Pension plan would keep funds intact if firms fail

back

Pension plan would keep funds intact if firms fail

by Kim Ki-chan, JoongAng Daily

September 30, 2003

The Labor Ministry yesterday unveiled a new pension system that, if the National Assembly approves it, would guarantee wage-earners’ pensions even if their company goes bankrupt.
The plan in essence would force companies to fund their pension plans fully; the funds would be managed by an outside firm.
The ministry said it wanted the new pension scheme to be in effect next July.
At present, Korean firms with pension plans manage the pension contributions themselves; there are no provisions for recovering money in pension accounts if a firm goes bankrupt. Under the ministry’s proposal, pension funds would be managed and eventually paid out by financial firms contracted to manage the investment of those funds.
There would be two types of plans available to Koreans under the proposal: defined benefits and defined contributions. If benefits are defined, employees would be assured of receiving a pension based on their highest annual wage or their average wage over their working life. That would put employers at the mercy of an outsider’s expertise in managing the pension funds; if there were shortfalls in the benefits, the employer would be responsible for making them up. In the defined contributions plan, employees would receive a set annual pension payment based on their paychecks, and their pension would depend on how well those investments performed.
The ministry said the choice of a plan would be left to labor-management negotiations.
Only employees who have been with the same firm for over 10 years would be eligible for monthly pension payments; others would receive a lump-sum payment but that would be ¡°transportable¡±; workers could open individual pension accounts tax-free until retirement, keeping them to combine with payments by a new employer.
The choice of a plan could be a trigger for more labor-management disputes; employers would like to eliminate the uncertainties for them of a defined benefits scheme, while many observers predicted that workers would favor them even if the plan would not eliminate the risk that a bankrupt firm would not be able to compensate for investments gone sour. The ministry said it would add some protections to defined contribution plans to make them more appealing to workers.
Pension plans would be sold by banks and stockbrokers.