South Korea’s National Pension Service (NPS) notched up a 9.1% return on investment in H1 2023, securing its position as the world’s second biggest public pension fund with assets under management totalling KRW983 trillion (US$742 billion).

The fund reported a KRW83.9 trillion profit, bouncing back from its worst ever annual loss in 2022 which totalled KRW 79.6 trillion. It was lifted by returns a shade over 17% in both domestic and foreign public equities, while domestic and foreign fixed income reported 2.7% and 6.2%, respectively. In public equities, NPS’s portfolio easily outperformed benchmark indices. Alternatives including real estate and private equity returned 5.0%, supported by the strengthening value of the US dollar against the Korean won as well as interest and dividend income.

NPS is looking to both stabilise and boost its return by investing in alternatives as well as its global portfolio. Last year, NPS committed another KRW24.5 trillion (US$18.5 billion) to private equity and debt with at least 52 new commitments to private equity funds and projects in 2022, bringing the total number of funds and projects in its portfolio to 456, according to its latest annual report.

In June, it appointed investment bank Goldman Sachs and US real estate firm Bridge Industrial as overseas real estate investment managers, bringing its total number of overseas real estate managers to 63. This is part of a drive to raise alternatives exposures and increase investment return to 5.6% by end-2027, under the latest five-year asset allocation plan.

By end-June, the fund had KRW156.6 trillion in alternatives, of which KRW49.5 trillion was in real estate (86.5% in overseas markets), KRW65.0 trillion in private equity (78% overseas), and KRW39.4 trillion in infrastructure (79.0% overseas). It is targeting an allocation of 13.8% for alternatives by the year-end.

At the same time, the NPS has tripled sustainable investment sensitive to environmental, social, and corporate governance (ESG) factors in 2022. The amount of investment assets under the responsible investment category has nearly tripled to KRW384 trillion (US$288.3 billion) at end-2022 from KRW130 trillion in 2021. The NPS says that it invested about 43% of its entire investment assets with considerations for responsible investment.

The NPS appointed Kim Tae-hyun as chair last September for a three-year term. He is a career government finance bureaucrat, who transferred from the state-run Korea Deposit Insurance Corp (KDIC), where he had served as CEO for less than a year. He entered office with manifold challenges.

In the long-run, NPS’s assets are forecast to decline from 2039 and be totally depleted by 2055, according to South Korea’s National Assembly Budget Office’s estimates. The chair of the NPS’s budget committee,  Chun Byung-mok, said in January, “If the current pension structure is maintained, its incomes will outpace payouts for the next 20 years but the trend will reverse from 2041. The need for pension reform has become stronger because of the deteriorating fiscal situation.”

Demographic trends are working against the fund. Government statistics show that the working-age population was 71.7% of the wider population in 2021, but that share is expected to decline to 51.3% by 2050.  Facing the prospect of receiving lower retirement benefits than their parents, younger people are pressing for the option to leave the pension programme altogether. The Yoon administration is seeking to extend the fund’s life, requiring improved yields. The performance in 2022 merely added impetus to NPS’s drive to diversify its portfolio.

The fund’s ability to deploy such large sums is constrained by its own workforce limitations. NPS has been struggling with talent attraction and retention since it moved its headquarters 200km south of Seoul, frustrating its target of doubling its staffing size to 500. While in-house capabilities are being developed, NPS’s planned growth will remain heavily reliant on external managers, particularly in foreign markets.

Related funds NPS
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