New Rules Could Lead to More Pre-funded Retirement Plans in South Korea

July 19, 2011 (PLANSPONSOR.com) – According to a Towers Watson global news brief, in June, South Korea issued the first significant amendment to the Employee Retirement Benefit Security Act, 2005 (ERBSA), to take effect on July 1, 2012.  

The amendment restricts Severance Pay Scheme (SPS) withdrawals and enhances Individual Retirement Products (IRPs), which Towers Watson says together are expected to spur demand for pre-funded retirement plans.  

The report explained that under ERBSA, employers were given the option, with the consent of workers, to implement a pre-funded employer-sponsored plan to replace SPSs, which have been prevalent in South Korea for many years. By April 2011, funded plans had accumulated total assets of over SKW30 trillion (about US$30 billion), and covered over 2.6 million employees. However, this still represents less than 30% of the Korean workforce, leaving the traditional SPS as the prevalent retirement plan in South Korea.  

Towers Watson said an important part of the amendment is the alignment of SPS withdrawal provisions with those of funded DC retirement plans. Many companies, especially in the high-tech industry, freely permitted withdrawals at will from SPS accounts during employment. This disparity in withdrawal flexibility may have discouraged the creation of funded retirement plans.  

In the future, SPS withdrawals will be restricted to new home purchases, medical expenses over a period of six months or more for employees or dependents, or national disasters. This is similar to withdrawal requirements under funded DC retirement plans.  

The amendment will significantly slow down SPS withdrawals. Employers with SPSs will see their balance sheet liabilities increase steeply, often perceived as a negative in the financial markets. Pre-funded retirement plans are now on a more equal footing with SPSs because the ability to make withdrawals has been equalized. The government hopes that the net effect will be to jump-start the employer-sponsored pension movement.  

The report said the amendment will also make it easier to use IRPs, formerly called Individual Retirement Accounts (IRAs). IRPs may now be set up by workers in a funded retirement plan to provide for their own additional contributions (self-employed workers can also establish IRPs). Employees who terminate under a funded retirement plan must transfer their benefits to an IRP, which can then be terminated at will (presumably with adverse tax consequences). This may actually give them greater access to their benefits before retirement than those covered under SPSs.  

The full tax implications of IRPs have not yet been clarified.  

The Towers Watson report is at http://www.towerswatson.com/newsletters/global-news-briefs/4989.

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