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National Pension Service (NPS) President Park Hae-choon said Tuesday that the portion of stocks in its portfolio will rise to 40 percent by 2012 from 17.5 percent at the end of last year, in order to raise its return on investments by two percentage points. The portion of investments in real estate, social overhead capital projects and overseas resource development will rise from 2.5 percent to 10 percent, while that for bond investment will be reduced to 50 percent from 80 percent.
The NPS had been criticized until now for its low return on investments by sticking only to bonds. CalPERS, or the California Public Employee Pension Fund invested 56 percent of its assets into stocks and achieved an average 12.3 percent in annual return on investments during 2005 to 2007. Over the same period of time, the NPS¡¯ return on investments was 6.1 percent.
A 2 percentage point increase in returns on investments is said to have the effect of pushing back the date of the NPS fund¡¯s depletion from 2060 to 2075. The longer the period of time that people can receive pension payments, the more stable the lives of senior citizens will be and the government will see a drop in fiscal expenditures. The entire public would welcome an aggressive stock market investment strategy by the NPS if it could lead to higher returns on investments.
That¡¯s why the NPS has been moving to boost the ratio of investments into stocks and other alternative investments over the last two to three years, in order to boost returns on investments. Last year, the fund management committee, which makes top decisions at the NPS, approved raising the portion of stock investment in its portfolio to 30 percent by 2012. Over the next four years, the NPS will invest W80 trillion (US$1=W1,014) in both domestic and foreign stock markets over the next four years.
But it remains a mystery why Park suddenly announced the decision to pour in another W40 trillion into the stock markets. During the first half of this year, the NPS suffered a 10.7 percent loss on the stock investments as bourses around the world performed poorly. Any aspiration to make big profits on the stock market must be accompanied by the risk of substantial losses. It remains unclear whether the NPS is ready to deal with those risks and just how capable it is in stock investments and risk management.
Some believe Park¡¯s rush to begin aggressive investments in stocks stems from discussion with Cheong Wa Dae. What makes us suspicious is that perhaps the government has designated the NPS to move to revive the Korean stock market, which has been mired in a slump after foreign investors left in droves after dumping shares. The fact that such suspicions arise shows just how murky the NPS¡¯ asset management practices were.
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