Starting in 2030, retirement benefits must be funded externally, no exceptions... Fund-based plans to be introduced in 2028

[Financial News] The government is pursuing a requirement for all workplaces to fund retirement benefits externally. It aims to begin with workplaces with 100 or more employees in 2028 and extend the requirement to small businesses with fewer than 10 employees from 2030.
 In addition, the fund-based retirement pension system, whose introduction the government had previously announced, is expected to launch in 2028. It will coexist with the existing contract-based system, comprising defined benefit (DB), defined contribution (DC) and individual retirement pension (IRP) plans. The fund-based option, which will apply to DC and IRP plans, is expected to feature a three-way competition among financial institutions, public institutions and employer associations (or labor-management organizations).
 On the 29th, following consultations between the government and political parties, the government announced the “Plan to Strengthen the Function of Retirement Pensions.” The government and political parties aim to draft an amendment to the Act on the Guarantee of Employees’ Retirement Benefits (the Retirement Benefits Act), reflecting the announcement, and pass it within the year. With the plan broadly centered on “mandatory external funding” and “the introduction of a fund-based system,” the Retirement Benefits Act is expected to undergo a complete overhaul.
 The government will first pursue mandatory external funding of retirement benefits at all workplaces. A three-stage timeline was presented: workplaces with 100 or more employees in 2028; those with 10–99 employees in 2029; and those with fewer than 10 employees in 2030. Following consultations among labor, management and the government, the parties agreed not to apply the law retroactively to periods of continuous employment before it takes effect.
 Under the amendment, the severance pay system—under which employers and employees directly make and receive payments, and which had been treated as equivalent to the existing retirement-benefit system—will be abolished. From 2030, small businesses, too, will have to operate a retirement-benefit scheme using one of three options: DB, DC or the newly introduced fund-based system.
 Second, the government has decided to introduce fund-based retirement pensions in line with an agreement among labor, management and the government. If the law is revised according to the existing plan, their introduction in 2028 is likely. The fund-based option will apply to DC and individual retirement pension (IRP) plans.
 As previously planned, the fund-based system is expected to have three structures: a “financial open model” (financial model), operated by the financial sector—either individual financial institutions or a consortium; an “alliance model,” in which multiple employers or labor-management organizations establish the trustee corporation; and a “public open model” (public model), involving public institutions such as public corporations. With government approval, each model will be able to establish a trustee corporation to manage retirement pensions as a fund.
 The government decided to leave issues such as National Pension Service participation and the establishment of a Retirement Pension Service (working name) to discussions in the National Assembly.
 To ensure the stability of the funds, the government plans to assess staffing, facilities and financial requirements during the approval process and set a minimum capital requirement at a certain level or above. The amendment will also specify the trustee corporations’ liability for damages, the burden of proving negligence, and subscribers’ right to claim damages.
 The government also plans to improve regulations to support the launch and expansion of pension-backed loans, which can be used instead of early withdrawals, and to introduce a “default” option to encourage people to receive benefits as a pension rather than as a lump sum. Under the default, a particular option applies automatically if a beneficiary makes no choice for a certain period after becoming eligible to receive benefits.
 The government also plans to ease the cap on IRP investments in risky assets (currently 70%) and revamp the default options for DC and IRP plans to focus on returns, alongside other reforms to the existing contract-based system. 
[email protected] Kim Jun-hyeok Reporter