The National Pension Service's (NPS) decision to raise its domestic stock allocation from 14.9% to 20.8% by next year and to expand—but not disclose—the range of its strategic asset allocation (SAA) is being interpreted as a desperate measure taken in a situation where it was difficult to either raise or maintain the existing limit. While the government's position is to minimize market shock by avoiding mechanical selling, concerns are emerging over how sustainable the new asset allocation plan can be, given that the actual holding already exceeds even the new limit by nearly 10 percentage points.
The National Pension Fund Management Committee took the unusual step on the 28th of adjusting this year's target weights by asset class. While the committee typically only decides on a mid-term asset allocation plan covering the following five years, the fact that the domestic stock holding already exceeds the limit by nearly 15 percentage points was a contributing factor. The mid-term asset allocation is a plan that determines target weights and management direction by asset class—including stocks, bonds, and alternative investments—over the next five years to enhance the profitability and stability of the National Pension Fund.
The committee decided to adjust this year's domestic stock target weight from 14.9% to 20.8%, an increase of 5.9 percentage points. The decision reflects the structural changes in the domestic stock market following amendments to the Commercial Act, including mandatory cancellation of treasury shares, as well as the fact that the domestic stock weighting has already grown significantly. "This is a measure to enhance the long-term profitability and stability of the fund and to mitigate the market impact of rebalancing," a government official explained.
The committee also decided to expand the SAA permissible range for domestic stocks to flexibly respond to volatile domestic stock market conditions. The intent is interpreted as securing operational flexibility through SAA to prevent mechanical selling. However, the government decided not to disclose the SAA permissible range, which had previously been 3%. A government official said, "This is because there are concerns about affecting the fair execution of fund management duties and the stability of financial markets."
The committee also improved rebalancing rules, including reducing the maximum daily rebalancing scale, to minimize market impact and stably enhance fund returns. The committee plans to monitor the stock market through the end of the year and adjust the SAA permissible range one more time at year-end.
According to government sources, the NPS fund's current domestic stock weighting reaches 30%. Even applying the new limit (20.8%), which takes effect from the end of next month, the holding exceeds the limit by nearly 10 percentage points. In a situation where any way of raising the stock weighting could be problematic, the committee appears to have actively utilized SAA to pursue both improved profitability and market stability.
Indeed, global investment banks (IBs) including Morgan Stanley (10,000), Goldman Sachs (9,000), and JP Morgan (10,000) are forecasting continued strength in the Korean stock market. If the NPS were to raise its stock weighting only slightly from the existing 14.9%, it would once again face the limit issue. While it would be possible to adjust the weighting without making additional investments in the bull market, criticism could arise that an institution responsible for the public's retirement funds is failing to maximize returns through stock investment.
A significant increase in the stock weighting has the disadvantage of making it difficult to respond flexibly in a downturn. Considering that a benchmark interest rate hike is expected in July of this year, along with macroeconomic risks such as rising U.S. Treasury yields and oil price instability, an excessive exposure to risk assets could come back as a boomerang to the fund—the public's retirement money—in the event of a major market shock. In fact, worker-side committee members at the fund committee argued that the NPS should adhere to its principles due to such concerns.
The market views that the committee's decision will avert the originally feared sell-off of hundreds of trillions of won. Lee Jun-seo, a professor of business administration at Dongguk University, said, "If you reverse-calculate considering the NPS's current domestic stock holding ratio, it can be estimated that the SAA and tactical asset allocation (TAA) were adjusted within a range that does not require selling domestic stocks," adding, "It appears that the selling pressure can be alleviated to some extent." Nam Jae-woo, head of the Fund and Pension Department at the Korea Capital Market Institute, assessed that "the NPS has signaled to the market that there will be no mechanical large-scale selling."
Health and Welfare Minister Jeong Eun-kyeong said, "The stable management of the National Pension is a key task that protects the public's precious retirement funds and supports long-term fiscal stability," adding, "We will continue to closely monitor market conditions and ensure that fund management harmonizes principles with flexibility."
