Korea’s Uninsured Retirement Pensions

Retirement pensions are not protected by deposit insurance. If a financial institute that manages retirement allowances goes insolvent, employees may lose part or all of their pensions, a last resort for their retired lives. Yet few employees know this. The Ministry of Labor and Korea Deposit Insurance Corporation (KDIC) argues retirement instruments should be protected immediately while the Ministry of Finance and Economy, which has power to change, maintains a wait-and-see approach.

Your Pensions Depends on the Fate of Financial Institutes-

The government pays back up to 50 million won per person, principle and interests combined, for the money put into financial products under deposit protection if a financial institute goes bankrupt. However, retirement pensions are not subjected to deposit protection.

A retirement pension system is the scheme where banks, investment banks, and insurance companies that manage retirement allowances deposit the funds and buy beneficiary certificates, insurance policies, and bonds on behalf of businesses and employees. Because the players that buy financial instruments are financial institutes, they are not protected by the depositor protection law, says the KDIC.

For example, a bank that manages 300 million won of company A in retirement allowances buys beneficiary certificates from company B, savings products from C, and insurance policies from D with 100 million won each. If company B goes bankrupt, company A ends up losing the 100 million won that was invested in beneficiary certificates. If company B, C, and D go under altogether, whole pensions disappear.

For employees, defined benefit pension plans, where employers guarantee payment and they suffer damages if things go wrong, are better than defined contribution pension plans where employees bear the brunt.

“It is not right for the government to protect individual depositors who put billions of won into several financial institutions and to turn a blind eye to retirement pensions reserved for living expenses later in life not protected under law,” said an employee of a SME that adopted the retirement pension system.

Only Oblivious SMEs Adopt the System-

As of the end of April, only 6,667 workplaces with 55,567 employees switched to a retirement pension system among about 500,000 with five or more employees obliged to adopt the system. The total amount of retirement allowances is 77.42 billion won. That is 1.4 million won per employee.

The Ministry of Labor said that the number of workplaces that adopted the system increased to some 8,000, but still the adoption rate is only 1.6 percent. Besides, 98 percent of them are SMEs with less than 100 employees.

The companies under the Korea’s two umbrella labor unions, the Federation of Korean Trade Unions and the Korean Confederation of Trade Unions, refused to switch to the system since the labor unions gave a guidance to its affiliates not to adopt the system citing there is no guarantee of receiving benefits after retirement.

“The current retirement pension system is far from ensuring decent lives after retirement as it does not protect the right to receive pensions or provide enough tax credits,” said Kang Ik-gu, director of the FKTU.

The Ministry of Planning and Budget encouraged state-owned corporations to switch to the system, saying it will give additional points in performance evaluation when they adopt the system, but to no avail.

Different Stances Within the Government-

KDIC’s Chairman and President Choi Jang-bong said “we are considering including retirement pension system in deposit protection if a financial company goes bankrupt.”

“Enhancing retirement plan protection is a global trend,” said Park Jae-soon, director of the insurance policy of KDIC. “The U.S. is set to increase the protection ceiling for employee pension accounts from 100,000 dollars to 250,000 dollars starting this July by revising the federal deposit insurance law.”

The Ministry of Labor, in charge of the retirement pension system, said, “Considering that the old retirement insurance is protected under the law, it is not right to exclude the new system from protection.”

The Ministry of Finance and Economy that deals with the depositor protection law, however, does not intend to revise the law.

Choo Kyung-ho, director general for financial policy bureau of MOFE, said, “We have yet to conclude whether it is right to protect retirement pension plan completely. We will review the issue watching how the system is implemented.”

An official of an insurance company said, “Even though the retirement pension system is protected, challenges remain regarding who will bear the burden of insurance premiums and what the rate of insurance will be.

Kyung-Joon Chung news91@donga.com