How NPS is trying to escape its equity dilemma

The last two years have shown the volatility of the asset class. Korea’s national pension fund wants to change the odds in its favour, partly through more active stock ownership.
How NPS is trying to escape its equity dilemma

Equity investments have proven to be a decisive performance factor for Korea’s National Pension Service (NPS) – for better and worse. The pension fund is brewing a plan to unshackle its overall returns from public market sentiment.

The recipe? More diversification via increasing overseas investmentsmore alternative investments and a more assertive approach to domestic equities. While the first two will gradually develop over time as it allocates more capital to them, it has actively been seeking the third through a wide array of new initiatives and frameworks that will make its voice as an asset holder more widely felt.

The need for a revamp is evident when looking at NPS's performance over the past two years. 

The pension fund (which manages assets worth W723.9 trillion ($607.9 billion) as of end-November 2019said on February 11 that its investment return is likely to have averaged 11% in fiscal year (FY) 2019, reversing a 0.92% decline the previous year. The preliminary FY2019 annual result is still subject to change.

The performance of NPS's equity portfolio in particular has been a roller-coaster for the last two years. For FY2019 as of November, global equities returned 28.95% (-6.19% in FY2018) and domestic equities 6.2% (-16.77% in FY2018).


NPS has a relatively direct investment approach to its local stock exposure. Domestic equities made up W122.3 trillion, or 17.1% of its total portfolio, by end-September 2019, and it managed 54.4% of these local equities in-house. As a comparison, the pension fund managed just 37.5% of global equities internally.

The fund's ability to put this direct influence to work has been empowered in recent months.

On December 27 last year, the NPS management committee approved guidelines for shareholder activism. This will pave the way for the fund to exercise its stewardship more actively by, for instance, demanding that companies in which it holds stakes dismiss corporate executives over breach of trust and other illegal activities.

The NPS also designed its guidelines so that it can ferret out those businesses which fail to set up, make public and carry out reasonable dividend policies, or have unduly high ceilings for the salaries of corporate board members. It will then force those companies to change these practices or make a shareholder proposal for change if they drag their feet. 

Furthermore, the pension fund has changed its officially listed purpose for holding shares in 56 domestic companies from “non-engagement investing” to “general investing”, according to data from regulatory filings.

The changes come after Korean regulators relaxed rules last September to make it easier for public pension funds to exercise shareholder rights more actively. It also follows investor calls for Korean authorities to take steps to prevent listed companies from treating minority shareholders unfairly.

A stewardship code introduced in December 2016 set guidelines for institutional investors. This allows them to participate actively in corporate governance by exercising their voting rights in the interests of their beneficiaries. NPS adopted the code as early as July 2018.

The more assertive signals from the national pension fund have made Korean financial groups increasingly cautious over legal risks associated with shareholders, ahead of general shareholders' meeting due to take place in March. Many of the financial groups currently face legal risks.

NPS is, however, unlikely to roll out its platform of greater shareholder activism in time for the March proxy season due to delayed internal preparations. “We’re still in the process of setting up the new subcommittees,” Cho Heung-seek, vice president of the NPS Fund Management Committee, told reporters on February 5.

South Korean President Moon Jae-in has also called for the swift revision of laws to allow institutional investors to ramp up shareholder engagement in the domestic market. This, he stressed, would prevent abuses of power in the business world.

In his New Year’s speech January 7, Moon urged the government to amend the Capital Markets Act and the Commercial Act, saying that the proposed changes were critical to ensure fairness in the domestic market.

NPS sharply increased its stakes in major listed domestic firms after investment rules were eased at the beginning of 2020. As of end-January, the number of listed companies in which NPS held a stake of 5% or more reached 313. This is up 7.2% from the end of 2018, according to data compiled by FN Guide. The NPS held a stake of 10% or more in 96 companies, up 20% year-on-year.


The focus of a pension fund such as NPS on long-term investment returns and its sizeable equity exposure means its annual performance can be sharply affected by stock market fluctuations. Sometimes equity movements can lead it to undershoot its target returns, as in 2018, while last year they helped it overperform. 

But bad performance is a particularly delicate issue for a national pension fund such as NPS. Every Korean is a stakeholder by default, and that leaves the pension fund prone to political attention and criticism when it performs badly. Its performance has become even more sensitive considering that it is currently projected to run dry by 2057 due to a low fertility rate, an aging population and a slowdown in economic growth.

Such short-term political scrutiny does nothing good for the stability inside a long-term investor. Indeed, NPS has experienced its share of political influence, with the operational challenges that follow.

Take the case of now former chairman and chief executive officer, Kim Sung-joo. On January 7, Kim left NPS 10 months before the end of his term so that he can run in the general elections in April for the ruling Democratic Party.

He is seeking re-election in his district in Jeonju, which is also where he had pushed for the relocation of NPS investment management’s headquarters as a member of a National Assembly health and welfare committee from 2012 to 2016. President Moon Jae-in appointed him as head of the state-run pension fund in 2017.

NPS was impacted heavily by the relocation of the pension fund’s headquarters from Seoul, to the much smaller city of Jeonju some 200 kilometres south. This was followed by years of commotion within its investment teams, as many opted out to avoid the long, daily commutes from their homes in Seoul, sources with knowledge on the matter told AsianInvestor.

Yet with a more assertive strategy in domestic equities, plans to increase the proportion of foreign stocks in its investment portfolio from 22.6% in 2019 to 50% in 2024 and a further push into alternative investments, NPS seems determined to find a way to dampen future commotion, be it from its performance, internal operations or external stakeholders.

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