[Reporter’s Notebook] The Role of the National Pension Service as KOSPI 5000 Approaches

The National Pension Service (NPS) has taken the unusual step of convening an emergency meeting of the Fund Management Committee at the end of January. While the Ministry of Health and Welfare, which oversees the NPS, explained that this is to “review the portfolio,” the market expects that the agenda will include a discussion on increasing the cap on domestic stock holdings.

As of the end of October last year, the NPS’s domestic equity allocation was reportedly already approaching 18 percent. This far exceeds the 14.4 percent target for domestic equity holdings set for this year. The concern is that, if the current guidelines are maintained, the NPS may end up selling stocks automatically as indices fluctuate, which could amplify market volatility.

The key question is: why now? The Fund Management Committee typically meets on a regular basis to review the fund’s operations. This time, an emergency meeting has been called sooner than expected. The timing is notable. With the KOSPI surpassing 4,900, the government’s much-touted “KOSPI 5,000” milestone is now within reach.

The legal and institutional role of the NPS is clear: to ensure long-term and stable returns on the nation’s retirement funds. To achieve this, independence, political neutrality, and market neutrality must remain core principles. Supporting the index is not one of the NPS’s main responsibilities. Of course, if this move is intended to prevent market price distortion caused by mechanical selling when the cap is reached, it could be argued that the NPS is acting to uphold market neutrality.

Nevertheless, questions remain as to whether this action needed to be taken at this moment. Using tactical and strategic asset allocation, the NPS could theoretically increase its domestic equity share to the 19 percent range. There are also technical options available, such as adjusting the pace of rebalancing and executing trades in tranches to mitigate market impact.

This move may reinforce the perception among the market and foreign investors that the NPS is being used as a tool to achieve policy objectives. In the next downturn, or under the next administration with new goals, the rationale of “preventing mechanical selling” could be invoked again and again. As this perception grows and precedents accumulate, the NPS risks losing not only returns but also credibility.

Foreign capital is already eyeing the Korean stock market and its companies. In this context, there is a different role for the NPS to play in achieving a healthy KOSPI 5,000. Ultimately, the NPS is too large a whale for the domestic market to absorb in its entirety. Rather than intervening directly in market prices as an individual investor, the NPS should focus its efforts on active shareholder engagement to address backward corporate governance and insufficient shareholder returns among Korean companies. Serving as a breakwater against the “Korea Discount” (the undervaluation of the Korean stock market) is the most effective and convincing role the NPS can play.

If corporate fundamentals improve, foreign investors will naturally become more interested and motivated to invest. In the end, the index follows as a result, not a target. What the NPS must uphold is not a number, but its principles.

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