🚨 Fund-Type Retirement Pension

Today Korean Social News for Beginners | 2025.10.29

0️⃣ Strengthening Retirement Income through Joint Labor-Management Operation

📌 'Fund-Type Retirement Pension' - Government to Reveal Plan by Year-End

💬 On the 28th, the Ministry of Employment and Labor launched a labor-management-government task force (TF) and announced it will finalize the design of the 'fund-type retirement pension' system by the end of the year. This is the first major overhaul of the retirement pension system in 20 years since its introduction, aimed at strengthening workers' retirement income security. Currently, retirement pension reserves total 432 trillion won, but most are concentrated in principal-guaranteed products with low real returns, and 87% of recipients take lump-sum payments rather than pensions. The new system seeks to improve management expertise through joint labor-management operation and establishing an independent trustee, while also considering mandatory participation to prevent unpaid retirement benefits. Various issues are being discussed, including the form of the trustee, whether to allow financial companies to enter, profit vs. non-profit distinctions, differences in roles with the National Pension, and whether to make retirement pensions mandatory.

💡 Summary

• Fund-type retirement pension is a system where a joint labor-management fund committee manages pension assets through an independent trustee.
• It aims to improve the low return rates and lump-sum payment bias of the current contract-type retirement pension.
• The goal is to increase returns through economies of scale and professional management, and prevent unpaid retirement benefits.

1️⃣ Definition

Fund-type retirement pension means a system where a fund management committee jointly formed by labor and management operates retirement pension assets through an independent trustee, moving away from the existing contract structure where companies directly contract with financial firms. The key is to achieve economies of scale and improve operational efficiency by pooling multiple companies' retirement pensions into one fund for professional management.

Currently, Korea's retirement pension system is mainly based on a 'contract type' where individual companies make contracts with financial firms. However, the fund-type is a new model that aims to increase professionalism and transparency by integrating multiple companies' retirement pensions, and to ensure workers' retirement income stability in the long term.

💡 Why is this important?

• It can improve the low return rate problem of retirement pensions and increase workers' real retirement income.
• Through economies of scale, it can lower operating costs and increase profitability through investment diversification.
• It provides an institutional foundation to fundamentally solve the problem of unpaid retirement benefits.
• Transparency and accountability are strengthened as labor and management jointly participate in operations.

2️⃣ Problems with Current Retirement Pension System and Need for Reform

📕 Low Returns and Lump-Sum Payment Bias

• Retirement pension reserves are concentrated in principal-guaranteed products. Key facts:

  • As of 2025, retirement pension reserves have grown to 432 trillion won.
  • However, over 80% of this is invested in principal-guaranteed products like deposits or insurance.
  • Real returns barely exceed inflation, with minimal asset growth effects.
  • The proportion invested in real assets like stocks or bonds is low, making long-term returns much lower than developed countries.
  • Workers lack understanding and interest in investment, and companies prefer safety-focused management.

• Lump-sum payments overwhelmingly outnumber pension payments. Key issues:

  • 87% of retirement pension recipients take lump-sum payments instead of pensions.
  • Taking lump sums greatly weakens the retirement income security function as the money is depleted quickly.
  • Many are forced to choose lump sums due to needs like home purchases or children's education expenses.
  • Tax benefits exist for pension payments, but worker awareness is low.
  • The retirement pension system is not properly fulfilling its original purpose of securing retirement income.

📕 Unpaid Retirement Benefits and Small Company Difficulties

• Unpaid retirement benefits remain a serious problem. Key facts:

  • Hundreds of billions of won in retirement pay go unpaid annually, harming workers.
  • Unpaid benefits are concentrated in struggling small businesses or closing workplaces.
  • Companies often retain retirement pay internally and can't pay it when facing financial difficulties.
  • Currently, companies can choose between retirement pay or retirement pension, creating unpayment risks.
  • Unpaid retirement benefits directly damage workers' retirement lives.

• Small companies have limitations in managing retirement pensions. Key problems:

  • Small reserve amounts mean weak negotiating power with financial companies and high fees.
  • Lack of professional staff makes efficient asset management difficult.
  • The burden of various administrative tasks and management costs is relatively large.
  • While a small business retirement pension fund system exists, enrollment rates are low and it hasn't been activated.
  • From the company's perspective, retirement pension management is burdensome, making many reluctant to adopt it.

📕 Limitations of Contract Structure

• Inefficiencies from individual company contracts are significant. Key limitations:

  • Each company contracts with financial firms individually, making economies of scale difficult to achieve.
  • From financial companies' perspective, many small contracts increase management costs.
  • From workers' perspective, there's the hassle of creating new retirement pension accounts when changing jobs.
  • Management expertise is lacking and investment diversification is limited.
  • Information asymmetry between companies and financial firms sometimes leads to unfavorable contract terms.

