Dangerous Betting?

 

The Korean government is planning to turn the fund management arm of the National Pension Service into a public corporation despite objections. The Ministry of Health & Welfare and the Ministry of Strategy & Finance are going to prepare a plan to this end by March and submit it to the National Assembly the following month. 

This is because the National Pension Service has recorded a lower-than-expected yield in view of the increasing amount of the fund. The amount of the fund it manages has exceeded 455 trillion won (US$415 billion) and is estimated to reach 1 quadrillion won (US$907 billion) within 10 years, and 2.4 quadrillion won (US$2.1 trillion) in 2040. However, it recorded a rate of return of 4.2 percent in 2013, the lowest among major pension funds across the world. In contrast, the Canada Pension Plan Investment Board (CPPIB) and the Government Pension Investment Fund (GPIF) of Japan posted 16.5 percent and 8.6 percent, respectively. The lower yield of the National Pension Service can be attributed to its preference for bonds. At present, bonds account for 50 percent of the National Pension Service’s investment. Twenty percent went to the domestic stock market, but the downturn in 2013 led to a significant decline in profits. Alternative investment in the form of foreign stock and real estate takes up just 10 percent.

This is why the government is looking to turn the arm into a public corporation. But many experts are expressing concerns, because this is likely to lead to a higher ratio of investment in risky assets for the purpose of raising the rate of return, which, in turn, could incur severe losses. Besides, the National Pension Service is second to none when it comes to long-term performance. During the 14-year period starting from 2000, it posted a yield of 6.33 percent, whereas the percentage is 5.22 percent for the CPPIB and 5.45 percent for the California Public Employees' Retirement System (CalPERS).

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