Is pension fund becoming reckless in investment?

Under the leadership of former World Bank official Jun Kwang-woo, the National Pension Service has been more assertive in overseas investment. / Korea Times

By Kim Tong-hyung

The National Pension Service (NPS), the country’s main social protection system that doubles as its largest financial investor, doesn’t feel the need to apologize for aggressively pursuing higher returns.

While the so-called demographic time bomb is an increasing worry for most rich economies, it’s hard to find a nation that should be more anxious than Korea, where the average life expectancy of 80-plus meets one of the lowest birthrates on the planet.

Until the country makes the difficult choice of higher taxes, poorer old people or delayed retirement in coping with the looming pension crisis, it will have to ride the NPS and its bulging investment muscle to ensure that the growing number of pensioners get their monthly payments.

Some observers have raised concerns that the massive pension fund, the fourth-largest in the world, is becoming too reckless in its attempts at higher returns, even as the eurozone debt crisis and other toxic developments worsen global conditions.

Critics point to a widening portfolio of foreign investment to question whether the NPS, led by longtime bureaucrat and former World Bank official Jun Kwang-woo, is motivated by national pride more than healthy returns.

NPS officials will argue that it’s inevitable for the fund to take some chances with Korean pension subscribers’ money with international equities and alternative assets when it could ill-afford to be complacent.

The NPS’s average return on investment has reached 7.2 percent in the past three years to add an extra 63 trillion won (about $56 billion) to its coffers.

It lost 0.18 percent on its investment in 2008, when the pain from the Lehman Brothers collapse was fresh, but recovered with double-digit returns both in 2009 and 2010. However, the fund barely managed a modest 2 percent return last year as the European problems blew up and decimated stock markets.

The NPS’s assets are currently measured at 350 trillion won (about $311.5 billion). Jun has vowed to expand the pot to 500 trillion won by 2015, when the fund will have around 100 trillion won invested abroad.

``The NPS continues to see its assets bloat but Korea doesn’t have enough targets to invest, so it’s pressed harder to look overseas, especially when Korean bond yields continue to decline. With baby boomers retiring, the pension fund is making increasing efforts to gain higher returns, but investing aggressively in international markets when the world economy continues to deteriorate could be a risky gamble,’’ said a finance industry official.

The NPS has indeed been visibly more assertive in both the domestic market and overseas.

The state pension fund is undisputedly the biggest investor in Korea’s fixed-income and equities markets, being the biggest shareholder of corporations like top steelmaker POSCO, banking industry heavyweights KB, Hana and Shinhan, and semiconductor maker Hynix.

Technology giant Samsung Electronics and automotives cartel Hyundai are among 80 or more companies here that list NPS as their second-largest shareholder. According to NPS officials, there are 175 firms here where the fund has at least a 5 percent presence.

The NPS has been showing more boldness in international investments as well. Its proportion of assets invested abroad was less than 10 percent in 2010 but its plan is to elevate it to near 30 percent by 2020.

The fund’s high-profile spending in past years included purchasing KDX Grand Square in Tokyo, the Aurora Place office tower in Sydney, the HSBC building in London and acquiring a 12 percent stake in Gatwick, the British capital’s second-largest airport.

It is more actively seeking merger and acquisition opportunities abroad as well. Last year, the NPS created an 8 trillion won fund with 12 large business groups like POSCO, Hanwha and SK to help accelerate overseas acquisitions by Korean companies. Under the arrangement, which last for four years, it will contribute 50 percent of the funds needed for the deals while the companies will finance the other 4 trillion won.

Making the first investment from the scheme, the NPS recently confirmed that it will fund half of GS Engineering and Construction’s $300 million purchase of Inima, a Spanish desalination company.

It is also preparing to provide ammunition for KT in its purchase of Telkom, a South African telecommunications provider, a deal that is estimated to be worth more than $600 million, and help fund Dongwon’s acquisition of Spanish tuna company Luis Calvo Sanz.

Korea currently has one of the lowest birth rates among maturing economies, with the country’s 2010 figure standing at 1.22 births per woman, well below the 1.71 average of Organization for Economic Cooperation for Development (OECD) nations.

As with many other countries, Korea expects to see the proportion of the retiring population balloon in the coming years. This is feared to escalate pressures on the country’s fiscal position as retirees collect pension and medical benefits that must be paid by a shrinking number of taxpayers.