S.Korea's NPS likely to log 8.2% loss for 2022, record-low return

South Korea’s National Pension Service (NPS) is expected to post a negative return of 8.2% for 2022, according to its preliminary report on Thursday. It is the worst-ever annual performance for NPS since the fund management arm was founded in 1999.

The pension fund logged a 4.9% negative return as of end-November last year, but further plunged in December amid the equity and bond market downturn. NPS, one of the world’s largest pensions, is forecast to see its assets under management (AUM) drop to 890.5 trillion won ($677.2 billion) as of end-2022 from 948 trillion won as of end-2021. 

The 2022 performance will mark NPS’ third negative return on a yearly basis. The pension giant posted losses of 0.2% (427 billion won) in 2008 and 0.9% (5.9 trillion won) in 2018.

The huge loss came as the equities and bonds tumbled amid the Federal Reserve’s tightening and woes over a possible recession.

NPS’ traditional assets, such as public stocks and bonds, were hit hard. Domestic stocks and overseas stocks had 22.8% and 12.3% losses, respectively, as money-weighted returns; domestic bonds and overseas bonds had 5.6% and 4.9% losses, respectively.

But the four asset classes surpassed their benchmarks, the report said. Domestic stocks and overseas stocks exceeded the standards by 47 and 15 basis points, respectively; local bonds and overseas bonds outperformed by 4 and 88 basis points, respectively.

ALTERNATIVE ASSETS' PROFIT BELOW BENCHMARK

Alternative assets, such as private equities, bonds and real assets, achieved 8.9% profit. But the asset class' performance was below the benchmark, which reflects the inflation effect.

Market watchers advise that NPS should introduce more flexibility to its asset allocation, setting value at risk for each asset, instead of determining target proportions of asset classes.

Although NPS needs to increase its proportion of alternative assets to hedge inflation, it is not easy to do so under the current asset allocation strategy. 

The pension fund’s alternative asset portion in its entire portfolio reached 16.4% as of end-December, exceeding the target of 13.8%. The percentage automatically rose as stocks and bonds plunged last year, losing some of their weight in the portfolio.

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

Jihyun Kim edited this article.