• Labor and management participation and oversight are limited. Key problems:

  • Under the current system, companies often unilaterally decide on management methods.
  • Workers find it difficult to know exactly how their retirement pensions are being managed.
  • Transparency is low and responsibility for management performance is unclear.
  • Structural mechanisms for labor and management to jointly participate in decision-making are lacking.
  • Education and information provision to increase workers' understanding and interest are also insufficient.

💡 Major Problems with Current Retirement Pension System

1. Low returns: Bias toward principal-guaranteed products, insufficient asset growth
2. Lump-sum bias: 87% take lump sums, weakening retirement income security function
3. Unpaid benefits: Hundreds of billions unpaid annually, harming workers
4. Diseconomies of scale: Excessive operating costs due to individual company contracts
5. Lack of transparency: Insufficient joint labor-management participation, opaque management information

3️⃣ Key Features and Expected Effects of Fund-Type Retirement Pension

✅ Core Structure of Fund-Type Retirement Pension

• A joint labor-management fund committee is formed. Key features:

  • A fund management committee is established with equal participation from employer and employee representatives.
  • The fund committee decides major matters like asset management direction, trustee selection, and investment policies.
  • Labor and management jointly participate in decision-making, strengthening transparency and accountability.
  • Management status is disclosed to workers through regular reports and audits.
  • A system is established for making rational decisions with expert consultation.

• An independent trustee professionally manages assets. Key characteristics:

  • The trustee selected by the fund committee handles actual asset management.
  • The trustee can be a public institution like the National Pension Service or a professional financial institution.
  • The scope of allowing for-profit and non-profit entities to participate will be decided through labor-management-government consultation.
  • Multiple companies' retirement pensions are managed together to achieve economies of scale.
  • Long-term returns can be increased through professional portfolio construction.

✅ Economies of Scale and Return Improvement Effects

• Integrated management reduces costs and increases returns. Key effects:

  • Large-scale asset management strengthens negotiating power with financial companies to secure low fees.
  • Investment diversification spreads risk and can pursue stable long-term returns.
  • Portfolios can be optimized by investing in various asset classes like stocks, bonds, and alternative investments.
  • With professional management staff and systems, more efficient management is possible than individual companies.
  • In the long term, workers' retirement pension reserves will grow more, increasing retirement income.

• The design references international best practices. Key examples:

  • The Netherlands' industry-wide pension funds achieve high returns through economies of scale.
  • Canada's public pension management organization (CPPIB) produces world-class results through professional management.
  • These countries achieve both long-term investment and stable returns through fund-type structures.
  • Korea is also benchmarking these success stories in designing the system.

✅ Prevention of Unpaid Benefits and Consideration of Mandatory System

• Mandatory enrollment prevents unpaid benefits at the source. Key measures:

  • Currently, companies can choose between retirement pay and retirement pension, but all companies will be required to join the retirement pension.
  • Companies deposit fixed amounts monthly to external trustees, preventing internal retention.
  • Even during financial difficulties or closure, workers' retirement pensions are protected as separate funds.
  • Workers can check their retirement pension accumulation status in real-time.
  • Worker damage and social costs from unpaid retirement benefits can be greatly reduced.

• Gradual introduction and careful system design are needed. Key tasks:

  • Considering small business burdens, phased mandatory implementation by size and industry is being reviewed.
  • Government support or grace periods for very small businesses are also being discussed.
  • Support must be provided for companies previously operating retirement pay systems to transition smoothly.
  • Through sufficient promotion and education, both labor and management should understand and prepare for the new system.
  • A pilot project could be implemented first to identify problems and improve before full expansion.

4️⃣ Related Terms

🔎 Worker Retirement Benefit Security Act

• This act is the basic law for securing workers' retirement benefits.
  • The Worker Retirement Benefit Security Act is a law that imposes obligations on employers to pay retirement benefits so workers can receive stable income when they retire. Implemented in 2005, it has provided the basic framework for Korea's retirement benefit system to this day.
  • According to this law, employers must choose to operate either a retirement pay system or retirement pension system. Retirement pay is paid as a lump sum when workers retire, while retirement pension involves entrusting reserves to external institutions for management, then receiving them as a pension or lump sum upon retirement.
  • Retirement pension systems include Defined Benefit (DB), Defined Contribution (DC), small business retirement pension fund system, and Individual Retirement Pension (IRP). The fund-type retirement pension being promoted will be added as a new type by amending this law.

🔎 Defined Benefit (DB) and Defined Contribution (DC)

• DB and DC are the main retirement pension types currently in operation.
  • Defined Benefit (DB) is a system where the benefit level at retirement is predetermined. Retirement benefits are calculated based on years of service and average wages, with the company bearing management responsibility. Even if investment returns are low, the company must make up the shortfall, making it favorable for workers.
  • Defined Contribution (DC) is a system where companies deposit a fixed percentage of wages (usually 1/12) annually into workers' accounts, and workers directly choose how to invest it. Retirement benefits vary according to investment results, so workers bear the investment risk. However, accounts are easy to transfer when changing jobs, and there's high autonomy in management.
  • Fund-type retirement pension is an attempt to combine the advantages of both systems. The goal is to pursue higher returns than DC through professional fund management while ensuring stability like DB. It's also a structure where labor and management jointly participate in decision-making to share responsibility.

