Weekly Contributions

Retirement Pension System (Revised Version Based on Laws and Regulations as of August 2026)

Bongsoo Jung, Labor Attorney / KangNam Labor Law Firm

I. Introduction

With the enforcement of the Act on the Guarantee of Employees’ Retirement Benefits in December 2005, the retirement pension system was introduced in addition to the existing severance pay system. As of August 2026, the statutory “retirement benefit system” includes the defined benefit retirement pension plan (DB), defined contribution retirement pension plan (DC), the Retirement Pension Fund System for Small and Medium Enterprises, and the severance pay system. Meanwhile, the term “retirement pension system” refers to DB, DC, and the individual retirement pension plan (IRP). Under the retirement pension system, an employer accumulates funds for employees’ retirement benefits with external financial institutions or other entities during the period of employment and pays the benefits as an annuity or lump sum upon retirement, thereby strengthening protection of employees’ entitlement to retirement benefits and their retirement income security.

The 2012 amendment restricted interim settlement of severance pay to statutory grounds, thereby preventing retirement benefits from being depleted as living expenses during employment. From April 14, 2022, the system was further strengthened so that, in principle, not only retirement pension benefits but also severance pay must be transferred to and paid through an IRP account designated by the employee or another account prescribed by law. In addition, the pre-designated investment option system (default option), intended to improve the long-term returns of DC and IRP plans, came into full operation in July 2023. From July 2026, the coverage of the Retirement Pension Fund System for Small and Medium Enterprises (Pureun Seed) and the scope of persons eligible for participant-contribution accounts were expanded.

The following sections examine, based on the laws and regulations in effect as of August 2026, the differences between the severance pay system and the retirement pension system; the need for and procedures for introducing retirement pensions; the principal features of DB, DC, IRP, and the Retirement Pension Fund System for Small and Medium Enterprises; and key points concerning interim settlement, interim withdrawal, and transfers to IRP accounts.

 

II. Comparison of the Severance Pay System and the Retirement Pension System

The differences between the severance pay system and the retirement pension system may be summarized as follows.

1. Under the retirement pension system, funds for retirement benefits are accumulated externally during employment and benefits are paid through retirement pension providers or similar institutions. In contrast, under the severance pay system, the employer generally pays the statutory severance pay directly to the employee upon retirement.

2. The basic statutory benefit level under the severance pay system and the DB plan is the same in that the benefit must be at least 30 days of average wages for each year of continuous service. Average wages are calculated in accordance with the Labor Standards Act and are generally based on the total wages paid during the three months immediately preceding the date on which the cause for retirement arises. Under a DC plan, by contrast, the employer contributes at least one-twelfth of the participant’s total annual wages each year, and the final amount received varies according to the contributions paid and the participant’s investment performance.

3. The method of paying retirement benefits has also changed. From April 14, 2022, in principle, not only retirement pension benefits but also severance pay must be transferred to an IRP account designated by the employee or to the relevant account under the Retirement Pension Fund System for Small and Medium Enterprises prescribed by law. Statutory exceptions apply, including retirement after age 55, retirement benefits of KRW 3 million or less, the employee’s death, departure from Korea after retirement by certain foreign workers, and deductions required under other laws. For DB and DC benefits, an exception is also recognized for repayment of loans secured by the right to receive retirement pension benefits.

4. Because retirement pension assets are accumulated outside the employer, protection of employees’ entitlement to retirement benefits is strengthened. In particular, a DB plan must maintain at least the statutory minimum reserve at the end of each fiscal year, and the current minimum funding ratio is 100% of the standard liability reserve. Under a DC plan, contributions are paid into individual participant accounts. The severance pay system relies relatively more on the employer’s internal funds; however, even in the event of insolvency, separate safeguards exist, including preferential payment of wage claims and the substitute payment system. Accordingly, it is inaccurate to state categorically that “if the employer becomes insolvent, the employee cannot receive severance pay.”

5. From the employer’s perspective, regular contributions to a retirement pension plan can spread the one-time cash burden that would otherwise arise when employees retire. Under a DB plan, however, the employer bears any additional funding obligation caused by a shortfall, whereas under a DC plan, once the employer fulfills its statutory contribution obligation, the investment performance is reflected in the participant’s benefit amount.

