KOREA - Korea has taken its first major step towards establishing a funded corporate pensions system with the new Employee Retirement Security Act (ERSA), which will allow employers the option of setting up either a defined benefit or defined contribution plan.
The two options will be available as alternatives to the existing mandatory severance payment system. Currently, all employers (with five or more employees) must provide any employee leaving service witha severance payment of at least 30 days’ average wages for each year of employment.
Jayne Bok, senior consultant at Watson Wyatt in Seoul, said: “ERSA is critical to pension reform because it creates a corporate pension playingfield where previously nothing substantial existed in terms of externally funded and externally managed pension plans.”
And though this was “good news” for Korea, Bok predicts that progress in establishing the schemes will be slow.
She said: “Firstly, the demand-side. Due to the voluntary nature of the bill, we would see developments as slow and staggered, with a possible ‘blizzard’ effect nearing the expiration date for existing Retirement Insurance and Retirement Trust vehicles of 31 December, 2010.“Secondly, the supply-side.
There is the question of whether pension providers will be able to educate themselves and the general public in time for the kick-off datefor this legislation, which is 1 December, 2005. “Obviously there is a nationwide lack of experience and expertise in terms of pensions. Korea has yet to produce a fully-fledged ‘pension actuary’ distinction. Ienvision a huge lack of supply at the outset, if not quantitatively(due to low demand), then at least qualitatively. This will take several years to overcome.”
Bok also noted that another delaying factor could be the Employee Representative Body consent which will be required for the switch to anew scheme.
A key area that still needs disclosing is the incentives that the government will use to encourage companies to fund existing unfunded liabilities via a DB or DC scheme rather than opting for the existing Severance Pay Plan.
Presidential decrees are expected in the coming months to fill in the details.
Bok added: “Fast or slow, in any case, ERSA is good news for Korea, a rapidly ageing society with a looming deficit in the National PensionScheme and less than 25% of retirement assets funded externally.
“And although it is a longterm process, the foundation for the second pillar will gradually ease the pressure from the other pillars, i.e. theNational Pension Plan and individual retirement savings plans. It will also help create a culture for long-term investing and help educate the average Korean employee to make sound investments, which have hitherto been going into shortterm money market funds, bank deposits or real estate.”
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