‘paid at the employer’s discretion’ severance system to be scrapped; small businesses must also choose a DB, DC or fund-based plan

[Financial News] When mandatory external funding of retirement benefits takes effect, workers will no longer have to worry about losing their severance pay. According to the timetable for mandatory external funding set by the government and ruling party, from 2030 employers and workers at small businesses with fewer than 10 employees will also have to choose and operate at least one of the defined benefit (DB), defined contribution (DC) or fund-based plans. Workers’ preferences are expected to differ depending on wage growth and expected investment returns.
The government says it will also consider extending coverage to workers and labor service providers who are not currently eligible for retirement benefits under the law—those with less than one year of continuous service or with stipulated weekly working hours of under 15—so the burden on small businesses is likely to increase significantly.
■ Preferences expected to vary by pay structure and other factors
According to the plan to strengthen the retirement pension system announced by the government on the 29th, mandatory external funding of retirement benefits will apply to all workplaces in South Korea from 2030. The existing severance pay system will then be abolished. Under Article 8 of the current Employee Retirement Benefit Security Act, the system requires employers to pay retiring employees at least 30 days’ worth of average wages for each year of service. However, the current system does not require employers to set aside reserves. The employer simply pays it out, so to speak, “as it sees fit.”
The government and ruling party believe that this loophole in the system has led to frequent wage arrears. Severance pay accounted for 41.1% (822.9 billion won) of all unpaid wages last year.
Alongside the abolition of the existing severance pay system, from the year after next, workplaces with 100 or more employees will have to choose and operate either a contract-based DB or DC plan—in which an individual or company enters into a separate contract with a financial institution—or a fund-based plan, in which a third-party manager pools and invests the funds set aside. The requirement will be extended to all workplaces in 2030.
The choice of plan is expected to vary according to the positions of employers and workers at each workplace. An official at the Ministry of Employment and Labor explained, “The government is not promoting either DB or DC. DB would be advantageous for workers on a seniority-based pay system that reflects wage growth, while DC would be advantageous if it can generate returns higher than the rate of wage growth.”
■ The challenge of introducing the system at small businesses
Retirement pension adoption rates vary widely by workplace size. In 2024, adoption rates at workplaces with 50 or more employees were in the 80%–90% range, compared with 23.2% at workplaces with fewer than 30 employees and just 10.6% at those with fewer than five. Of the 1,767,543 workplaces with fewer than 10 employees that will be subject to mandatory external funding from 2030, only around 76,000 currently operate a retirement pension plan.
The Ministry of Employment and Labor said it developed the plan after surveying 1,500 workplaces that had not adopted a retirement pension plan. Some 52.5% of the responding workplaces said it would be “burdensome.” An official at the ministry explained, “Given the distribution of workplace sizes in South Korea, workplaces with fewer than 10 employees—which make up an overwhelming majority—accounted for 90% or more of the sample.”
The issue is that the Ministry of Employment and Labor is also pursuing a plan to extend coverage to workers with less than one year of service and ultra-short-hours workers (those working fewer than 15 hours a week), who are not covered under current law. The government says it will review the matter later based on analysis by the Korea Labor Institute and social dialogue at the Economic, Social and Labor Council (ESLC).
An official at the Ministry of Employment and Labor added, “There have been various demands, including that the criterion for ‘workers with less than one year of continuous service,’ who are not eligible for retirement benefits, should be changed to ‘six months’ or that coverage should be applied across the board. The issue has been placed on the ESLC’s agenda and is now being discussed among labor, management and the government, so we have not provided an answer. We plan to announce one once labor-management consultations take place.”
[email protected] Kim Jun-hyeok Reporter