Escaping the COVID Quagmire One by One... Pension Funds Turn to '+ Returns'

National, Private School, and Government Employee Pensions
Creditor Asset Returns Perform Well
Stock Sector Still '-' So Far
Plan to Increase Overseas Stock Investments for Stable Investment Security

[Asia Economy Reporters Jihwan Park and Minji Lee] Pension funds, major players in the capital market, are gradually recovering from the shock caused by the novel coronavirus disease (COVID-19). Although the global financial markets experienced turmoil and negative returns during the first quarter due to the COVID-19 pandemic, they have recently been escaping from poor performance one after another.

According to the financial investment industry on the 31st, the National Pension Service's fund return rate as of the end of May this year was tentatively estimated at 0.37%. It started at 0.60% in January but recorded continuous negative returns due to the spread of COVID-19, with -0.45% in February, -6.08% in March, and -2.57% in April, before successfully turning positive for the first time.

The Teachers' Pension is recording the highest return rate among major pension funds. Although it showed a poor performance with a -0.65% return rate until April, it has shown a rapid recovery with 2.64% in May and 2.49% in June. In the case of the Government Employees Pension, it was the only major pension fund to show a negative return of -0.3% until May but posted a positive return of 0.5% in June.

The recovery in pension funds' returns was largely influenced by domestic and overseas bond sectors. The National Pension Service's cumulative domestic and overseas bond returns as of May were 2.27% and 10.59%, respectively. As of June, the Teachers' Pension posted overseas bond returns of 13.15% and domestic bond returns of 4.56%, while the Government Employees Pension's bond returns were recorded at 2.2%.

The solid performance of bond asset returns is attributed to the decline in interest rates as major domestic and global countries implemented accommodative monetary policies such as interest rate cuts and bond purchases to overcome the COVID-19 situation. Bonds have a structure where bond valuation gains increase when market interest rates fall because the discount rate used to measure present value decreases.

Foreign exchange gains also increased due to the rise in the won-dollar exchange rate. A pension fund official explained, "In the case of overseas investments, significant foreign exchange gains occurred due to the rise in the dollar value, which showed strength until June."

However, the operating returns in the stock sector remain negative. The National Pension Service's domestic and overseas stock returns were -6.18% and -2.63%, respectively. A National Pension Service official said, "Returns on domestic and overseas stocks are slow to recover due to concerns about prolonged economic recession and U.S.-China conflicts related to the Hong Kong security law."

The Teachers' Pension also recorded poor stock investment returns. Until June, domestic direct stock investment returns were -2.41%, and domestic indirect stock investment returns were -3.16%, both negative.

However, overseas stock investment returns showed slight positive returns of 0.37% in May and 0.07% in June. A Teachers' Pension official explained, "The stock market hit its lowest point in March and has been trending upward until July, and expanding the proportion of domestic and overseas stock investments in April was effective," adding, "As of the 29th of this month, returns are in the 4% range for domestic stocks and 5% range for overseas stocks." The Government Employees Pension also posted negative stock returns of -5.3% and -2.9% in May and June, respectively.

Pension funds are focusing their asset investment strategies on overseas investments to secure stable returns in the mid to long term. They plan to gradually reduce the proportion of domestic stock investments while increasing overseas investments. The National Pension Service plans to lower the domestic stock target ratio by 0.5 percentage points and raise the overseas stock target ratio by 1.8 percentage points next year compared to the previous year. According to the mid-term asset allocation plan released by the National Pension Service, the target asset allocation by the end of 2021 is 16.8% domestic stocks, 37.9% domestic bonds, 25.1% overseas stocks, 7.0% overseas bonds, and 13.2% alternative investments. By the end of 2025, the plan is to reduce domestic stocks to 15% and increase overseas stocks and overseas bonds to around 35% and 10%, respectively. The Teachers' Pension and Government Employees Pension also plan to reduce their domestic stock investment ratios by 0.4% and 2.1 percentage points, respectively, this year.

At the 8th National Pension Fund Management Committee held on the same day, Park Neung-hoo, Minister of Health and Welfare and chairman of the Fund Management Committee, said, "With the fund size approaching 1,000 trillion won, overcoming the limits of domestic investment and minimizing domestic market shocks caused by asset sales and investment risk diversification make expanding overseas investment inevitable," adding, "The overseas investment ratio will be raised to over 50% by 2024."

This content was produced with the assistance of AI translation services.