 

III. Need for and Introduction of the Retirement Pension System

1. Need for the Retirement Pension System

From the employee’s perspective, a retirement pension is one component of the multi-pillar retirement income security system consisting of the National Pension, retirement pensions, and private pensions. By accumulating retirement benefit funds outside the employer, the system strengthens benefit entitlements, and when changing jobs, employees can transfer and aggregate retirement assets through IRP accounts and continue investing them as retirement funds. However, the actual effectiveness of a retirement pension in providing retirement income security may vary depending on investment products, fees, inflation, and the participant’s investment preferences. Accordingly, proper plan selection and investment management are important.

From the employer’s perspective, retirement benefit funds can be accumulated in a planned manner, thereby spreading cash-flow burdens over time. Retirement pension contributions may also be treated as deductible expenses, subject to statutory requirements and limits, pursuant to Article 44-2 of the Enforcement Decree of the Corporate Tax Act. In addition, where certain requirements under the Wage Claim Guarantee Act are met, an employer may qualify for a reduction in the relevant contributions.

2. Introduction of the Retirement Pension System

An employer seeking to establish a DB or DC retirement pension plan must prepare retirement pension rules after obtaining the consent of, or hearing the opinion of, the employee representative in accordance with Article 4 of the Act on the Guarantee of Employees’ Retirement Benefits, and must report the rules to the Minister of Employment and Labor. This is not an “approval” system. As a general rule, the consent of the employee representative is required when a type of retirement benefit system is newly established or changed to another type. When the contents of an already established system are amended, the employer must generally hear the opinion of the employee representative, while consent is required if the amendment is disadvantageous to employees.

Retirement pension providers are financial institutions or other entities that satisfy the statutory registration requirements and perform plan-management and asset-management functions. Plan-management functions include operation of the plan, presentation of investment options, and recordkeeping. Asset-management functions include receipt of contributions, custody and management of assets, payment of benefits, and execution of investment instructions. Employers must continuously perform their statutory administrative obligations, including participant education, payment of contributions, compliance with the plan rules, and procedures for benefit payments.

 

IV. Types of Retirement Pension Plans

1. Defined Benefit Retirement Pension Plan (DB)

(1) Concept: Under a DB plan, the level of benefits that an employee will receive upon retirement is determined in advance, and the employer bears responsibility for investing the plan assets. The benefit level must be set at no less than 30 days of average wages for each year of continuous service. To ensure the ability to pay benefits, the employer must maintain at least the minimum reserve at the end of each fiscal year. The minimum funding ratio applicable since January 1, 2022 is 100% of the standard liability reserve.

(2) Characteristics: Because the benefit level under a DB plan is fixed by the plan, the employer bears the risk of any shortfall resulting from investment performance. As a general rule, participants cannot make interim withdrawals from the reserve; however, where statutory grounds and requirements are met, such as the purchase of a home, a residential lease deposit, medical expenses for long-term care, bankruptcy or individual rehabilitation, or a disaster, the participant may pledge the right to receive retirement pension benefits as collateral. Therefore, it cannot be said that a DB plan is “always” advantageous for a particular company. The choice should be made after considering wage growth, length of service, workforce structure, funding burden, and investment risk as a whole.

(3) Eligibility for Benefits: A DB pension is paid to a participant who is at least 55 years old and has participated in the plan for at least 10 years, and the pension payment period must be at least five years. If the participant does not satisfy the eligibility requirements for a pension or wishes to receive a lump-sum payment, the benefit may be paid as a lump sum. Upon retirement, benefits must, in principle, be transferred to and paid through an IRP account designated by the participant or another account prescribed by law, subject to statutory exceptions.

2. Defined Contribution Retirement Pension Plan (DC)

(1) Concept: Under a DC plan, the level of contributions to be paid by the employer is fixed, and the participant invests the amount accumulated in his or her own account. The employer must contribute in cash to the participant’s DC account an amount equal to at least one-twelfth of the participant’s total annual wages and must make such contributions regularly at least once each year. The participant may make additional contributions in addition to the employer’s contributions. The final retirement benefit is determined by the sum of the employer’s contributions and the investment gains or losses.