🔎 Trustee

• A trustee is an independent institution that actually manages retirement pension assets.
  • A trustee is an entity that receives the task of managing retirement pension assets from the fund management committee and handles actual investment and management. It's a core institution of fund-type retirement pension and must be an organization with expertise and independence.
  • Various options are being discussed regarding the form of trustee. First, having a public institution like the National Pension Service handle it. Public nature and stability are high, but there may be concerns about efficiency and expertise. Second, allowing private financial companies (banks, insurance, securities, etc.) to participate. Expertise is high, but conflicts of interest from profit-seeking are raised. Third, establishing a new non-profit entity.
  • The trustee forms a board with joint labor-management participation and has obligations for transparent accounting and regular reporting. Clear guidelines must be established and followed for asset management strategy, investment targets, and risk management. It must also maintain soundness and fairness under government supervision.

🔎 Mandatory Retirement Pension

• Mandatory retirement pension is a policy requiring all companies to adopt the retirement pension system.
  • Mandatory retirement pension means improving the current system where companies can choose between retirement pay and retirement pension, to require all workplaces to operate retirement pension systems. The purpose is to fundamentally prevent unpaid retirement benefits and stably secure workers' retirement income.
  • The key to mandatory participation is preventing companies from retaining retirement pay internally by requiring monthly deposits of fixed amounts to external financial institutions or funds. This way, even if companies face financial difficulties or close, workers' retirement benefits are protected separately, eliminating unpayment risks. Additionally, accumulated funds operated in capital markets can positively impact the national economy in the long term.
  • However, careful approach is needed as mandatory implementation could burden small businesses significantly. Complementary measures being discussed include phased implementation by size and industry, government support for very small businesses, and providing sufficient preparation time. Education to increase workers' understanding of retirement pensions must also be conducted in parallel.

5️⃣ Frequently Asked Questions (FAQ)

Q: What happens to existing DB or DC types when fund-type is introduced?

A: Existing systems will be maintained, with fund-type added as a new option.

• Even with the introduction of fund-type retirement pension, existing DB and DC types won't disappear. Companies and workers can choose the system that fits their situation. First, large companies or stable mid-sized companies can continue operating DB or DC types. Second, small or very small businesses can join fund-type retirement pension to enjoy economies of scale benefits. Third, transitioning from existing systems to fund-type through labor-management consultation will be possible. Fourth, the government plans to fully explain the pros and cons of each system and support companies in making rational choices.
• However, if mandatory retirement pension is also promoted, retirement pay systems will likely gradually disappear and be integrated into retirement pension systems. Even in this case, it's expected to be a method of choosing between DB, DC, or fund types. What's important is understanding the characteristics of each system well and selecting the most suitable system considering the company's financial situation and workers' preferences.

Q: Will returns really increase if I join the fund-type retirement pension?

A: Long-term return improvement is expected through economies of scale and professional management, but it's not guaranteed.

• Fund-type retirement pension can expect economies of scale effects by managing multiple companies' assets together. First, managing large-scale funds strengthens negotiating power with financial companies to lower fees. Second, professional management staff and systems enable more efficient investment than individual companies. Third, risk-adjusted returns can be increased through diversified investment in various assets like stocks, bonds, and alternative investments. Fourth, the impact of market volatility can be reduced by consistently maintaining long-term investment strategies.
• However, investment always carries risk, so high returns are not guaranteed. Losses may occur depending on market conditions. However, it has been historically proven that returns on real asset investment are higher than principal-guaranteed products in the long term. What's important is transparent information disclosure and professional risk management. Workers also need to take interest in how their retirement pensions are being managed and ensure sound management through joint labor-management participation.

Q: When will the fund-type retirement pension be introduced?

A: System design will be completed by the end of 2025, with phased implementation after legal amendments.

• The Ministry of Employment and Labor launched the labor-management-government task force on October 28, 2025, and announced it will finalize the basic framework of fund-type retirement pension by year-end. First, key matters like the form of trustee, labor-management participation methods, and operating regulations will be decided by the end of 2025. Second, amendments to the Worker Retirement Benefit Security Act are expected to be submitted to the National Assembly in the first half of 2026. Third, additional time will be needed to prepare enforcement decrees and rules after legal amendments are completed. Fourth, conducting a pilot project first to supplement problems before full implementation is also being considered.
• Overall, full implementation is expected around 2027 or 2028. However, the schedule may be delayed depending on the political situation or the process of coordinating differences between labor and management. Mandatory retirement pension likely requires more preparation time than fund-type introduction, so it will probably be promoted in phases. It's important for both workers and companies to increase their understanding of the new system and prepare for the changes.

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