Hands off Korea`s massive pension fund

The fund of the National Pension Service last year surpassed 400 trillion won (368 billion U.S. dollars), equal to a third of the country’s GDP. The milestone was achieved just two years and seven months after the fund reached 300 trillion won (276 billion dollars). The amount is expected to exceed 1,000 trillion won (9.2 trillion dollars) in 10 years. Since its launch 25 years ago, the fund has surprisingly grown fast and become the world`s third biggest following those of Japan and Norway.

The pension’s earnings rate of 7 percent last year was also one of the world`s highest. The average earnings rate over the past 25 years is 6.69 percent. This good performance was thanks to the strategy of lowering the proportion of sovereign bonds to the 60-percent range while actively investing in stocks and real estate.

National pension is the final safety net for a person`s silver years. To prevent the fund from going bankrupt with Korea`s low birth rate and rapidly graying population, the system must be changed to make people pay more and receive less. The major shareholder of Samsung Electronics will soon be the National Pension Service instead of Samsung Life Insurance. The fund owns more than 5 percent of shares of about 220 publicly traded companies. To raise the earnings rate, the fund must play its role to maximize value and improve management.

Despite the need to assume these roles, however, many obstacles remain in the freedom of fund management and professionalism. Though the fund management division manages the fund, the fund management committee makes the final decisions. The chairman is the health and welfare minister and four vice ministers are members of the committee comprised of 20 members from industry and civic groups as well as employers, employees and representatives of domestic policyholders. So the committee inherently lacks expertise and can easily be politically influenced. Its governing structure needs reform so that it can be separated from the government or politics.

Politicians have often tried to lay their hands on the fund. President Park Geun-hye, who pledged to strengthen the independence of the pension service in her campaign, faced strong opposition when she tried to funnel the fund into the basic pension after she was elected. Ministries have tried to use the fund for public investment or loans with low profitability or boost the stock market. This is why the autonomy of fund management and political neutrality of its governing structure must be ensured.

The government in 2008 submitted a bill to the National Assembly to separate the fund management division and turn it into a limited fund management company as well as strengthen its independence to the level of the Bank of Korea or the Monetary Policy Committee through a fund management committee comprised of seven civil experts. But the bill was scrapped when the 18th National Assembly`s term ended. The 400 trillion won (368 billion dollars) fund shall not be left in the hands of non-experts, so the government as well as both the ruling and opposite parties must take on reform of the fund.

Half of the Korean people will depend entirely on pension after retirement. The fund should earn public trust by being fostered into growing in a sound manner in both profitability and stability like the California Public Employee Pension and the Dutch Civil Servants’ Pension Fund. The Korean pension fund can hopefully live up to its name as something worthy of the people`s trust.