Korean pension fund under pressure from high dollar

The won-dollar exchange rate shows no signs of falling from the upper 1,400 range. As the currency continues its high-level trend, foreign exchange authorities are reportedly set to meet with the National Pension Service this week to discuss measures. Observers expect the pension fund to act as a stabilizing force in the foreign exchange market by adjusting its asset management strategies. While currency stabilization is necessary, there are concerns that such intervention could negatively affect pension returns, which are critical for citizens’ retirement security.

The government is targeting the National Pension Service because it is one of the largest users of dollars. As of the end of August, 44% of the fund’s 1,322 trillion won in assets were invested in overseas stocks and bonds, most of which are dollar-denominated. Reducing this proportion or increasing currency hedging could potentially help lower the exchange rate. With no practical way to prevent individual investors, known as “Seohak Ants,” from sending dollars abroad, the government is focusing on the pension fund, over which it has greater influence.

The concern is that this strategy could reduce the pension fund’s returns over the medium and long term. From January through October, the National Pension Service posted returns in the 20% range, an unusually high figure resulting from simultaneous surges in domestic and international stock prices. Over the past 20 years, the fund’s average annual return has been about 6.27%. With the KOSPI rising 60% this year amid recurring volatility caused by U.S. concerns over an artificial intelligence bubble, year-end stock prices and returns are highly unpredictable.

In a volatile market, increasing the pension fund’s domestic stock allocation from the current roughly 14.9% or having the government intervene in hedging policies without clear principles could lower returns. With South Korea’s interest rates 1.25 to 1.5 percentage points below U.S. levels and strong overseas investment demand from both individual investors and corporations, using the pension fund to defend the exchange rate could simply deplete it. Foreign pension funds emphasize operational independence precisely to avoid such risks.

The current exchange rate, reminiscent of past crises such as the foreign exchange crisis and the global financial crisis, is indeed concerning. Rising import prices add to the challenges. Yet with a continuing current account surplus and South Koreans holding far more overseas assets than liabilities, the situation differs significantly from past crises. Rather than relying on the National Pension Service to push down the exchange rate, the proper approach is to accelerate structural reforms to strengthen the economy’s fundamentals.