The First Overhaul in 20 Years — What's Settled and What Isn't
On February 6, 2026, Korea's tripartite (labor–management–government) task force agreed on two things: phased mandatory external funding of retirement benefits and wider use of fund-type retirement pensions. It is the biggest change since retirement pensions were introduced in 2005. The government plans to survey micro and small businesses first. A joint public–private working group will then design the details, and the government aims to amend the Employee Retirement Benefit Security Act within the year.
What hasn't been decided yet: the phase-in schedule by company size, the level of fines, and how financial support will work. Some blogs quote a specific "effective date" or "fine amount." None of these figures is an official, finalized plan. Current adoption stands at 26.8% of workplaces and 53.2% of workers, and most workplaces without a pension plan are SMEs.
Why This Is a Cash-Flow Issue for SMEs
Under the lump-sum severance system, companies only book a provision and pay the full amount when an employee leaves. Mandatory external funding means real cash goes out to a financial institution every year. The key open question is how to handle the severance liability already built up from past service. Because the rules aren't final, test several scenarios now: funding it all at once, spreading it over several years, or funding future service only. Behind the policy is a concern about worker protection. Unpaid severance is one of the main forms of wage arrears in Korea.
Estimating Your Unfunded Severance Liability
The basic formula is 30 days of average wages × years of service. It applies to employees with at least one year of service who work 15+ hours a week. Average wages include regular bonuses and allowances, so estimate each employee's figure from actual pay.
Hypothetical example: a 30-employee manufacturer
Compare this estimate with the provision for retirement benefits on your financial statements. If the provision is smaller, the gap is a liability that doesn't even show up on your books. Also check whether recent pay raises are reflected.
DB, DC or Fund-Type (Pureun Ssiat): Which Fits?
To switch from lump-sum severance to a pension plan, a company needs consent from a majority of employees (or their representative). It then drafts the pension plan rules and files them with the Ministry of Employment and Labor.
Advantages of Moving Before the Mandate
Year-End Checklist
Prepare with KITIM
KITIM's management consulting team covers the whole process: labor-cost structure diagnosis, severance liability estimates, financial and funding plans, and HR policy updates. If you want to know your company's exposure and funding options before the legal schedule is set, contact KITIM for a consultation.