Mandatory retirement pension reserves by 2030 put small firms in a bind

As the government pushes to make external retirement reserve deposits mandatory at all workplaces by 2030, more than half of businesses that have yet to adopt a retirement pension plan say the requirement would place a financial burden on them.

The policy aims to prevent unpaid retirement benefits by securing funds in advance, but the willingness of small businesses — which would face immediate cash outflows — to comply has emerged as the key test of whether the system can take hold. The government plans to ease the transition by staggering the rollout by company size and offering support to workplaces that adopt the system early.

According to the Ministry of Employment and Labor's plan to strengthen retirement pension functions, a Korea Labor Institute survey of 1,500 workplaces without retirement pension plans, conducted between April and July this year, found that 52.5 percent said the mandatory external deposit requirement would be burdensome. Another 15.6 percent said it would be "very burdensome."

Mandatory external deposits would change how companies set aside money for retirement benefits. Unlike the current system — where employers pay out retirement benefits at the time of separation — the new requirement would compel them to deposit funds in advance with financial institutions or other external custodians. Even companies that already owe retirement benefits could face varying degrees of transition pressure depending on how much they have set aside and their current financial position.

Firms that have been using retirement benefit funds as working capital before payout would see their internal liquidity shrink as external deposits grow. That is a central reason small business owners have pushed back against the shift: alongside rent and materials costs, it would add another regular cash outlay.

The Korea Federation of Micro Enterprises voiced opposition Sunday to a mandate that, in its view, fails to account for the payment capacity of small workplaces. The group also flagged the administrative burden on business owners without dedicated staff and the fees charged by financial institutions. The Korea Enterprises Federation similarly called for a phased rollout and policy support that takes into account the fiscal conditions and operational burden facing small and mid-sized businesses, in a statement issued Thursday.

Adoption rates vary sharply by workplace size. According to 2024 data, the retirement pension adoption rate stood at 10.6 percent for workplaces with fewer than five workers, 32.7 percent for those with five to nine workers, and 57.3 percent for those with 10 to 29 workers. The rate reached 92.1 percent at workplaces with 300 or more employees. While most large companies already operate the system, small businesses face the dual challenge of building up reserve funds while simultaneously setting up the plan itself.

The government's push for mandatory deposits is driven by the scale of unpaid retirement benefits. Last year, unpaid retirement pay reached 822.9 billion won ($616 million), accounting for 41.1 percent of all unpaid wages. Because recovering funds after a company falls into financial difficulty or shuts down is often impossible, the government argues that advance deposits are the only reliable way to protect workers' entitlements.

The government plan, announced Thursday, would require external deposits at workplaces with 100 or more employees starting in 2028, those with 10 to 99 employees in 2029, and those with fewer than 10 employees in 2030. The schedule is contingent on the National Assembly passing an amendment to the Act on the Guarantee of Workers' Retirement Benefits before the end of this year.

The obligation would apply only to service accrued after each phase takes effect — not to the full amount of retirement benefits accumulated over an employee's entire tenure before the mandate kicks in.

Workplaces that voluntarily adopt the system before the mandate takes effect will receive temporary financial support. The government has included 6 billion won for matching contributions to reserve deposits and 6.2 billion won to offset business loan costs in next year's budget proposal. Both amounts are earmarked for a 2027 early-adoption support project and do not represent the total support to be provided throughout the 2028–2030 mandatory phase. The government also plans to introduce fee exemptions for small workplaces and to streamline the plan registration process.

The government also plans to diversify how retirement reserves are managed. It intends to promote fund-type retirement pensions — in which a professional trustee pools and manages participants' deposits — as an option alongside the existing contract-based model. Investment gains and losses, however, would still accrue to individual participants. The government says it will enshrine a participant-first principle in law, establish liability for breaches of core fiduciary duties, and put in place safeguards including performance evaluations and public disclosure requirements.

Making external deposits mandatory for all workplaces is a separate matter from guaranteeing retirement benefits for all workers. The current mandate does not cover employees with less than one year of continuous service or those working fewer than 15 hours a week on a four-week average, and the new requirement alone would not extend that coverage. Broadening the scope of eligible workers would require a separate round of social dialogue and legislative deliberation.

The government plans to finalize a bill this month and push for passage before the end of the year. Translating the goal of protecting workers' retirement benefits into a functioning system will require both effective incentives to bring non-adopting businesses on board and stable management of accumulated reserves. Key issues in the legislative process are expected to include implementation conditions by workplace size, the form of government support, and the level of participant protection.