(2) Characteristics: Under a DC plan, assets are managed in separate accounts for each participant, and it is relatively easy to transfer assets through an IRP when changing jobs. On the other hand, because investment performance directly affects the amount of benefits, the participant’s investment choices and management of investment risk are important. A DC plan is not necessarily advantageous merely because wage growth is low; expected investment returns, fees, investment horizon, and risk tolerance should also be considered.

(3) Pre-designated Investment Option System (Default Option): This system allows retirement assets to be invested according to a pre-selected investment method when a DC or IRP participant fails to give investment instructions for a specified period. It came into full operation in July 2023, and participants may select one of the approved pre-designated investment methods offered by the retirement pension provider. The purpose is to reduce the problem of retirement assets remaining for long periods in cash-equivalent or principal-guaranteed products and to improve long-term returns.

(4) Benefits and Interim Withdrawals: The eligibility requirements for a DC pension are the same as those for a DB pension: the participant must be at least 55 years old, have participated for at least 10 years, and receive the pension over a period of at least five years. Interim withdrawals are permitted only for statutory reasons. Typical grounds include the purchase of a home or payment of a residential lease deposit by a person without a home; medical expenses for care lasting six months or longer that satisfy specified requirements; bankruptcy or commencement of individual rehabilitation proceedings within the preceding five years; disaster-related damage; and repayment of principal and interest on a secured loan where statutory requirements are met.

3. Individual Retirement Pension Plan (IRP)

(1) Concept: An IRP is a system under which retirement benefits received upon retirement are transferred to an account in the individual’s name and continue to be invested, or employees and other eligible persons make additional contributions themselves to build retirement assets. Under the special provision in Article 25 of the Act, in a business ordinarily employing fewer than 10 employees, if the employer establishes an IRP for an individual employee with that employee’s consent or at the employee’s request, the employer is deemed to have established a retirement benefit system for that employee. This special arrangement may be operated without preparing and reporting retirement pension rules.

(2) Eligibility for Benefits: A pension from an individual IRP is paid to a participant who is at least 55 years old, and the pension payment period must be at least five years. Unlike DB and DC plans, an individual IRP itself does not require “at least 10 years of participation” as a condition for receiving a pension. A participant aged 55 or older may receive the benefit as a lump sum if he or she wishes to do so.

(3) Interim Withdrawals: IRP assets are not a bank deposit account from which funds may be freely withdrawn. Interim withdrawals are permitted only for grounds prescribed by the Enforcement Decree, such as the purchase of a home, a residential lease deposit, long-term care, bankruptcy or individual rehabilitation, or a disaster. Because the specific grounds and requirements may differ depending on the nature of the account and the source of the funds, the applicable laws and the relevant retirement pension provider should be checked before an actual withdrawal.

4. Retirement Pension Fund System for Small and Medium Enterprises (Pureun Seed)

(1) Concept and Coverage: The Retirement Pension Fund System for Small and Medium Enterprises is a system under which the Korea Workers’ Compensation and Welfare Service (KCOMWEL) manages the retirement benefits of employees of small and medium-sized enterprises through a pooled fund. From July 1 through December 31, 2026, businesses ordinarily employing fewer than 50 employees are eligible to participate. From January 1, 2027, eligibility will be expanded to businesses ordinarily employing fewer than 100 employees.

(2) Contributions and Investment: An employer that establishes this system must regularly pay employer contributions at least once each year in an amount equal to at least one-twelfth of the participant’s total annual wages. Because KCOMWEL manages the fund on an integrated basis, the operating method differs from an ordinary DC plan in which each individual business directly structures its investment products. Government support may be provided for a portion of employer contributions, participant contributions, or operating costs where the requirements under applicable laws and the budget are satisfied.

(3) Expansion in 2026: From July 2026, Article 23-8 was amended to expand the persons eligible for participant-contribution accounts under the fund system by applying, mutatis mutandis, the scope of persons eligible to join an IRP. As a result, persons earning income, including labor providers, may use participant-contribution accounts under Pureun Seed in a manner similar to an individual retirement pension.

