Pension fund divided over changing targets of local stock allocation

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The headquarters of National Pension Service (NPS) located in Jeonju / Courtesy of NPS

NPS delays decision on asset rebalancing plans until by-elections

By Anna J. Park

The National Pension Service (NPS), the country’s largest institutional investor responsible for the public pension fund, failed to reach an agreement about whether to make a change in its proportion of domestic stocks in a previously set asset allocation goal.

The pension fund operation committee members of the NPS ― altogether 20 members including the welfare minister, who chairs the committee ― held a meeting last Friday, discussing a possible rebalancing of its asset allocation portfolio goal approved last May.

The asset allocation goal set domestic stocks’ ideal ratio in the NPS’ entire assets at 16.8 percent by the end of 2021, a decrease by 0.5 percentage points from a 17.3 percent target at the end of 2020. Overseas stocks’ strategic allocation target increased to 25.1 percent by the end of 2021 from 2020’s target of 22.3 percent.

The meeting aimed at reviewing whether to allow the NPS to hold an additional 3.5 percentage points in each previously set asset allocation target. If it’s allowed, the NPS could hold domestic stocks up to 20.3 percent ― 16.8 percent plus 3.5 percent ― of its entire assets worth around 835 trillion won ($740 billion). Currently, the NPS only has flexibility of up to an additional 2 percentage points of its approved asset allocation proportion goal. This means the NPS’ upper limit in holding local stocks is 18.8 percent ― 16.8 percent plus 2 percent ― by the end of this year.

If the NPS’ asset operation committee members agree to allow flexibility in the asset allocation goal up to 3.5 percentage points in each asset category, the national pension fund could hold an additional 12.5 trillion won worth local stocks.

One of the main reasons the NPS decided to discuss whether to give more leeway and flexibility in managing its asset allocation portfolio was local retail investors’ outcry against the NPS’ massive sell-off earlier this year. They criticized the NPS’ sell-off as a key reason behind the recent bearish move of the nation’s main benchmark KOSPI and tech-heavy KOSDAQ.

Actually, the national pension fund net-sold domestic stocks worth 14.5 trillion won ($12.8 billion) for 51 consecutive trading sessions ― the longest record ever ― from Dec. 24 to March 14 in order to keep the strategic asset allocation target set for the end of last year. At the end of last year, the NPS held around 21.2 percent of its assets in local stocks, far higher than last year’s maximum allocation target, and it was forced to sell off local stocks.

More discussions in April’s monthly NPS meeting

However, members present at the NPS’ monthly meeting could not narrow their different opinions regarding the matter, according to a source familiar with the issue. According to the source, the 20 members’ views were sharply divided over the matter, failing to reach an agreement at the meeting.

While some agreed to increase the NPS’ maximum local stock holdings, considering local stocks’ higher rate of returns among other asset categories, some others opposed the idea, saying the current target is high enough for the Korean stocks, as the local stock market’s entire size only accounts for about 2 percent of the global capital market.

The opponents also stressed that keeping the strategic goal would ultimately be beneficial in stabilizing the Korean stock markets. They argued that if the NPS increases the portion of local stocks, it could work positively for the local stocks for the time being, but when the market faces a major crisis, its bubble might be more harmful.

Another point of their opposition is that by the end of 2030, the NPS’ expenditures in paying out pensions would be higher than the collected pension premiums. In order to lessen the local stock market’s shock when the NPS has to sell domestic stocks to pay out the pensions, they argued that it needs to reduce local stocks’ portion in its portfolio gradually.

The NPS said the issue will be discussed again at the next monthly meeting in April.