The Retirement Pension System to Be Introduced in July 2004

Temporary workers who have been employed for less than a year along with employees of companies with no more than four workers will be subject to retirement benefits or pensions staring January 2007.

From July of next year, Korean businesses can also adopt the retirement pension system when the union agrees so that companies can save money at financial institutions including banks, insurance companies, investment trust firms to compensate their workers at the retirement.

The Labor Ministry announced yesterday that it would publicize its bill on securing workers` severance payment and present it to the National Assembly next month.

The bill, if enacted into law, will expand the coverage of the retirement pension system to include those who have been employed for less than a year or by companies with less than 5 workers, thereby benefiting over 4.49 million.

Under the plan, the employees for less than a year will be subject to severance payment as soon as the retirement pension system takes effect.

To ease too much burden, companies with no more than four employees are allowed to implement the system as late as January 2007 and begin the payment to the retirees at the 50% level before expanding the level on a gradual basis over years.

Companies with over four employees are allowed to adopt the severance payment system or the retirement pension system with consensus of the union members. Nevertheless, the government plans to encourage local businesses to turn to the retirement pension system through reducing its acknowledgement of damages in companies` holdings for the retirement payments, which is banned to exceed 40%.

Song, Young-jung, head of the department of the labor standard at the Labor Ministry said, “The current retirement payment system is flawed since employers do not always save the retirement money aside as the book says and therefore, companies cannot pay the retirees in some cases. The retirement pension system is introduced to complement such drawbacks meanwhile protecting compensations of workers in their retirement. ”

The retirement pension system is allowed in two different kinds, which is either a defined benefit (DB) plan or a defined contribution (DC) plan. A defined contribution (DC) plan is a plan, which bases the pension at retirement on the accumulations in the member`s account at that date. And a defined benefit (DB) plan is a plan, which bases the pension at retirement on the member`s length of service and, usually, his or her average salary at retirement.

Besides, the individual retirement account (IRA) will be given to each worker so that the retirement money can be deposited even after the worker moves to another company. When the money is deposited at the IRA in lump sum, taxes will be taken hold until the pension is paid.

In case of the lump sum, the retirement pension is payable to workers regardless of their age. And individual companies can pay the pension money flexibly by the company`s regulations. Basically, those who are over 55 are eligible in receiving the pension money.

Financial experts noted, “The implementation of the retirement pension system is expected to generate other positive effects, such as revitalizing stock markets through additional funding of 15 trillion won to the financial market, which will be collected from local firms that will no longer have to hold retirement money inside except for 16 trillion won kept in the retirement insurances. ”

Kyung-Joon Chung news91@donga.com