By: HUB’s EB Global Benefits Team

What is it about?

South Korea is preparing to implement a significant retirement benefit reform. Under the proposed reform framework, the country’s traditional unfunded Severance Pay Scheme (SPS) would gradually be abolished and replaced with mandatory externally funded retirement plans for all employers.

This follows a recent agreement reached by a task force with representatives from the government, labor organizations, and employer groups. The government is now expected to finalize a legislative roadmap to be announced in July 2026 targeted for enactment before year-end. Additional implementation details are expected to be released progressively as the reform framework is developed.

Historically, South Korea’s statutory severance benefit system allowed employers to satisfy the obligation either through:

  • Severance Pay Schemes (SPS): Traditional unfunded severance pay arrangements maintained internally on company balance sheets; or
  • Externally funded programs set up under the Employee Retirement Benefit Security Act of 2005 (ERBSA). These plans are structured either as Defined Contribution (DC) or Defined Benefit (DB) plans.

Although large employers have increasingly transitioned toward funded ERBSA plans, many small and medium-sized companies have continued operating under traditional SPS arrangements.

Under the traditional SPS model, employers accrue severance obligations internally and pay lump-sum severance benefits directly to the employees upon employment termination including retirement. Because these obligations are often not externally funded, employees faced potential benefit security concerns if employers experienced financial distress or insolvency.

Furthermore, in the eyes of small employers, simplicity in unfunded SPS plan administration and minimization of on-going cash contributions seem to overcome the lack of immediate tax deductions of company contributions which are available to funded programs. For SPS programs, tax deductions are deferred to the time when the benefits are paid out.

The anticipated reform aims to strengthen retirement income security by requiring accruing liabilities to be funded externally through regulated pension vehicles. The government also seeks to improve long-term retirement outcomes by encouraging greater investment diversification and higher long-term returns of accumulating assets through the planned introduction of new funding vehicles as an alternative to the existing contract-based pension arrangements currently dominant in the Korean market. Under the proposed model:

  • Contributions would be pooled into collective investment structures;
  • Independent trustees would assume fiduciary responsibility for asset management oversight;
  • Assets could benefit from economies of scale and broader investment diversification;
  • Employers may retain the ability to offer either trust-based or contract-based arrangements depending on the final regulatory framework.

Importantly to clarify, the contemplated reform would not eliminate the statutory minimum retirement benefit entitlement. Employers would still be required to provide benefits broadly equivalent to existing statutory obligations. Current indications also suggest that lump-sum distributions may continue to be permitted, although policymakers may introduce incentives encouraging annuitized pension payments over time.

Implementation is expected to occur gradually through a phased rollout based on employer size and workplace conditions. Earlier government proposals contemplated staggered implementation thresholds for employers with 300+ employees, 100–299 employees, 30–99 employees, 5–29 employees, and fewer than 5 employees.

Impact on companies

  • Employers that are currently maintaining SPS arrangements would eventually be required to transition to externally funded retirement plans, increasing funding requirements, governance, and administrative obligations.
  • Companies will need to review retirement plan design, provider arrangements, and long-term pension funding strategies as implementation rules are introduced.
  • Employers may face significant employee communication and change management requirements.

Suggested employer action

  • Monitor legislative developments and implementation guidance expected throughout 2026 as the government finalizes the reform framework.
  • Assess whether current retirement arrangements remain compliant and sustainable under the anticipated mandatory funded retirement system.
  • Begin evaluating potential transition strategies for any existing unfunded severance arrangements, including funding, governance, and operational considerations.
  • Coordinate with legal counsel, retirement consultants, payroll providers, and pension administrators regarding future implementation requirements and compliance obligations.
  • Review employee communication strategies and assess potential employee consent requirements for future retirement benefit changes.

If you have any questions, please contact your HUB advisor. View more updates in our Global Benefits Directory.