NPS likely to give full rights on asset managment to experts

The National Pension Service (NPS) of South Korea, the world’s third-largest pension fund, is poised to give investment experts full rights over mid-term asset allocation, in efforts to ramp up the profitability of the fund forecast to be completely drained by 2055 under the current management system.   

NPS’ committee for financial calculations included the suggestion in a final report that will be submitted to Ministry of Health and Welfare, according to government sources on Friday.

The report also proposes that NPS should maintain the gross pension replacement rate of 40% and raise the contribution rate, currently 9%, by 3 percentage points every five years to 18%. It additionally suggests the state pension age should be increased from the current 62-65 to 66-68 to strengthen the financial stability of the fund.  

NO INVESTMENT EXPERTS

To enhance the fund’s profitability, the committee has recommended in the report that NPS should transfer the full rights of strategic asset allocation (SAA) decisions from the fund management committee to an organization of investment experts.

With 973.9 trillion won ($734.5 billion) in assets under management as of end-May, the pension fund’s asset allocation is largely divided into two parts – SAA, which sets target exposure to each asset class, like stocks, bonds and real assets, and tactical asset allocation (TAA), which aims for an alpha rate of return, or excess returns above the benchmark returns earned on investments.

NPS’ fund management arm, a group of investment professionals, has rights for all TAA decision-making processes. Regarding SAA, however, the group of experts and NPS Research Institute write proposals for the asset allocation, and the 20-member fund management committee gives the final approval.

SAA’s contribution to NPS’ investment returns amounts to 98.3% on a 10-year average.

The 20 members of fund management committee include five vice ministers, the chairman of NPS and 14 representing four groups – employers, employees, the insured and related government agencies. Such governance has often included economic experts but not investment professionals.

FUND DEPLETION

The pension fund can’t highly improve its profitability under the current governance structure, and no entity is held accountable for low returns, the report said. Therefore, final decisions on SAA should be made by the fund management arm or a separate organization of investment experts, it added.

Instead of making decisions on the mid-term SAA, the fund management committee may have rights to determine the exposure to stocks and bonds in the 20-year term, the report said. It also noted that the mid-term for asset allocation should be increased from the current five years to 10.

The financial calculation committee stated in the report that if NPS maintains the 5% gross pension replacement rate and raises the contribution rate to 15% or above, the fund’s depletion will be delayed by 10-20 years.  

The pension fund will begin to deplete in 2041 and be fully drained by 2055 under the current management system and the country's record-low fertility rate, 0.81 per woman as of the first quarter, according to NPS research in January. 

If the depletion is postponed, the pension fund’s five-year-term target return can be raised more than 1 percentage point from the current 5.6%, it added.

Write to Jung-hwan Hwang at jung@hankyung.com

Jihyun Kim edited this article.