employer implications

Sixty percent of employers surveyed by Willis Towers Watson have established externally funded ERBSA DB or defined contribution (DC) plans (DC being more prevalent among multinational companies). DB plan sponsors should prepare for the increase in employer contributions the higher funding target could cause and reexamine elements that influence the level of contributions, such as liability calculation and investment strategy. In addition, employers may wish to review their current governance arrangements for DB plans and prepare for the forthcoming changes. For example, an analysis based on asset/liability modeling may be a useful tool to help set the direction of DB plan governance and operation.


Further information concerning the corporate pension market in South Korea can be found in the PDF download below.

Download
Title File Type File Size
Corporate Pension Update: South Korea - Q1/2021 PDF .6 MB
Contact

Chongson An
Seoul

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