"Record Gains, But the Real Challenge Begins Now"... KOSPI Rally Deepens NPS Dilemma

Fund Size Hits Record High as Domestic Equity Allocation Expands
Selling Needed for Asset Allocation, But Public Pressure Mounts
"Missing the Right Timing for Selling Could Significantly Lower Returns"

Jung Eunkyung, Minister of Health and Welfare, is speaking at the 3rd National Pension Fund Management Committee held on the 14th of last month at the Seoul Government Complex Annex in Jongno-gu, Seoul. Photo by Yonhap News

As the KOSPI continues its unprecedented rally, the National Pension Service (NPS) is facing growing concerns. While the fund has enjoyed strong returns this year, increasing its assets by approximately 250 trillion won, the burden of having temporarily raised its allocation to domestic equities is also mounting. To bring down the now-excessive share of domestic stocks in its portfolio, the NPS would need to sell off tens of trillions of won worth of equities on the market. However, analysts say it will not be easy to do so in the face of political scrutiny and criticism from retail investors.

According to the investment banking industry on May 11, the NPS fund has already surpassed 1,700 trillion won in assets. Considering that the fund's reserves stood at 1,458 trillion won at the end of last year—when it achieved a record annual return of 18.82%—this means it has grown by 250 trillion won in just four months.

Simple calculations show that the NPS has already posted a return of over 16% so far this year, driven by the KOSPI rally. The general consensus is that the NPS has fully benefited from the KOSPI surpassing the 7,000 mark, thanks to its temporary expansion of domestic equity holdings.

In January, the NPS temporarily suspended the enforcement of its Strategic Asset Allocation (SAA) limits at a Fund Management Committee meeting, allowing it to effectively increase its allocation to domestic equities without restriction. As of the end of February, the NPS's domestic equity ratio had already climbed to 24.5%. Given the recent market rally, it is estimated that this figure surpassed 25% in May.

Under normal rules, if the NPS's domestic equity holdings exceeded its 2026 target allocation of 14.9%, plus or minus the SAA tolerance of 3 percentage points (for a maximum of 17.9%), it would have been required to mechanically sell domestic equities. However, with the temporary suspension in place, the NPS has delayed selling, and its domestic equity allocation has swelled far beyond the target range.

The real issue starts now. Despite having achieved record-breaking results, concerns are growing that the NPS’s basic asset allocation principle—the foundation of pension fund management—could be undermined by its excessively large domestic equity exposure. In particular, the NPS should reduce its overweight position during a bull market to lock in gains and prepare for increased volatility in the future.

The longer the NPS delays selling domestic equities, the more exposed the nation’s retirement savings become to the volatility of the Korean stock market. While returns may increase during a bull run, losses could be just as significant during a downturn. Moreover, public sentiment that the NPS should support the domestic stock market, combined with political pressure conscious of retail investors, makes portfolio rebalancing even more difficult for the NPS. Mathematically, reducing the domestic equity allocation from 25% to 18% would require selling about 120 trillion won worth of stocks. With local elections approaching, it is seen as highly unlikely that the NPS would be willing to take on this burden.

The NPS has already paid the price for excessively increasing its domestic equity allocation during the retail investor boom that followed the COVID-19 outbreak. At that time, the NPS also expanded its SAA tolerance to raise its exposure to domestic stocks but failed to reduce it in time during the rally. As a result, when global liquidity tightened and the market slumped, the NPS’s domestic equity return plunged to -22.8% the following year.

A senior official at a domestic pension fund and mutual aid association said, "If you ignore the fundamental principle of asset allocation, you will inevitably face the consequences," adding, "To avoid limiting your own flexibility, you need to gradually reduce your asset holdings during a bull market."

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