Ex-Pension Chief Warns Against Falling Returns on Investment

The National Pension Service, which manages W635 trillion in retirement funds for Koreans, is facing a monumental crisis (US$1=W1,123).

The top position at the NPS has been vacant for more than a year, and the rate of return on its investments has fallen to just around one percent.

The NPS is also rocked by jitters in emerging economies over the U.S. rate hike compounded by sluggish domestic stock market performance. It faces major changes in corporate governance, while the relocation of its headquarters to the small southwestern city of Jeonju has caused many talented staff to leave the organization.

The Chosun Ilbo spoke with former NPS chief Jun Kwang-woo who headed the fund from 2009 to 2013 and has been praised for improving its performance.

Jun Kwon-woo, a former chief of the National Pension Service, talks to the Chosun Ilbo in Seoul last week.

? How do you assess the situation facing the NPS?

"It's tough. The rate of return on the NPS' investments translates directly into the livelihood of pensioners. The basic principle of operating the fund is security and the public interest, but the most important one is profitability. If the rate of return falls one percentage point, the fund will run dry five years faster.

Amid the recent leadership vacuum, various audits and relocation have weakened staff morale and enthusiasm. There has been a dangerous drain of key staff. The NPS' overseas investment capabilities, which used to drive its profits, has also weakened.

The service depends on the amount of pension contributions collected and return on investments. It's not easy to raise the contributions, so the rate of return needs to be improved. But that's not happening."

? What must be done to boost earnings performance?

"We need to create a corporate governance structure where experts can independently operate the NPS' fund. The NPS already accounts for seven percent of the domestic bourse's market cap, and it owns more than 10-percent stake in around 90 listed companies. The time will come when these shareholdings must be sold off in order to cover pension payments and this could jolt the domestic stock market.

This is why overseas investments and alternative investments are crucial. To succeed in overseas investments, we need to forge cooperative ties with global banks and keep abreast of the latest information.

It must also be shielded from political influence to stay competitive. Any outside influence results in market distortion and the public ends up paying for this. Didn't we see an example of this recently?”

? What is the most suitable governance model?

"I believe the Canadian and Dutch pension models are ideal. The Canadian national pension fund is run as an independent entity. The Dutch pension fund is run by a private investment affiliate. Both are showing better rates of return on investments than the NPS."

? How will bolstering the NPS' shareholder rights with measures like the Stewardship Code help improve returns on investment?

"The Stewardship Code aims over the long term to boost returns. There is a positive view that that will improve corporate governance, while skeptics say it will only violate management rights and decrease investment value.

The structural source of controversy is a lack of independence in operating the NPS. The Stewardship Code is voluntary, so the devil is in the details. The NPS said it will bolster shareholder activity when it comes to dividends, but payout ratios differ from company to company, so a broad approach is not advisable.

As a long-term investor, the NPS must place more importance on long-term profitability than short-term interests. We need to see if the Stewardship Code coincides with the big picture envisioned by the NPS."