The Struggle of South-Korea’s Pension Fund

Fights against fear, and reality: The struggle of the world’s third-largest pension fund with public distrust and aging population.

South Korea’s National Pension Service, the world’s third-largest pension fund managing a whopping 675 trillion won ($566.80 billion), has been struggling with substantial public distrust. Some issues fuelling the public sentiment are based on myth, yet others reflect a grim reality that the pension fund faces amid radical demographic shifts. What are the drivers that cause so much public concern?

AAAccell works with Pension Funds across Europe as part of a project to develop an intelligent cloud system for risk control and portfolio optimization for sustainable pension funds (Link). We also look at other Pension Funds across the globe.

“As long as the state is responsible, it makes no sense for those who’ve paid, not to receive their pension pay-out. The government is in the process of revising relevant procedures.” With this anxious sounding statement, President Moon of South Korea addresses the growing concern of South Korean citizens in fear of their future pension. South Korea’s state pension fund – the National Pension Service (NPS) – responsible for ensuring the pension payments of millions of citizens has seen an increasingly negative media coverage. 


Since its inception in 1988, the NPS has grown from a mere 53 billion won (approximately $4.3 million) to 700 trillion won (roughly $596 billion), which amounts to more than the annual GDP of Belgium. Almost half of its total assets, 337.3 trillion won, have been earned from returns on investment. In the first four months of 2019 alone, the NPS achieved returns of 6.81% on its investments. The public feelings of unease run counter to the recently published figures. Instead, the main driver fuelling the concern of South Koreans is the discussion about the looming depletion of the fund in 2057. 


Depletion by design 

The government conducts a mid-term financial projection of the pension fund every five years. The latest forecast in 2018 prognosticates that the pension fund will be depleted in 2057, three years earlier than a previous estimate. However, when introduced in 1988, the retirement scheme was intended to be only temporary to support pensioners in receiving more than they contributed. By this design, the pension was expected to play a crucial role in guaranteeing decent welfare for all future senior citizens regardless of their income level as well as redistributing national wealth. After 2057, the currently funded scheme will be transitioned to a pay-as-you-go (PAYG) system, where current workers will finance current pensioners instead of savings in the government deposit. 

Two types of pension fund schemes

There are two common ways to finance pension plans: a pay-as-you-go system and a funded system. Under the pay-as-you-go system, contributors pay for current pensioners. The annual general budget is used to finance the pension fund if beneficiaries outnumber contributors. In a funded system on the other hand, contributions are made regularly into a pension fund for future retirement obligations. The reserves built to pay future benefits with past asset accumulations can be invested.

Health and Welfare Minister Park Neung-hoo asserted at a press conference that “the national pension should be operated as long as the country exists.” The government will still be able to provide benefits to pensioners as long as it can impose pension contributions from workers. The government has been trying to dispel worries over the depletion by drawing parallels to advanced Western economies who had followed similar strategies. For example, Germany or France had funds, which were exhausted long ago, but are now running a PAYG system.

Sustainability concern, shadows of future

There is ground for worry in South Korea’s rapid demographic shift. A strikingly low birth rate and an ageing population were not considered when the government introduced the NPS in 1988. Ironically, at the time of the establishment, the administration had been working on nation-wide policies to reduce birth rates. By the definition of the United Nations, South Korea is already an “aged society” with 14% of the population aged 64 or older. The PAYG system is vulnerable to expanding retirees and diminishing workers. Germany pushed back the pension age from 65 to 67 and the UK to 68. France extended the contributory period necessary for full pension from 37.5 years to 41.5 years. In Italy, the minimum contributory period was lengthened from 15 years to 20 years. 

By the definition of the United Nations, South Korea is already an “aged society” with 14% of the population aged 64 or older. The world-lowest birth rate of 0.98 is only aggravating the demographic pressure on its pension fund.

Concerns over their retirement savings are arising despite those reform measures. For South Korea, the sustainability of the PAYG system looks even more pessimistic. The world-lowest birth rate of 0.98 is only aggravating the demographic pressure on its pension fund. As a result, in 2050, South Korea’s old-age dependency (OAD) ratio will hit 72.4% – almost 20.5 percentage points above the OECD average. Considering this grim demographic reality, a transition to the PAYG system itself cannot be a satisfactory answer. The government will need to present more concrete reform plans after the change to soothe public anxiety over their pension.


The transition in a political stalemate

Politics has also been stalling on necessary reforms reflecting this new population trend. The Ministry of Health and Welfare has proposed four measures to the National Assembly. In contrast to the first plan, under which the current system remains intact, the second plan proposes increasing the minimum contribution amount. Additionally, the third and fourth proposals call for raising the pension benefit in part while raising mandatory insurance fees tied to the NPS. Details differ, but all four options would oblige future generations to pay more than 30% of their income for the pension contribution. Politicians have been reluctant to present ideas that will surely be met with resistance by the burden towards the young and the uncertainties facing the elderly.


