National Assembly Pension Special Committee "Need to Improve Governance System"

The Special Committee on Pension Reform in the National Assembly (Pension Special Committee), whose activity period is scheduled to end this month, held a public hearing on the 26th on ways to improve the National Pension Fund's investment returns.

The public hearing was held to introduce the reform tasks discussed so far and to hear opinions from various experts. Private advisory committee members under the Pension Special Committee attended. Each expert presented ways to improve the National Pension Fund's returns. Professor Kim Woo-chang from KAIST's Department of Industrial and Systems Engineering and Professor Lee Jun-haeng from Seoul Women's University’s Department of Economics gave presentations, while Professor Yeo Eun-jung from Chung-Ang University’s Business Administration Department and Professor Yoon Seon-jung from Dongguk University’s Department of Business Administration participated in the discussion.

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The National Pension Fund's return rate recorded a historic low of -8.22% last year. Along with the deterioration in returns, the fund depletion point has moved up by two years compared to five years ago. The point at which the fund turns to deficit has also been brought forward by one year, drawing heavy public criticism. Consequently, calls for improving the National Pension Fund's returns have grown louder. This occasion was arranged accordingly.

Professor Kim Woo-chang of KAIST proposed improvement possibilities based on financial theory. He emphasized, “The top priority for improving returns is to clearly define the roles of insurance, finance, and the fund by generation at the institutional level. Through this, securing sufficient investment periods, achieving social consensus and understanding of risk levels, and improving long-term returns through additional investment risks can be accomplished.”

Professor Lee Jun-haeng of Seoul Women's University analyzed that return improvement can be induced through asset allocation competition. He said, “Compared to a single strategic asset allocation, diversification of asset allocation reflecting various market views can reduce asset allocation risk. Especially during financial market crises, it allows flexible and multifaceted responses and will help resolve issues related to large pension funds.”

He added, “Currently, alternative investments can be separated and divided, and the remaining assets can be split into n funds by dividing them 1/n each, with an additional fund handling cash inflows and outflows. Since the current proportion of alternative investments is relatively low, alternative investments are possible even in the n funds, and the diversification effect of asset allocation reflecting various perspectives on the global capital market will appear.”

Professor Yeo Eun-jung of Chung-Ang University urged improvements in the governance system. She emphasized, “It is desirable to separate and operate the pension system and policy sector from the pension management sector. The Fund Management Headquarters should be separated from the corporation to support independent management.”

She also stated, “To overcome the limitations of investment centered on existing individual asset classes and secure investment flexibility, a Tactical Asset Allocation (TAA) Overlay system using exchange-traded derivatives should be introduced. For benchmarking the management system, a multi-asset ($1.5Bil) is currently being entrusted for management, and it is necessary to analyze the effectiveness of its introduction and provide feedback for future asset management.”

Professor Yoon Seon-jung of Dongguk University also mentioned governance. He said a governance structure that balances representativeness and expertise appropriately is needed. Professor Yoon explained, “It is possible to consider reorganizing into a dual structure consisting of a policy committee (ALM Committee) that determines the fund’s risk tolerance level composed of representatives recommended by the government, National Assembly, and subscriber organizations, and a fund management committee composed of experts that actively conducts asset allocation within the allowed risk tolerance.”

Meanwhile, the Pension Special Committee held three public hearings this month. This public hearing was the third in order. Based on the discussions from the public hearings, the committee plans to publish a report containing reform direction proposals at the committee level.

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