NPS’ nagging concerns: talent shortage, slow alternative asset growth

With an aim to bolster its alternative portfolio, the National Pension Service has taken bold new steps over the past few years, including launching joint ventures to co-invest with global asset managers and drastically reshuffling its investment divisions, as well as expanding and empowering its overseas offices.

But the alternative asset growth has not kept pace with its rapid asset expansion, remaining below its target proportion for a decade, which is blamed largely on its chronic problem – talent shortage.

The pace of its employment growth also has been far slower than that of assets which surged by a quarter over the past three years. Rather, dozens of investment staff have been leaving the South Korean pension fund every year since its relocation to Jeonju, about a three-hour drive from Seoul.

A lack of in-house investment staff is hindering its ambitions to venture into multi-asset strategy and overseas venture capital investments, including unicorn companies, or private firms with a valuation of over $1 billion.

Around 260 employees, shy of its target number of 288, run the world's third-largest pension scheme's assets worth $700 billion. The amount of per-employee managed assets reached close to 3 trillion won ($2.7 billion), more than three times larger than Dutch pension manager APG’s 800 billion won and over 10 times as much as the Canada Pension Plan Investment Board (CPPIB)'s 200 billion won.

For alternative assets worth 90.2 trillion won as of the end of October 2020, only 59 employees handle the portfolio across three divisions: private equity/venture, real estate and infrastructure.

“In-house investment managers at foreign pension funds individually oversee three to four funds on average. But at the NPS, the number goes up to 10. It’s hard to look at each of them once in a quarter,” said a source familiar with the NPS' work.

Regarding hedge funds into which NPS diversified in 2015, it has deployed only half of the 4 trillion won, or 0.5% of its total assets, earmarked for the asset class by the end of 2020. Only three employees, including the recently-hired replacement, are in charge of the hedge fund investment.

In 2019, NPS expanded its alternative asset classes into private debt and multi-asset strategies, but none of its internal staff has yet been assigned to their investment.

RESET EVERY FEW YEARS

Between 2017 and 2019, a total of 74 employees at the NPS' Investment Management department had packed up and left, including a group of keymen. Last year alone, 20 employees quit, after 27 new hires joined the department.

"Talented middle-level managers are leaving as well, after building two to three years of experience,” said an ex-NPS investment manager. “Because of a series of employee departures, NPS cannot build a network at all, essential to expand alternative investments. They are just reset every few years.”

To curb the employee outflows, NPS unveiled a package of incentives in July 2020 that include providing a larger number of investment staff with opportunities to be relocated or dispatched to overseas offices and global investment companies. In 2017, it announced a plan to double the basic salary of its investment division heads by stages to narrow the pay gap with domestic asset management companies.

PUSHING BACK TARGET YEAR

NPS has been increasing allocations to alternative assets since the 2008 global financial crisis. As of the end of October 2020, alternatives stood at 11.6%, below its target of 13%. But the number could be lowered to reflect its asset growth to 790 trillion won at the end of last year, including investment gains.

Since reaching 10.8% in 2017, the proportion of alternatives has not crept up even by 1% points. NPS was supposed to boost the alternatives gradually to 15% of its total assets by the end of next year, under a five-year investment plan announced in 2017. But it was pushed back to end-2025. 

“Given the rapid asset growth, it is hard to meet the target ratio for alternatives which, unlike traditional assets, are not publicly traded,” said an NPS source. “But based on the amount of our committed capital, the gap between the target ratio and our investment execution is being narrowed.”

Most of alternative investments are made in proprietary deals, in which the seller does not put the asset on the market, meaning information and network are key to make alternative investments.

Last year, NPS signaled its intention to step up venture capital investments by renaming its private equity investment division as the private equity and venture capital investment division. But its VC investments have been confined to domestic deals so far.

“Unlike the domestic market where NPS announces allocation plans and then asset managers compete to win the beauty contest, global VC funds stick with their investment strategy and terms, and only give one to two weeks to a selected group of LPs before closing their fundraising,” said a Korean VC fund CEO. “Under the NPS’ current network and decision-making system which takes one to two months, it will be difficult to follow them.”

COST OF LOST OPPORTUNITIES

Alternatives remained the second best-performing asset class with an average return of 8.89% since NPS launched the Investment Management department in 1988 through the end of 2019. During the period, overseas equities were the top performer, generating an average return of 10.08%. Between 2017 and 2019, returns from alternatives averaged 8.76%, outperformed its overall return of 5.87.

But failing to meet its target proportion of alternative investments between 2012 and 2018 meant its lost opportunities, which translated into lost annual incomes worth 500 billion won to 1 trillion won during the period, or a return of an additional 0.14% points per year. 

“NPS’ problems with the slow alternative investment execution stemmed from a combination of its manpower shortage following its relocation to Jeonju, and the government control over its budget and the number of employees as a public institution,” said an asset management head who previously had worked for the NPS. “Unless those structural problems are resolved, it won't see any improvement to its situation.”

Write to Jung-hwan Hwang at jung@hankyung.com
Yeonhee Kim edited this article.