S.Korea’s pension fund NPS to overhaul alternative investment strategy

The National Pension Service (NPS), South Korea’s state-run pension fund and the country’s largest institutional investor, plans to introduce a new benchmark portfolio framework to improve gains from its alternative investments – a move to increase flexibility and efficiency amid rapidly evolving market conditions.

Seo Won-joo, chief investment officer (CIO) of the state fund management division, emphasized the urgency of the transition during a press briefing on Tuesday, saying that the new system would be quickly implemented.

“The adoption of a new benchmark portfolio will enable us to swiftly incorporate new asset classes that were previously challenging to access due to the rigid structure of our investment strategy,” he said.

The new benchmark portfolio is a hypothetical combination of risk assets, such as equities, and safe-haven assets, including bonds.

GREATER FLEXIBILITY

Under the previous framework, the NPS was constrained to seven predefined asset classes, including domestic and overseas stocks, bonds and alternative investments.

However, the new approach allows for greater flexibility, enabling the fund to flexibly construct portfolios as long as new assets for purchase meet the preset risk-return requirements, he said.

Seo, formerly CIO of the Government Employees Pension Service (GEPS), said the new benchmark portfolio will be initially applied to alternative investments that offer relatively lower risk and higher returns, before expanding to equities and bonds over time.

“With the rapid growth of the NPS fund, a fundamental change in our investment approach is necessary,” he said, signaling broader changes in the fund's management strategy.

RECORD INVESTMENT RETURN FOR SECOND CONSECUTIVE YEAR

In 2024, the state pension fund posted an all-time high 15% return from its investment activities, buoyed by a US stock rally and gains from alternative investments.

The strong performance, its highest since the launch of the NPS fund in 1988, surpassed its previous record high of 13.59% in 2023.

At last year’s return rate, the state fund earned 160 trillion won ($110 billion) in investment gains, with its total assets under management rising to 1,213 trillion won, or $830.3 billion, at the end of 2024.

The pension fund’s cumulative returns since its inception stood at 783 trillion won at the end of 2024, posting an average annual return rate of 6.82%.

NPS IN LEAGUE WITH GLOBAL PEERS

Seo said the NPS’ performance compares favorably to global peers such as Norway’s Government Pension Fund Global (GPFG) and the Netherlands’ ABP.

“Last year’s investment gain is nearly four times the 44 trillion won paid annually to seven million pension recipients and amounts to 24% of the government’s 2024 budget of 657 trillion won,” he said.

Despite the strong results, Seo underscored the NPS’ commitment to long-term sustainability.

“While we have achieved record returns for two consecutive years, we will not be complacent. Our mission is to safeguard the financial security of future retirees,” said the CIO.

He added that the fund will continue to refine its decision-making process, investment strategies and organizational infrastructure to adapt to changing market dynamics.

The NPS, one of the world’s largest pension funds, has been under growing pressure to improve returns and enhance investment efficiency as the country’s aging population accelerates the fund’s long-term payout obligations.

Analysts said the introduction of the new benchmark portfolio represents a significant shift in the way the fund manages risk and returns in an increasingly complex investment landscape.

Write to Gyeong-Jin Min at min@hankyung.com

In-Soo Nam edited this article.