NPS to hike risky asset purchases under simplified allocation system

The National Pension Service (NPS), South Korea’s state-run pension fund, is introducing a new simplified asset allocation guideline under which it aims to increase its purchase of risky assets, including stocks and alternative asset products.

In its first system reshuffle in 18 years, the state fund said it is introducing a 20-year asset allocation standard portfolio to boost long-term profitability.

Under the plan, approved at an NPS fund management committee meeting, the state fund’s top decision-making body, the standard portfolio will have a top-line classification of risky assets (stocks) and safe assets (bonds) with targeted return rates over a 20-year investment horizon.

The new top guideline will be supplementary to the current five-year strategic asset allocation (SAA) system, which sets mid-term goals across various asset classes such as local stocks, local bonds, overseas stocks, overseas bonds and alternative investment.

Within the SAA boundary, the state fund sets annual tactical asset allocation (TAA) goals.

RISKY ASSETS SET AT 65% OF THE FUND

The fund committee meeting, presided over by Health and Welfare Minister Cho Kyoo-hong, also decided to raise the proportion of risky assets to 65% of the NPS’ entire fund while limiting safe assets to 35% under the long-term fund operation strategy.

“The current asset allocation system, introduced in 2006, has virtually no long-term management goal, investing only in pre-determined asset classes,” said Minister Cho. “Under current guidelines, it has been difficult to properly respond to market changes and the emergence of new financial products.”

Under the current system, the NPS has invested its 171 trillion won ($124 billion) alternative investment fund in private equities, infrastructure and the property market at a 4-3-3 ratio.

With the introduction of the new standard portfolio, however, the NPS can spend the alternative investment fund disproportionately to maximize investment gains.

With 1,048.8 trillion won worth of assets under management (AUM) as of January 2024, the NPS is Korea’s largest institutional investor and the world’s third-largest pension fund.

Last year, the NPS delivered its best investment results since its inception in 1999 with a 13.59% annualized return.

The majority of profits came from listed stocks. Domestic and overseas stocks achieved 22.12% and 23.89% returns, respectively. Local and overseas bonds respectively logged 7.4% and 8.84% returns.

Alternative investments posted a 5.8% return last year.

In Korea, which has one of the world’s fastest-aging populations, the state pension fund’s assets are forecast to start running a deficit as early as 2041 and could be depleted by 2055, analysts warn.

Write to Byeong-Hwa Ryu at hwahwa@hankyung.com

In-Soo Nam edited this article.