This content is from: Local Insights

Pension plans spur growth of financial market

On December 29 2004, the National Assembly passed the Employee Retirement Income Security Act (ERISA) to introduce a more comprehensive employee retirement pension plan, including derivation of and alternatives to the current severance scheme. ERISA took effect in December 2005, and the introduction of new retirement pension plans sponsored by employers is a milestone, not only for employee benefits and welfare in Korea, but also for the Korean financial market.

The objective is to provide post-retirement benefits more securely than that previously available for corporate employees. Under ERISA, employers and employees will have a choice from any one of the following retirement benefits plans: (1) a severance payment plan that is currently in place, or (2) a retirement pension plan in the form of a defined benefit plan or defined contribution plan.

If the retirement pension plan is adopted, an independent financial firm must be appointed to manage the reserved funds in accordance with ERISA and government guidelines, and reserved funds must be maintained in the accounts managed by such an independent financial firm (and not in company accounts). Although the adoption of the new retirement pension plan is optional, the introduction of various incentives (including tax breaks) to be unveiled shortly will make the adoption of such a plan more attractive for corporations.

Both Korean and international financial firms are striving to tap this new market. The introduction of ERISA and the retirement pension plan will act as catalyst for further growth of Korea's asset management market. The retirement pension plan (which typically lasts for a substantial period of time) is also expected to further stabilize Korea's financial markets.

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