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Korea: New Retirement Pension Plans Improve Stability Expectations
By Ji-hyun Kim, Korean Herald
South
Korea
October 28, 2005
Lee Mi-ok has three big things to look forward to as retirement approaches; golf, grandchildren, and a sizable pension of around 2 million won each month.
She'll become eligible for the payments any time after turning 55 years of age and having worked at least 10 years. Lee, 41, can even receive the entire amount all at once if her company, a biomedical equipment supplier, chooses a certain type of pension plan.
"I'm still a bit uneasy when I think about not having a job, but I feel relieved thanks to the steady income that I'll be getting when I turn retirement age," said Lee.
The added sense of security that this mother of two feels stems from the new pension plan that provides employees with a choice between an annuity or a lump-sum.
"The newest pension plan is meaningful because Korea still has a very weak social security net. This way, the country's middle-aged and elderly are offered more stability and security," said Park Jae-hyun at Woori Securities.
The plan will apply to all companies with five or more employees beginning in December.
Based on a vote by workers, employers can choose from two different types of plans.
For the defined benefit type, employers must fix the amount of severance pay and set aside up to two-thirds of the due amount which is invested in a different financial institution each year.
Employers selecting the defined contribution type must make yearly investments worth at least one-twelfth of employees' annual salaries. The bottom-line pension depends on this investment.
Despite the high-risks, workers are likely to prefer the defined contribution type because of the potentially high returns. Employees can also access their funds before the due date.
Traditionally, the pension system granted employees a lump-sum severance pay that varied according to payrolls.
The biggest shortcoming in the existing plan is that too many people forfeited their pension soon after they retired.
Of course the new plan is also not without problems, experts say.
"The biggest concern is that there is no regulatory framework to overlook the pension plan," said Bang Han-nam, a researcher at the Korea Labor Institute.
Corporate Korea is also not fully prepared to set aside the funds to fully prop up the new program.
"Furthermore, companies are reluctant because of the burden of having to finance these expensive pension plans," said Bang.
Despite the downside, the government is more than eager to activate the new pension scheme on hopes that it will spark the financial sector into life.
Competition is already heating up among local financial companies that are seeking bigger access to the 12 trillion won that will be up for grabs when companies begin participating in the new pension scheme.
This market is expected to further expand to a minimum 40 trillion won over the next five years.
"With around 800 billion won seen to be flowing into the stock market next year, the new pension plan should add more dimensions to asset management and also help bolster the stock market," said Chung Young-wan of Samsung Securities' investment information team.
The brokerage recently joined the bulging number of financial companies that are meeting corporate officials to introduce them to financial products catering to the new pension plan.
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