Mr. Kim, the president of a company, has been paying the employees’ retirement pay at the end of every year. Although he is not sure whether this is right or wrong, employees seem to be happy with receiving the extra money each year. However, this year, Mr. Kim is under financial stress due to liquidity squeeze, and it will be difficult to secure enough money to continue this early payout of the retirement pay.
Employee A happened to request his retirement pay this year soon after Mr. Kim saw the news that early payment would be prohibited. Is paying out the accumulated retirement pay really prohibited by law? Mr. Kim is concerned that if he declines the request of employee A, this could result in claims of delayed payment of wage.
100-year life expectancy and purpose of retirement pay
The news that a “pension lottery” would be introduced in July 2011 caused quite a sensation. Although it was just a lottery, people seemed more interested than ever before because it had ‘pension’ in its name. Why would people be so interested in such a lottery? Probably because most people are unprepared for their retirement and well aware of this fact. Concerns about retirement are growing as people hear that life expectancy will increase to 100 years by the 2030s.
Wages that are paid by companies include payments to prepare for retirement. This is called employee retirement pay. The law states that employers are to calculate retirement pay according to employees’ service period and wages, for the purpose of financial stability for workers after retirement. However, many workers receive their retirement pay early. Even though Mr. Kim does not recommend that employees receive early payments, he has been paying them out at the end of each year in accordance with their wishes. Mr. Kim is partly happy to make the payments each year, because what he pays now will mean the company’s liabilities are lower in the future.
Should employers make retirement payments early when employees request?
Employers are punished if they fail to give retirement pay, and thus some employers mistakenly assume that they should accept employees’ requests for payment prior to retirement. However, company obligations to pay retirement benefits are imposed only upon employee retirement.
Early payouts are made only as an exception, and require both a request from the employee and approval from the employer. Therefore, it is within Mr. Kim’s authority to decline the request upon consideration of the company’s financial situation and the purpose behind the employee’s request. Employers sometimes agree to make early payouts, believing that refusal to do so could lead to claims of overdue wages, but this is not the case.
Early retirement payouts are restricted by law with some exceptions
To pursue the original purpose of retirement pay and old age security, early payout of employee retirement pay has been prohibited since July 26th this year. However, exceptions can be made in such cases as first-time house purchases, long-term residential leases, or convalescence over 6 months.
In light of this, Mr. Kim cannot continue the practice of early payout of retirement pay, nor approve the request from employee A. Employers would not be punished if they give early payouts of retirement pay for one of the exceptions allowed by law. However, it is recommended that employees be encouraged to let their retirement pay accumulate considering the purpose of the law.
Some companies with annual salary systems pay retirement benefits in advance. They divide the equivalent of 1 year’s retirement pay by 12 months and add the divided amount to the monthly wage. Of course, this calculation is also a type of early payout of employee retirement pay, and the court considers such calculations null. Retirement pay is a reward for labor that has been provided, so retirement pay cannot be pre-paid. The practice of prepaying must cease since it is prohibited by law.
Restrictions on early settlement of employee retirement pay and retirement pension plans: should the pay be put into a pension plan?
People often encounter reports that they should put their retirement pay into a retirement pension plan. The rate of workers participating in a retirement pension plan is now 39%, and workers are encouraged to join such plans. Although a retirement pension plan is an advisable way to prepare for an aging society, retirement pay should not always be put into them.
According to law, employers may choose between retirement pay and retirement pension plan, and thus only need to establish between the two. (Employers of businesses established after July 26th, 2012, shall set up a retirement pension plan within one year after the establishment of the business.)
The major difference between the two systems is that the retirement pay system keeps the money inside the company, while the retirement pension system accumulates the money in financial institutions outside the company. The money is more secure under the pension system since it is accumulated outside the company and the amount accumulated can be recorded as a company expense. Employees will be paid their retirement benefit by the financial institution. Due to its name ‘retirement pension,’ misunderstanding is quite frequent that the benefit is only payable as a regular monthly pension. However, retirement benefits can be paid either as a lump-sum or a regular pension.
When we take a close look at the retirement pension plan, it is obvious that cashing out the retirement benefit before retirement is impossible in the first place. The retirement pension plan works as follows; 1. the company accumulates money at a financial institution 2. the financial institution manages the money 3. employees receive their pension from the institution. This process leaves no financial relations between the company and the employees. Thus, legal disputes in relation to retirement benefits should decrease.
The law restricts early payment of retirement benefits, in order to encourage more workers to join retirement pension plan. Then a question comes across: does the law restrict employees from using their retirement benefits early for emergencies? The answer is no. Since the retirement pension plan is a financial instrument, employees can make an ‘early withdrawal’ in response to emergencies.
It is quite worrisome for Mr. Kim that he must not do early payout and introduce the retirement pension plan. Employees may mistakenly believe that their real income has decreased if they are not given their annual early payout. When employers introduce the retirement pension plan, they need to provide opportunity for employees to fully understand that the plan is designed for their financial stability after retirement.
Spread of performance-based benefit and how to calculate pension
Calculation of retirement benefits and retirement pension is based on wages that the company has paid and the length of service of workers. The question here is whether all the money the company has paid is included in “wages” or not. The question often comes in relation to performance-based bonus. Under the law, wage is defined as ‘salaries and any other money and valuable goods an employer pays to a worker for his or her work.’ Money or in-kind paid to ‘celebrate, encourage, or commemorate’, such as performance-based bonus, cannot be included in calculation of wage. For instance, bonuses 1. to celebrate achievement of revenue targets, 2. to celebrate the conclusion of a collective agreement without disputes, and 3. to commemorate the anniversary of company establishment, are not included in the calculation since they are not wages. Payment of the benefit is on the promise that certain conditions or goals should be achieved. In addition to this, the payment of such benefits is not always fixed. It is impossible to consider the benefits as wages if the amounts vary every year.