The National Pension Service (NPS) has been operating without the chief officer of national pension fund management for a year.
Temasek Holdings Private Ltd., a state-owned holding company that can be characterized as a national wealth fund owned by the Government of Singapore, sold part of its stake in Celltrion Inc. and Celltrion Healthcare Co. at 1.1 trillion won (US$988.76 million) in March. Temasek invested a total of 400 billion won (US$359.55 million) in Celltrion Group between 2010 and 2013 and its remaining stake was worth 7 trillion won (US$6.29 billion) at that time. It made nearly 20 times larger gains on valuation in just eight years.
This is the result of Temasek’s recognition of Celltrion’s technology. At the time, domestic institutions declined to make an investment in Celltrion. Temasek also built a safety net for the large-scale investment. It invested in convertible bonds to collect interests on its initial investment and make more profits by turning them into stocks when the company got into its stride.
The National Pension Service (NPS), the world's third-largest pension fund which oversees 630 trillion won (US$566.29 billion) of South Korea’s public pension assets, is now facing a crisis. There are even growing concerns that the pension fund can be disassembled, with an increasing number of employees leaving the company. Since there are not enough employees investing, the NPS shows poor earnings rates.
The “investment staff exodus” from NPS is largely because its new office was relocated far from Seoul last year and the NPS has been operating without the chief officer in charge of managing national pension fund assets for a year. The position of overseas alternative investment chief has been vacant for a year and five months and chief officer of stock investment has been recently dismissed from the post. Cho In-sik, head of overseas securities, who has served as the acting chief officer of national pension fund management, has tendered his resignation. In regard to asset management, four out of seven positions for directors and coaches who have a primary responsibility have been operated with patch-up.
This also triggered exodus of hands-on investment officers. Right before its new office was relocated to the provincial city of Jeonju, 30 employees handed in their resignation in 2016, 27 in 2017 and 10 this year. The number of investment employees at the NPS decreased from 274 to 242 at the end of June.
The government is also aware of the problems. When the Ministry of Strategy and Finance announced the fund evaluation results in May, it pointed out, “The NPS should raise expertise of the investment team and come up with measures to prevent workforce exodus that has occurred after the shift to Jeonju.”
Given the current situation, it is only natural that the NPS earnings rates have deteriorated. According to the NPS, its earnings rate stood at -0.21 percent in the first quarter this year. It even lost the principal. Its average rate of returns in the past five years also came to 5.81 percent, less than half the rate of the world’s top six pension funds such as Canada with 12.24 percent, and the Netherlands and Norway with 9.32 percent and the United States with 9.16 percent. Its earnings rate last year was 7.28 percent, reaching a five-year high, but it still fell short of the Government Employees Pension Service with 8.8 percent and the Korea Teachers Pension with 9.2 percent over the same period.
Just like Temasek’s investment in Celltrion, successful investment depends on those who work for investment. However, it’s hard to expect such a thing because one employee invests too much money. According to the data made available for parliamentary inspection of government offices last year, one investment officer managed 1.7 trillion won (US$1.53 billion) in 2016, which was 2.5 times higher than 700 billion won (US$629.21 million) of public pensions of the Netherlands. However, the figure after a year and a half increased to 2.6 trillion won (US$2.34 billion), which is nearly four times higher than that of the Netherlands.
Since the NPS doesn’t have enough labor pool, it has a low percentage of overseas securities and alternative investment. Currently, the NPS’ share of home investment exceeds 70 percent. As of the end of last year, the NPS could exercise its voting rights in more than 770 South Korean companies and had over 5 percent of stake in 300 companies. This is why the NPS is criticized as a “whale in a pond.”
The NPS should first expand investment in overseas securities and alternative investment further in order to delay pension exhaustion as much as possible. Currently, the NPS has a 50 percent share of bond investment. The California Public Employees' Retirement System in the US invests only 19 percent of capital in bonds and the remaining in stocks and actual assets. The Netherlands’ public funds also invests 30 percent of its assets in bonds and the remaining in stocks and alternative investment.
The NPS also needs to dramatically increase investment in overseas assets from the current 20 percent. Japan’s Government Pension Investment Fund invests 40 percent of its funds in overseas assets, while Canada Pension Plan Investment Board invests 80 percent. A head of the pension and funds management division at a securities firm said, “The government should give independence and autonomy to the NPS and stop making an attempt to drag NPS’ savings into political business.”