Implementation of the Employee Retirement Benefit Security Act on the 14th... "Expecting Improvement in Management Performance"

[Asia Economy Reporter Hwang Yoon-joo] An analysis has emerged that companies implementing the Defined Benefit (DB) retirement pension system will have an opportunity to improve the expertise and accountability of retirement pension management by introducing a Reserve Fund Management Committee.

Song Hong-seon, Senior Researcher at the Korea Capital Market Institute, stated this during a webinar held on the 12th under the theme "Improvement of DB-type Retirement Pension Management System."

The amendment to the Enforcement Decree of the Employee Retirement Benefit Security Act will take effect from the 14th. The amendment includes regulations requiring companies operating DB-type retirement pensions to form a Reserve Fund Management Committee and prepare a Reserve Fund Management Plan (IPS). The DB-type retirement pension system guarantees that the company pays a predetermined retirement benefit amount upon retirement. The company manages the funds externally, and employees receive the fixed benefits regardless of management performance.

As of the end of September last year, out of the 266 trillion KRW in domestic retirement pension reserves, DB-type reserves accounted for 151.2 trillion KRW, representing 56.9%.

The return on DB-type retirement pension reserves is guaranteed to match the wage increase rate. However, in the low-interest-rate era, the low returns in the 1% range and inefficient reserve fund management have continuously raised the need for system improvement.

With the legal amendment, DB-type retirement pension users with 300 or more employees must manage reserves according to a management plan reviewed by the Reserve Fund Management Committee. The plan must be prepared at least once a year.

The Reserve Fund Management Committee is composed of 5 to 7 members, chaired by an executive in charge of retirement pension operations. The management plan must include ▲ the purpose and target rate of return for reserve fund management ▲ methods of reserve fund management ▲ evaluation of management performance, among other details.

The industry expects that this system improvement will help rational management of DB-type retirement pensions, which have a high proportion of principal and interest guarantees but low returns.

Senior Researcher Song evaluated, "The Reserve Fund Management Committee is not a full introduction of a fund-type system, but it is a meaningful improvement in governance that can bring about a change in user awareness within the contract-type framework."

He also explained, "Looking at overseas cases, the introduction of DB-type Reserve Fund Management Committees significantly improved financial soundness," adding, "The introduction of the management committee improved management performance, which led to an improvement in the funding ratio, calculated by dividing reserve assets by pension liabilities."

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