Employer Action Code: Act
A tripartite (government, labor and management) task force recently announced its agreement on major reforms that would require all companies to provide externally funded defined contribution (DC) or defined benefit (DB) retirement plans — known as Employee Retirement Benefit Security Act of 2005 (ERBSA) plans. These long-anticipated changes would impact companies that only offer the Severance Pay Scheme (SPS), requiring them to implement ERBSA plans with external funding with pension providers. In addition, the tripartite task force has agreed on the activation of a fund-type (or trust-based) retirement plan financing arrangement.
The government's aim is to strengthen workers' retirement income security. The government has formed a task force group to iron out details and is targeting enactment of legislation to amend ERBSA by the end of 2026. Further details on the roadmap are expected to be announced in July.
Since the introduction of funded ERBSA DC and DB plans in 2005, many employers have replaced unfunded SPS arrangements with these funded plans. Adoption is particularly high among large employers, with more than 90% of companies with 300 or more employees having made this transition. However, most small and medium-sized enterprises have not followed suit. This is despite the legal requirement that all companies established after July 2012 adopt funded plans, as well as multiple policy and regulatory measures intended to discourage the continued use of unfunded SPSs.
Key details
- The mandate for all companies to provide a funded ERBSA plan, and the abolition of unfunded SPS plans, would be implemented in stages, taking into account workplace size and conditions. Specifics are pending, though an earlier government proposal defined a phase-in approach based on company size (i.e., 300 or more employees, 100 to 299 employees, 30 to 99 employees, five to 29 employees, and fewer than five employees)
- A fund-type (trust-based) retirement plan arrangement for ERBSA DC plans would be introduced as an alternative to the existing contract-based arrangements. Under the trust-based model, an independent external trustee would pool employer contributions into a collective fund and manage the assets centrally. This structure is intended to achieve economies of scale and improve long-term investment returns. Employers would be permitted to offer both the trust-based and contract-based models. Historically, most DC plan assets have been invested in principal interest guaranteed (PIG) products, largely because plan members have shown limited engagement in selecting among investment options. While PIG products provide stable returns, their relatively low long-term performance has raised concerns for the government. In response, default investment option requirements introduced in 2022 were designed to encourage investment in other asset classes that are expected to deliver higher, though more volatile, long-term returns. The introduction of a trust-based model would also establish clear fiduciary duties for trustees, with the objective of improving investment outcomes for plan members
- The mandated minimum level of benefit accrual would not change. ERBSA plans would still be permitted to pay benefits as a lump sum, though the government may introduce incentives to encourage payment of pensions
Employer implications
With the recent tripartite agreement mandating ERBSA adoption and enabling trust based retirement plan arrangements, employers should prepare for potential changes as the legislative process progresses in the National Assembly. Key considerations include employee consent requirements for modifying retirement benefit structures and the need to assess suitability of trust based solutions. Employers should take the following actions:
- For employers that have not yet adopted an ERBSA arrangement: Assess available options for implementing ERBSA and closely monitor legislative developments. Because any modification to existing retirement benefit arrangements will require majority employee consent, employers should proactively evaluate plan design implications and prepare for employee communication and approval processes
- For employers already operating an ERBSA DC plan: Consider whether a trust‑based arrangement may better meet organizational needs. To understand this model, employers may review practices in markets with established master trust environments (e.g., the United Kingdom and Australia). Depending on the final Korean framework, employers interested in transitioning to a trust‑based arrangement will need to identify and select a trustee that delivers optimal value for both the employer and plan members
