NPS to take longer-term approach to asset allocation

The National Pension Service is planning to build an investment portfolio with a longer-term perspective for a period of at least 10 years, shifting from the current five-year-based allocations. The move is expected to encourage the South Korean pension scheme to take more risk to maximize returns over the next few decades.

The longer-term approach comes as spending at the $770 billion pension fund is projected to outstrip revenue, excluding investment gains, from 2030. Its assets are forecast to surpass 1,000 trillion won ($900 million) next year and peak at 1,778 trillion won ($1.6 trillion) in 2041. That means it would have only 10-20 years left to make aggressive investments.

On May 28, the NPS' top decision-making body, Investment Management Committee, will convene to approve the plan, according to investment banking sources on May 25.

Up to now, the world's third-largest pension scheme has set a five-year asset allocation plan every May, based on which annual allocations are determined. 

From this year, however, the NPS is expected to first make a longer-term portfolio for a minimum of 10 years and then draw up five- and one-year allocations plans.

With a longer-term horizon, the NPS expects risky assets to account for 70-80% of its total portfolio from 2031 or afterward. Based on its 2020-2025 allocation plan unveiled last year, it is supposed to scale up exposure to risky assets to 55.1% this year and 65% by 2025. 

As of February this year, its assets under management reached 860 trillion won ($767 billion), of which so-called risky assets such as equities and alternatives make up 55.6%. It breaks down into domestic equities at 20.9%, overseas equities at 24% and alternatives at 10.7%

But the longer-term approach will unlikely bring a drastic change to its portfolio.

"In order to maximize returns by 2040 by when the NPS assets will continue to expand, it will move in the direction where the proportion of risky assets is rising," said a source with deep knowledge of the NPS.

"Considering the market impact and risk management, the NPS will take a gradual approach to the change."

Of the newly-added risky asset in the coming years, overseas equities and alternative assets will likely take a big chunk.

Under the 2020-2025 allocation plan, the NPS plans to cut exposure to domestic equities to 15% by 2025, versus this year's 16.8%. As a top shareholder of some 300 listed Korean companies, it is trying to gradually reduce the ratio of domestic equities in order to avoid massive sell-offs in the future when the NPS enters the decline stage.

By contrast, it aims for the proportion of overseas equities and alternatives to expand to 35% and 15%, respectively, versus this year's target of 25.1% and 13.2%. 

Some industry watchers, however, advise the NPS' asset allocations need to be based on a further longer-term horizon, say 20-30 years, considering its lifecycle according to which its assets will begin to deplete from 2041, even including investment proceeds.

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