Korea Must Mandate Retirement Pensions as Safety Net for Super-Aged Society

Korea's retirement pension system marks its 20th anniversary this year. As more workplaces adopt the system, accumulated reserves reached 431.7 trillion won ($320 billion) at the end of last year, with 7.144 million participants enrolled. Notably, reserves have doubled over the past five years, reflecting growing interest in retirement pensions as a safety net for later life.

However, only 437,000 workplaces have adopted the system, representing just 26.4% of all businesses. While adoption rates are high among large corporations, small and medium-sized enterprises and workplaces with fewer than 30 employees still lag behind. Improving investment returns, which have failed to keep pace with inflation, remains another challenge.

"In a super-aged society, retirement pensions must achieve both stability and profitability," Kim Kyung-sun, Chairman of the Korea Retirement Pension Development Institute, said in an interview with Seoul Economic Daily on Wednesday. "To ensure stable retirement income for workers, it is urgent to unify the severance pay system into retirement pensions through mandatory adoption."

Kim added that "since unification of retirement pensions will inevitably proceed gradually, it would be desirable to introduce fund-type pensions simultaneously to improve returns."

However, mandatory retirement pensions face considerable opposition from small business owners due to cost burdens. "For Korea's retirement pension system, which is still in a growth stage, to mature like those in advanced countries, more institutional mechanisms are needed," Kim emphasized.

**Why is the retirement pension system necessary?**

"The National Pension eligibility age is gradually rising, reaching 65 for those born in 1969 and later. Since retirement age at most companies falls short of even 60, many face an income crevasse. Receiving accumulated retirement pension during this period would be a great help," Kim said.

"The National Pension's income replacement rate is currently capped at 40%, which critics consistently point out is insufficient to guarantee retirement income, but there are limits to raising premium rates. In contrast, retirement pensions accumulate 8.3% of annual salary each year—one month's salary for every 12 months worked. Considering the National Pension premium rate is currently 9% and will rise to around 13%, properly managing an 8.3% retirement pension contribution could substantially strengthen retirement income security when combined with the National Pension."

**Returns are too low.**

"Although one-year returns for retirement pensions recently reached around 4.7%, up from the 10-year average of about 2%, the perceived impact remains low. Higher returns require combining long-term and professional investment," Kim explained.

"Since retirement pensions were introduced in 2005, the system's maturity is low, and the dual structure with the severance pay system means people lack awareness of it as a pension. Frequent mid-term withdrawals and terminations have prevented long-term investment. High demand for principal protection also limits active management—currently 87.2% of assets are in principal-guaranteed products."

**The government is pushing for mandatory enrollment and fund-type pensions.**

"Retirement pensions are a core means of supporting workers' post-retirement life, so there are high expectations that they should exceed statutory severance pay levels. Yet both Defined Benefit plans, where companies are responsible for management, and Defined Contribution plans, where workers can manage their own investments for higher returns, are focused on safe, principal-guaranteed investments. This results in poor average returns and growing demand for a new fund-type retirement pension system. Introduction of fund-type pensions is also necessary to expand worker choice."

**Annuitization rates are low and preference for lump-sum payments remains high.**

"In Korea, the pension receipt rate is only 13% by account. There is little tax benefit difference between receiving retirement pensions as a lump sum versus as an annuity, providing little incentive for annuity receipt," Kim noted.

"To spread the annuity culture, we must first reduce mid-term withdrawals to maximize accumulated reserves. Mid-term termination of Individual Retirement Pension (IRP) accounts should be made difficult in principle until pension eligibility, while collateral loans should be activated to minimize mid-term withdrawals. Year-end tax settlement benefits on retirement pension contributions should be mandatorily deposited into worker IRP accounts, separate from other tax refunds. Tax benefits for lump-sum receipt should be gradually reduced."

**Many participants don't seem to know how their pensions are managed.**

"Current law requires companies to provide retirement pension education to workers at least once annually, which can be delegated to pension providers, but most is formalized through online education. Rather than perfunctory annual education, it would be better for specialized institutions to provide in-person education for first-time participants."

**What about overseas examples?**

"The UK has Pension Wise, a pension consulting service provided by a public agency. It began in 2015 when the 55% tax on retirement pension lump-sum withdrawals was eliminated and pension liberalization policies allowing withdrawal at any time after age 55 were implemented. It's provided free to those 50 and older, offering guidance on pension start timing considering family situation, income, and debt, along with content on investment risks, taxes, and fees. Since 2022, unless explicitly refused, people must receive Pension Wise services when withdrawing or transferring pensions—a reference worth noting."

**How does Korea's retirement pension compare globally?**

"Each country differs in worker awareness and financial market conditions that form the foundation of their systems. Korea's trust system is less developed than advanced countries, which is cited as a limitation for introducing fund-type corporations. Joint labor-management decision-making as participant representatives is needed in fund corporation governance structures, but this culture is underdeveloped. However, as Korea's capital market is expected to continue growing, the potential for higher returns will increase if a more active investment culture forms."

**What fund-type model does Korea need?**

"When discussing fund-type systems, only fund corporations establishing separate legal entities are considered, but there are also proposals to introduce financial institution-centered fund management specialists. For small business workers, the idea is to activate the existing SME Retirement Fund, which can be considered a fund-type system, while establishing professional management organizations to operate larger company pensions on a discretionary basis."

**What are the essential conditions for introducing fund-type pensions?**

"The active discussion of fund-type introduction in the current contract-based retirement pension system is due to low returns. However, returns don't automatically rise just by introducing fund-type pensions. Considering retirement pensions' basic nature as workers' retirement income, funds must grow to a certain scale to achieve economies of scale while improving returns. Frequent withdrawals and terminations must be restricted to enable long-term accumulation, which allows long-term investment to reduce loss risk. Governance transparency is also important. The OECD's pension fund governance guidelines suggest separation of operational and supervisory responsibilities, accountability measures including participant representative participation in governing bodies, expertise requirements, and external audit guarantees."

**How should worker participation and employer burden be balanced for small businesses during the mandatory adoption process?**

"The Korea Workers' Compensation & Welfare Service operates the SME Retirement Fund for companies with 30 or fewer employees. It waives fees for three years upon enrollment and supports 10% of employer contributions. Workers earning 130% or less of minimum wage receive additional support of 10% of wages," Kim said.