The myth about the poor investment performance

Another source of public distrust toward the NPS is the skewed coverage of its investment performance. Any losses often face extensive media coverage, continuing to aggravate public fears. However, it is debatable whether the NPS’s return has been genuinely problematic. Last year, the NPS recorded 0.92 % loss in its investment. Yet, it was the first loss in a decade and the first since the global financial crisis in 2008. The damage is relatively minimal compared to 7.7 % loss of Japan’s Government Pension Investment Fund (GPIF), 3.5 % of California Public Employees’ Retirement System (CalPERS) and the 2.3 % of Dutch ABP in the same year. The average investment return of NPS marks 5.51 % over the last ten years while Japan’s GPIF recorded 4.23 %. The performance might be under other funds, such as the 8 % return by the Canada Pension Plan Investment Board (CPPIB), Norway’s Government Pension Fund Global (GPFG) or Sweden’s AP3, but it shows that public myth about NPS’s poor investment performance is exaggerated. 

South Korean citizens protesting for an NPS reform, (image from People’s Solidarity for Participatory Democracy homepage, 2018)

Home market bias and conservatism

Nevertheless, criticism about NPS too conservative portfolio has a valid point. The NPS tends to perform well in a bear market, but it showed a disappointing return in the bull market because of its preferences for low-risk assets such as domestic bonds. According to the research of the National Assembly Budget Office, 1% additional gain in the NPS investment would delay the fund depletion by six years. Aware of these criticisms, the NPS has been readjusting its portfolio to seek higher returns for its investment. Last year, it announced that it would increase its proportion of more risky assets. Plans include to boost stocks and real estate from 50% to 60%, expand overseas investment from 30 % to 45 % and bolster allocations in alternatives up to 15 % for portfolio diversification. 


Too big for the South Korean stock market

Another element that drove the portfolio readjustment were concerns over a too extensive influence of the NPS on the South Korean stock market. The number of South Korean stocks the NPS is currently holding amounts to 7 % of total market value. It is projected to reach 9 % around 2025. The NPS has more than 5 % of stocks in some 300 companies and more than 10 % in around 90 companies. 15.9 % of stocks issued by Samsung Group belong to the NPS. When the NPS announced its plan for the active stewardship on these companies, it faced tremendous criticism. The general fear was that the government would abuse the power of the NPS to tame private firms into conformity under its policies. Aside from the short and medium-term market neutrality concern, the South Korean stock market would plummet when the NPS is depleted in the long run.


15.9 % of stocks issued by Samsung Group belong to the NPS.

Costs from going overseas

However, the rapid expansion of overseas investment led to more extensive consignment operation of foreign assets, and subsequently higher intermediary costs. Whether the NPS has sufficient expertise and staffs to manage this diversified portfolio is also worrisome. The NPS is notorious for below-market pay for its staff. It has recently experienced an exodus of employees after a controversial relocation of its headquarters from Seoul to Jeonju, the far southern part of South Korea, as part of national policies for balanced regional development. According to the Korea Capital Market Institute (KCMI), the NPS lost approximately 2.5 trillion won ($2.16 billion) over the last five years because of inefficient stock trading practices.


Last window of opportunity

The NPS will continue to accumulate assets until 2041 reaching 1,778 trillion won ($1,508 billion). With an increasing portfolio on foreign stocks and alternative assets, the NPS will provide ample opportunities for overseas asset management companies. For the South Korean government, the meaning of opportunity is more desperate. Failure to reform the NPS within this period would leave a devastating impact on an ageing South Korean society. The public woes about ‘no country for old men’ are not just mere anxiety.




Written by:

Author – Keunwang Nah, born in South-Korea, is currently pursuing a master’s degree at Stanford, specializing in Cyber Policy. He served as an Intelligence Officer in the Republic of Korea Air Force and for the Ministry of Foreign Affairs. Among his experiences, Keunwang was responsible for an 800-million-dollar Global Disease Eradication Fund as part of the Korean Official Development Assistance (ODA) focused on the prevention and eradication of infectious diseases in developing nations. (Follow on LinkedIn)

Co-Author – Julian Osborne, born in Germany, has a master’s degree from the University of Zurich in “Democracy, Development and International Relations”. He has worked for several years in various Financial Services roles related to FinTech and digital innovation. Since 2018, he has been a Representative Director of AAAccell, a Fintech in wealth and asset management and spin-off from the University of Zurich. (Follow on LinkedIn)

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