Korea’s state pension fund needs split to improve efficiency: National Assembly report

  • 2020-08-13

The National Pension Service needs to be split to enhance the efficiency of the South Korean state pension fund’s operations and reduce its heavy reliance on local markets for investment returns, a parliamentary research report showed.

In a recent state affairs analysis report, the National Assembly Research Service proposed the country discuss in earnest the need to split the NPS into a few separate organizations to ensure higher returns from the assets it manages.

“The NPS, as a single entity, creates a problem in operating its fund, given that its assets are too large for the size of the local financial markets,” the parliamentary research arm said in the report.

The NPS is the world’s third-largest pension fund with 749 trillion won ($627 billion) in assets under management as of the end of May, following Japan’s Government Pension Investment Fund (GPIF) and the Norwegian state fund, the Government Pension Fund Global (GPFG).

The NPS, whose assets are expected to grow to some 1,000 trillion won by 2024, operates most of its funds through investment in local financial products

The flags of South Korea, right, and its National Pension Service (NPS) fly outside the pension fund's headquarters in Jeonju, South Korea, on Thursday, Nov. 22, 2018. The NPS is looking at boosting alternative investments abroad as weak returns domestically and slumping stock markets globally are forcing the world's third-largest pension fund to seek higher yields. Photographer: Jean Chung/Bloomberg via Getty Images

NEED TO DIVERSIFY PORTFOLIO

The NPS has long been asked to diversify its investment portfolio beyond its heavy exposure in local assets to ensure the fund’s long-term stability and higher returns from its investments, amid the decrease in the working-age population and the growing number of pension beneficiaries.

In response, the state pension fund said last month that the share of its overseas investments will rise to at least 50% in 2024 from 35% in 2019.

The NPS said it would also seek opportunities in alternative investment by forming strategic alliances with global asset management firms and major pension funds from other countries.

The National Assembly Research Service, however, suggested that the NPS should be able to better achieve that goal by dividing it up into different entities, rather than just operating its assets under the overarching single umbrella.

Among major global state pension funds, Sweden’s national pension system, AP, is the only one that operates its assets as six different funds.

“In the case of AP, returns from the six funds are similar to each other, in spite of higher costs operating them separately,” said the Korean National Assembly’s research arm in the report. “But the NPS needs to closely look at AP’s case as an example to diversify its portfolio and enhance its operation efficiency.”

By Jung-hwan Hwang

jung@hankyung.com

<Edited by In-Soo Nam>