The National Pension Service (NPS), South Korea’s state-run pension fund and the country’s largest institutional investor, has posted a record profit, buoyed by a strong rally in domestic equities that pushed the fund’s year-to-date return above 20% – the strongest performance among global public pension funds.
The state pension fund’s assets under management (AUM) surpassed 1,400 trillion won ($979 billion) at the end of October, up more than 200 trillion won from 1,212 trillion won at the end of last year, according to investment banking sources.
That surge represents pure investment gains over just ten months, lifting the NPS’ portfolio to about half the size of Korea’s gross domestic product (GDP) and cementing its position as the world’s third-largest pension fund.
The fund’s total investment returns are estimated to have exceeded 20%, about 100 basis points above its benchmark.
By comparison, last year’s record 15.3% return slightly lagged the benchmark by 23 basis points.
DRIVEN BY SOARING KOSPI
This year’s performance was driven by the soaring Kospi index, which has jumped more than 60% since January, led by semiconductor giants Samsung Electronics Co. and SK Hynix Inc.
Domestic equities were the standout performer, returning more than 60% and accounting for the bulk of gains. The pension fund posted 0.87% losses from domestic stocks in the first 10 months of 2024.
The NPS’ overseas stock holdings also benefited from a robust year for US technology shares this year, while bond and alternative assets delivered steady positive returns amid expectations of lower interest rates.
“The scale of investment income this year is unprecedented for a single fiscal year,” said a Seoul-based pension strategist. “With Korean equities soaring and risk assets performing broadly well, the NPS has achieved what few sovereign investors ever do.”
Other major global funds have reported comparatively lower gains.
Canada’s CPPIB returned 14.2% last year, Japan’s GPIF 14.2%, Norway’s GPFG 13.1% and California’s CalPERS 9.1%.
Given this year’s relatively modest performance of US equities, analysts said none of those funds are likely to match Korea’s 20%-plus result.
LONG-TERM IMPACT ON SOLVENCY
The NPS’ three consecutive years of double-digit gains are now altering projections for the sustainability of the country’s pension system.
The fund has averaged a 6.27% annual return over the past two decades, but maintaining this year’s conservative 20% gain would lift its 20-year average to nearly 7%.
That seemingly small rise could have major fiscal implications.
Under the government’s latest review, assuming a 4.5% average return, the pension fund is projected to be depleted by 2057.
A sustained 6.5% return, however, could push that horizon further to 2090 – a 33-year extension – with the onset of deficits delayed by nearly three decades to 2070, analysts said.
The pension fund’s investment income of 200 trillion won so far this year dwarfs the 62 trillion won collected in contributions from the pension subscribers, underscoring how returns, rather than premiums, have become the primary driver of the fund’s solvency.
NPS’ GOVERNANCE, PORTFOLIO FLEXIBILITY
“The higher the assumed investment return, the later the depletion date,” said Kim Yong-ha, a social welfare professor at Soonchunhyang University. “It’s time to revisit the actuarial assumptions, especially the rate-of-return forecasts, that underpin pension reform.”
The NPS’ annual return rates have averaged 6.8% since its inception in 1988.
Policymakers and former fund executives said the latest return rate should prompt deeper negotiations on the pension fund’s governance and portfolio flexibility.
“A structural improvement in returns can only be sustained if the fund’s investment arm operates with more independence and agility,” said a former senior NPS official. “Strategic exposure to risk assets, long-term allocation discipline and operational autonomy are crucial if the fund is to remain a reliable pillar for future generations.”
With the benchmark Kospi stock index at record highs and global markets still rallying, the NPS could yet post an annual return approaching as much as 25%, analysts said.
