NPS raises virus-induced threat level to grave; runs emergency team

  • 2020-03-23

The National Pension Service (NPS) takes the current financial market volatility caused by the COVID-19 outbreak as a grave threat and is operating its “emergency response team” for the first time in four years, the pension scheme said on March 22.

The recent stock market plunge is estimated to have wiped about 70 trillion won ($55 billion) off the NPS’ stock portfolios both domestically and globally, almost equivalent to the 73 trillion won net gains that the world’s No.3 pension fund made from investments in 2019.

NPS developed its own threat index in 2010 in the wake of the global financial crisis and operated the emergency response team in 2015 and 2016 when the index surpassed the level of 60. A reading of 60 indicates the onset of a threat, with the level of 80 or higher taken as a grave threat.

This is the third time for the $600 billion pension fund to raise the threat level to a grave since 2016 when anxiety about Brexit reached the peak. In 2015, Greece was on the brink of default.

The emergency response team carries out real-time market monitoring, and examines risk factors and prepare response measures for individual assets and the entire portfolio.

It also keeps track of global markets via its foreign offices in New York, London and Singapore and manages the price volatility of investment assets.

Operating the team is part of the NPS’ contingency plan to respond to a crisis.

The KOSPI index and the MSCI All Country World Index, the benchmarks for domestic and global stocks respectively, are down 30 since the start of this year.

Given that more than half of its equity portfolios are index-tracking passive funds, NPS is estimated to have incurred about 44 trillion won valuation losses from domestic stock markets and around 29 trillion won losses from global stock investments.

NPS manages 54.1% of domestic equities investment directly as of the end of 2019, while direct management accounts for 38.5% of global stock portfolios.

Europe and the US account for 80% of NPS’ equities and alternative investments.

“Bond price gains following global central banks’ rate cuts may offset some of the valuation losses, but it seems inevitable (for the NPS) to incur heavy losses,” said an asset management company source. “It will also likely face a higher risk for alternative investments such as infrastructure and real estate.”

Rating agency S&P said on March 23 that the South Korean economy would contract by 0.6% in 2020, two weeks after it lowered the growth forecast for the country to 1.1% from the previous 1.6%.

JPMorgan and Bank of Korea forecast double-digit declines in the US economy for the second quarter.

By Jung-hwan Hwang

jung@hankyung.com

<Edited by Yeonhee Kim>

(Photo: Getty Images Bank)