The Employee Retirement Security Act (ERSA), passed by the Korean National Assembly in December 2004, will take effect on December 1, 2005.  The ERSA provides guidelines for implementing new employer-sponsored pension plans that are externally funded and managed.  Employers can choose to offer either the defined benefit (DB) plan or defined contribution (DC) plan, based on a vote by their employees.  Employees can also opt to stay with the pre-existing compulsory severance pay system, which required companies to provide their employees with severance pay in a lump sum payment of one month´s salary per year of service, upon the employee´s termination at the firm.  These funds were typically kept on reserve in bank deposit accounts.

Under ERSA, companies will no longer directly manage or hold the pension accounts; rather, this responsibility will be undertaken by an external financial firm.  Under the DB plan, the employer must provide the employee with a defined benefit of a minimum of one month´s final salary for each of year of service, similar to the existing severance pay arrangement.  Under the DC plan, the employer makes a minimum annual contribution for each individual in the amount of 1/12 of annual salary.  The employer must offer at least three separate investment options for these contributions, and is strictly prohibited from any risky investments such as junk bonds or unlisted stocks.  Employees may also make their own contributions to the plan.  The DC plan poses greater risk to the employee, but also promises potentially higher returns.  Retiring employees will be eligible to receive pension payments, in a lump sum or as an annuity, once they turn 55 and have worked at least 10 years.

All contributions made by employers to the ERSA DB or DC plans are 100 percent tax deductible.  Companies with fewer than 10 employees can offer pension through individual retirement accounts instead of the above pension plans.  After December 1, companies will no longer be able to set up new severance pay arrangements.  In addition, tax deductions for severance pay will be phased out by December 2010.  In the five years leading up to that time, companies may convert severance pay accounts to DB/DC accounts.  Although companies with fewer than 5 employees are not currently required to offer severance pay, they will be required to comply with the new pension legislation by 2008, with an additional 2-year grace period.