[Opinion] Regret over the Audit of the National Pension Fund Management

The Board of Audit and Inspection announced the results of its audit on the 'National Pension Management Status,' conducted on the Ministry of Health and Welfare and the National Pension Service on the 30th of last month. As of the end of May, the size of the National Pension Fund has reached 750 trillion won, making it essential to understand the overall management status, including financial calculations and fund operations, and to prepare and implement improvement plans to ensure the stability of citizens' retirement lives. While reviewing the main audit results, there are several issues that leave much to be desired.

The Board of Audit and Inspection pointed out that when establishing the '4th Comprehensive National Pension Operation Plan' in 2018, the Ministry of Health and Welfare and the National Pension Service did not set financial targets due to reasons such as the need for a sharp increase in contribution rates for long-term financial stability of the National Pension. Instead, they only presented plans for adjusting contribution rates and benefits. This led to problems such as the inability to evaluate financial stability, difficulty in establishing long-term asset allocation strategies, reduced reliability of financial projections, and challenges in long-term performance evaluation.

Not only the National Pension but all public funds set explicit financial targets to secure long-term financial stability and conduct comprehensive asset-liability management analyses based on assumptions related to the fund to carry out mid- to long-term financial projections. Based on these results, a target rate of return that can stably achieve the financial goals is determined, and strategic asset allocation and fund operation plans are prepared and executed to achieve this.

In the 4th plan, the Ministry of Health and Welfare and the National Pension Service were not unaware of these points and did not prepare financial projections and comprehensive operation plans without reasonable financial targets. The comprehensive operation plan was prepared on the premise that the basic framework of the current National Pension system would not be changed, including financial projections and improvement plans for the system and fund operations. As a result, the forecast that the size of the National Pension Fund would increase and then sharply decrease and be depleted under any reasonable assumptions did not change. The fundamental reason for this outcome lies in demographic changes caused by low birth rates and aging.

For the National Pension to maintain financial stability, it must have the capacity to pay benefits sufficiently through contribution income and fund operation returns without sharp increases in contributions or reductions in benefits. The progression of low birth rates and aging negatively impacts the National Pension finances primarily because the population of young contributors decreases while the elderly population receiving benefits increases.

Low birth rates and aging also lead to a decrease in the working-age population, which will reduce the Gross Domestic Product (GDP) growth rate. Although productivity improvements and investments can partially compensate, overcoming the decline in GDP growth rate due to population decrease is difficult. The decline in GDP growth rate acts as an obstacle to increasing the domestic asset operation return rate, which is directly proportional to it, making it challenging to improve fund operation returns. The failure to set financial targets during the 2018 financial projections reflected the reality that no reasonable financial targets could be achieved without significant contribution increases, benefit reductions, or unrealistically high fund operation returns under low birth rates and aging.

Currently, the National Pension's target rate of return is determined by adjusting the nominal GDP growth rate. This is based on the logic that the fund must achieve a return rate that preserves its real value, and mid- to long-term asset allocation is decided so that the fund's expected return rate is at least equal to the target rate, with actual fund operations carried out accordingly. Of course, the setting of the target rate in this method has arbitrary aspects and, as the Board of Audit and Inspection pointed out, is not based on reasonable financial targets. However, if unattainable financial targets are set and excessively high target returns are determined accordingly, fund operations will inevitably bear excessive risks according to the basic investment principle of high risk-high return.

The operation of the National Pension is an extremely important matter for securing the retirement of the people. Measures to improve this must continue to be discussed and promoted. It seems necessary to hasten institutional reform discussions to achieve long-term financial stability by gathering the wisdom of not only the Board of Audit and Inspection but also stakeholders involved in National Pension operations.

Shin Jin-young, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School

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