[Viewpoint] Retirement plans take consideration

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[Viewpoint] Retirement plans take consideration

Korean law has long required companies with five or more employees to pay severance to departing employees with at least one year’s experience, regardless of whether they retired, resigned or were fired. The legal minimum severance obligation is 30 days’ average wages for each consecutive year of service.

This scheme, known as the Severance Payment System, has been the standard substitute for a corporate pension. However, as Korea has modernized and its citizens have come to expect longer and more comfortable post-retirement lives, the National Assembly has implemented important changes in the realm of retirement income security.

The Employee Retirement Benefit Security Act, enacted in 2005, permits the use of private investment plans to create an ongoing stream of retirement income for employees. Under the ERBSA, employers will be required to adapt at least one of the following retirement benefit plans: a retirement pension plan similar to those offered in many Western countries taking the form of either a defined-benefit or defined-contribution plan; or a continuation of the SPS, which is itself a defined-benefit plan, by Dec. 31, 2010.

The gradual elimination of SPS tax benefits, as well as the abolition of the severance insurance system by the end of 2010, has made the need to design and adapt a plan all the more urgent. Given the legal requirement that employers obtain the consent of a majority of employees (or of the labor union which represents a majority) in order to implement any change to existing retirement benefit plans, the financial constraints imposed by the SPS - and the understandable anxiety among employees caused by the prospect of placing their retirement income stream into the volatile financial markets - employees must work carefully with their legal counsel to prepare a communications plan that addresses employee concerns and obtain a popular mandate for any change to the existing SPS.

While any effective plan should be carefully calibrated to consider employee needs, industry realities and global pension policies, management should consider the following guidelines in advance of any dialogue with employees:

1) Develop clear but flexible goals.

Most employers will likely prefer a defined-contribution plan, in which the employees bear the risk of stock performance, to a defined-benefit plan, in which the payout to employees is guaranteed and the burden of asset management, as well as the risk of underperformance by fund assets, is placed squarely upon the employer. For the same reasons, many risk-averse employees will favor a defined-benefit plan, so resolving this conflict is the first priority.

Some employers have chosen to reach agreement by offering incumbent employees a one-time lump sum payment to win their approval of a defined-contribution plan, and/or differentiating between more generous and attractive (often defined-benefit) plans offered to incumbent employees and more flexible and cost-effective (often defined-contribution) plans to be imposed upon (voiceless) future employees, whose support is not needed for implementation. Because the legality of such differentiation is in question, employers are advised to consider this approach carefully and consult with legal counsel in advance.

2) Seek a supermajority, rather than a simple majority.

Although the ERBSA requires only a simple majority vote (i.e. 50 percent or more) of employees to effect a change, obtaining a strong mandate (perhaps 65-70 percent approval or higher) will ensure that the plan(s) adopted will enjoy the support of at least a stable majority of employees, notwithstanding the inevitable changes to the workforce that will take place as employees join and depart the company.

3) Be mindful of union approval requirements.

If the employee union represents a majority of union-eligible employees, the majority union’s consent is sufficient to approve the pension plan. However, if the union represents only a minority of employees, consent from the minority union and a majority of all employees is required. This means that minority union members will vote twice in adopting the pension plan.

4) Identify various employee interest groups and design the plan accordingly.

Understanding and identifying the discrete interest groups (based upon job titles, years of service, etc.) will be helpful in designing a multifaceted plan with the appropriate incentives tailored to each group. Such an approach will enable the employer to obtain the aforementioned super-majority approval.

5) Budget for the payout of accrued severance.

Employees must be given the choice of cashing out their accrued severance upon conversion to the pension plan, or rolling the accrued amount into the new plan. As many employees are likely to choose the former option, the company should budget carefully in anticipation of this significant drain on operating cash flow at the time of conversion.

6) Start early.

Due to the importance, sensitivity and complexity of the pension plan design and implementation process, it is advisable to begin the process at least six months in advance of the contemplated implementation date. Thus, in light of the Dec. 31 deadline, employers should begin their preparations and initiate contact with legal, tax and pension provider experts no later than the end of June.

*The author is a foreign legal consultant whose practice includes labor and employment law. He can be reached at patmonaghan@yahoo.com.


By Patrick Monaghan

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