National Pension Services (NPS); aggressive approaching

Since its introduction in 1988, Korea’s national pension plan has shown substantial growth and become representative of plan for people’s later years as the prime social welfare system. As a reserve fund which is necessary for the firm root of the National Pension Scheme, the National Pension Fund(NPF) has financed KRW 323.5 trillion (or around USD 293 billion) as of December 2010 and has grown to become the fourth largest public pension fund in the world in just about 20 years. It generated a 10.4 percent return last year.

   Asset Allocation

Source : National Pension Service, http://www.nps.or.kr/

 

Brief history of NPS and NPF

 

National Pension Services (NPS) in Korea do not have long history. The NPS was established to distribute pension benefits to insured such as the old or the disabled. Main goal of NPS is contributing to the general welfare improvement of the nation by making social security net.

Under the National Pension Act, the National Pension Fund (NPF) was established on January in 1988 for the purpose of preserving and increasing real values of the pension fund and long-term financial stability.

 

Fund starvation

 

Korean National Pension Services (KNPS), as a core of the nation’s social security system, is a partially funded system that has the characteristics of both funded and pay-as-you-go plans. Although KNPS is a relatively young, the fund size of KNPS has been increasing rapidly. Because of aging society, however, NPF is expected to growth substantially, peaking in 2043, and then shrink rapidly, completely depleting in 2060 if KNPS is not reformed according to the projections by the Ministry of Health and Welfare (hereafter ―MOHW) in 2008. Also, according to the data projected by Korean National Pension Research Institute, the contribution rate which is needed to finance the target level of pension will be as high as 24% after year 2060. That means the current system will be totally converted into pay-as-you-go plan.

After present CEO, Jun Kwang-woo, was appointed as the chairman of NPF

 

To deal with the drained fund problems mentioned above, the KNPS is going to have aggressive investment to prevent a future insolvency.

“A lot of potential investments are in the pipeline. They will be geographically distributed and sectorally diversified. At least a few investments are being discussed in the U.S.,” NPS Chairman and Chief Executive Officer Dr. Jun told The Wall Street Journal on Feb 17, 2011.

As you can see in the following graphs, the NPS’s asset base soared up to 300 trillion won ($268.4 billion) at the end of last year (2010) and is expected to rise to around 1,000 trillion won in about 10 years. The problem so far was that dominant investors are in Korean markets, with nearly 77.7% of the fixed-income domestic market and around 12.1% of domestic equity.(around 90% of the total equity based on data 2008.

 

2006(%)

2007(%)

2008(%)

2014(%)

Domestic Equity

11.0

15.1

12.1

more than 20%

Domestic Fixed Income

78.5

72.0

77.7

less than 60%

Overseas Equity

0.7

2.5

2.4

more than 10%

Overseas Fixed Income

8.7

7.9

4.0

less than 10%

Alternative Investment

1.1

2.5

3.8

more than 10%

Sources : National Pension Service, http://www.nps.or.kr/

 

Therefore, KNPF is taking aggressive approach to broaden its portfolio, planning to double the amount of overseas investments, which included equities, bonds and property, to more than 20 percent of its portfolio by 2015.

 

 

Strategy for investment

 

National Pension Fund management Committee(NPFMC), which deals with fund management guidelines also emphasizes the need to diversify portfolios from traditional investments like stocks, bonds and property to alternative investments which include private equity funds and commodities. This is a growing trend among KNPF, which are seeking higher returns on investments and decreased burden for beneficiaries.

 

Operation of Fund

(Portion of burden on beneficiaries is much greater than other way of funding such as oversea investment or alternative investment)

Sources : National Pension Service, http://www.nps.or.kr/

 

As already mentioned above, Dr. Jun is pushing NPS to increase its investment toward overseas up to 20% by 2015 from around 13% at the end of last year. This is especially needed to enhance the portfolio diversification effect. An increase in overseas investment will help to reduce a possible negative impact on the local capital market when NPS needs to liquidate a significant amount of securities for pension payments at a time. Overseas investment is also intended to develop investment skills over the long- term view by strengthening relationships with the world investment managers. In order to increase returns and reduce risks on asset, the National Pension Fund Management Center is currently working with various partners.

The NPS has already started it’s own scheme in foreign real-estate purchases for a few years. Last year, it spent around 2.6 trillion won on real-estate and infrastructure in several countries; the one concerned said KNPF has bought many premium buildings in London, Sydney or Paris. Last September, KNPF invested $400 million on real-estate specialized investment company Rockspring in London which has expected return as 10%.

 

 

Compared with Japan

 

This aggressive action of South Korea is quite different compared with neighbor Japan. Japan has suffered from pension funding which is one of the symbol of the country, longevity. Japan’s state pension fund is holding more than two-thirds of its assets in low-yielding Japanese government bonds. The ruling Democratic Party has made welfare reform a top priority and is considering a plan for pensions to be partially funded by a higher consumption tax.

However, Dr, Jun said that the increased risk because of its new tactics with alternative assets such as infrastructure, real estates, corporate restructuring fund, private equities, venture capital and so on would be released through diversification, including expanded investment in emerging markets such as China.

“Through diversification we create a natural hedge. Certain sectors behave better, others not so well. By combining those we lower the volatility,” he said.

 

 

More is needed

 

Despite the NPS’s aggressive approach, there has been social agreement that reform of Korea’s pension system is inevitable. The NPS calculates that the size of the fund will peak around 2043 and then fall because of the nation’s birthrate—around 1.19 children per woman. The NPS keeps on fighting a tough struggle to secure the finances necessary for the National Pension services and to finance the pension benefits.

 

 

 

 

hyejin Na

nhjkitty@naver.com

 

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8 Responses to National Pension Services (NPS); aggressive approaching

  1. required my pension

  2. 이한일 says:

    나는 당신들 하곤 아무런 관련도 없음. 국민 건강보헙 공단는 기만한 것이다. 당신들은 나에게 한번도 상의 하지 않는 것은 무효 처리한다. 한말 하고 싶으면 답면를 주라 . 핸드푠 010-8272-9896. 나는 당산들 허위계약을 검찰 수사 처리 한다.

    • 이한일 says:

      이한일 :나는 당신들하곤 아무런 관련도 없음. 국민 건강 보헙 공단는 기만한 것이다. 당신들은 나에게 한번도상의하지 않는 것은 무효 처리한다. 한말하고 싶으면 답면를 주라. 핸드푠 010-8272-9896. 나는 당산들 허위 계약을 검찰 수사 처리한다.

  3. to check and see my pension

  4. valdez roberto anicito says:

    check my pension

  5. i want to know my pension

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