The National Pension Service (NPS) is moving toward expanding its domestic equity holdings in its five-year asset allocation plan. The shift comes as a recent KOSPI surge led by semiconductor stocks has sharply pushed up the share of domestic equities in the NPS portfolio. As of the end of February, domestic stocks accounted for 24.5 percent of the NPS portfolio, far exceeding the 19.9 percent ceiling set under its strategic asset allocation. The fund finds itself in a dilemma: selling stocks during a rising market would hurt returns, but continuing to buy would deepen concentration in a single asset class. It is a moment that calls for careful deliberation in redefining the asset management framework.
As of the end of April, the NPS's total fund size is estimated to have reached 1,700 trillion won, an increase of about 250 trillion won from the end of last year. In just four months, the fund surpassed last year's full-year investment returns of 231 trillion won and posted gains nearly four times its expected premium income for this year (64 trillion won). It is a remarkable performance powered by the semiconductor stock rally. Yet such results can also become a burden for the NPS. With the KOSPI rally pushing the domestic equity ratio close to its limit, an artificial adjustment has become unavoidable. Rebalancing in line with the asset allocation rules could send up to 130 trillion to 150 trillion won worth of shares to the market, an inevitable shock. The Fund Management Committee's decision in January to defer rebalancing reflected this reality.
The NPS is the last line of defense for the retirement security of Korean citizens. It must pursue both returns and stability. Stock markets cannot rise indefinitely, and elevated returns are difficult to sustain. Advocating expanded allocation simply because domestic equities are currently strong is an imprudent approach. A deeper home bias could weaken the risk diversification function of the asset portfolio. Moreover, all four preliminary plans presented by the Ministry of Health and Welfare on the 15th are premised on raising the domestic equity ratio, raising concerns that the government could misuse the NPS, including by leveraging it to prop up the stock market. This is why the Fund Management Committee must produce a balanced medium-term asset allocation plan that mitigates risks. At the same time, now that improved returns have provided some breathing room, the stalled discussions on follow-up NPS reform must also gain momentum.