 

V. Interim Settlement of Severance Pay, Interim Withdrawals from Retirement Pensions, and Transfers to IRP Accounts

1. Interim Settlement of Severance Pay

Interim settlement of severance pay is permitted only when the employer accepts an employee’s request and a statutory ground is satisfied. As of August 2026, the principal grounds under the Enforcement Decree are as follows:

? Where an employee who does not own a home purchases a home in his or her own name

? Where an employee who does not own a home pays a jeonse deposit or lease deposit for housing (once during employment with the same business)

? Where the employee, the employee’s spouse, or a dependent family member requires care for at least six months and the medical expenses borne by the employee exceed 12.5% of the employee’s total annual wages

? Where the employee has been declared bankrupt within the five years preceding the date of application

? Where a decision to commence individual rehabilitation proceedings has been issued within the five years preceding the date of application

? Where the employee falls under a wage- or working-hours reduction ground prescribed by the Enforcement Decree, such as a system that reduces wages on the condition of extending or guaranteeing the retirement age, or an agreed reduction in contractual working hours

? Where the employee’s actual severance pay is reduced as a result of an amendment to the law concerning reduced working hours, or in another case prescribed by the Enforcement Decree

? Where the employee falls under a ground publicly announced by the Minister of Employment and Labor, such as suffering damage due to a disaster

2. Pledging Retirement Pension Rights as Collateral and Interim Withdrawals

Under a DB plan, interim withdrawal of the reserve itself is generally not permitted, but the right to receive benefits may be pledged as collateral where a statutory ground exists. Under DC and IRP plans, interim withdrawals from accumulated assets are permitted where statutory grounds prescribed by the Enforcement Decree exist. In particular, where DC assets are withdrawn on the ground of long-term care, separate requirements apply, including that the medical expenses borne by the participant must exceed 12.5% of the participant’s total annual wages.

Accordingly, it is inaccurate to describe interim settlement of severance pay, pledging of DB benefit rights as collateral, and interim withdrawals from DC and IRP plans using a single identical list of grounds. In an actual application, Articles 2, 3, 14, and 18 of the Enforcement Decree of the Act on the Guarantee of Employees’ Retirement Benefits should be reviewed separately according to the type of system involved.

3. Principle and Exceptions for Transfer of Retirement Benefits to IRP Accounts

Severance pay and DB/DC retirement pension benefits must, in principle, be transferred to and paid through an IRP account designated by the employee. The principal practical exceptions to the transfer requirement are as follows:

? Where the employee or participant retires after reaching age 55 and receives the benefit

? Where the retirement benefit amount is KRW 3 million or less

? Where the employee has died

? Where a foreign worker who worked in Korea under a status of stay permitting employment departs Korea after retirement

? Where another law requires deduction of all or part of the retirement benefit (the remaining balance after deduction must, in principle, be transferred to an IRP or similar account)

? Where a DB or DC participant repays a loan or similar obligation secured by the right to receive retirement pension benefits, an additional exception is recognized to the extent necessary for such repayment

 

VI. Conclusion

Since its introduction in 2005, the retirement pension system has developed from a simple lump-sum payment system upon retirement into a system designed to systematically build and preserve retirement income through external funding of retirement benefits, restrictions on interim settlement, mandatory transfers to IRP accounts, introduction of default options, and expansion of the Retirement Pension Fund System for Small and Medium Enterprises. In particular, from 2022, the principle of transfer to an IRP was expanded to include severance pay, and in 2026, the coverage of Pureun Seed and its participant-contribution accounts was expanded, further broadening the inclusiveness of the system.

Companies should compare the characteristics of DB plans, DC plans, the Retirement Pension Fund System for Small and Medium Enterprises, and the severance pay system by considering not only cost reduction but also workforce composition, wage structure, cash flow, investment risk, protection of benefit entitlements, and administrative burden. Employees should likewise view retirement benefits not as short-term living funds but as long-term retirement assets and should use IRP accounts, default options, additional contributions, and other available features in a manner appropriate to their age and risk tolerance.