Private Pensions
All employees of companies with more than 300 of them are required to be registered for a retirement pension by 2016, and this will be expanded to all companies by 2024. Retirement pension funds, which are professionally managed by individual companies or groups such as Samsung Retirement Pension Fund or Hyundai Motor Retirement Pension Fund, will also be introduced. Accordingly, the investment of defined contribution (DC) type retirement pensions in which the amount of retirement benefits paid to employees vary according to the performances of managed securities are expected to be expanded to 70 percent.
According to the related ministries on August 26, the government plans to announce such a plan to “boost private pensions” at the economic-related ministers’ meeting on August 27.
This plan entails that the government, considering the financial burdens of companies, will gradually expand the definition of companies that are required to apply for a retirement pension. In 2016, companies with more than 300 employees will be required first, and then those with more than 100 employees and 30 employees at two-year intervals. The government aims to include all companies by 2024.
Currently, the accumulated total deposit amount of retirement pensions is 85.3 trillion won (US$84.1 billion) with memberships of 4,995,000 regular employees (48.2 percent) as of the end of March. However, the application ratio varies greatly by company. Only 11 percent of companies with less than ten employees have retirement pension plan, but 87 percent of companies above 500 employees do. The government will finalize the decision by adjusting the timing to require retirement pension plans by size of business.
Retirement pension funds for which companies can make major decisions will be allowed as well. A corporate fund management committee shall be responsible for asset management by creating a fund type retirement pension system. Individual companies would still have contracts for retirement pension fund management with asset management companies including banks and insurance companies, which is the same as the current system. The difference is that companies would have more discretion over how to manage deposits. Once this system is launched, big corporations such as Samsung Electronics and Hyundai Motor could increase the returns on their pension by managing multi-trillion-won size retirement pension funds on their own. Small and medium-sized companies could also manage their pension funds by creating a retirement pension fund management committee together. An associate at the Ministry of Strategy and Finance explained, “Impoverishment of the older generation is becoming a bigger problem, since income after retirement is not guaranteed.” The main purposes of this plan to vitalize private pensions are to increase the number of people registered in retirement pensions, raise the returns by relieving regulations, and ultimately improve incomes after retirement. But in order to prevent loose supervision, the government will establish a separate guarantee organization.
Investment of DC-type retirement pensions into securities will greatly jump as well. Currently, DC type funds are allowed to invest up to 40 percent in risky assets including stocks, but this will be relieved to 70 percent, which is applied to defined benefit (DB) types. Moreover, in order to encourage people to keep their individual retirement pension (IRP) accounts and individual pensions, the government will figure out ways to promote pension type receipt rather than a one time lump sum receipt.
However, if a loss is incurred by a pension without any supplementary measures, the pension system itself will result in insolvency. In this case, employees’ lives after retirement could become more risky. This is a risk that has to be overcome.