Seoul weighs independence for asset management at NPC

The $130 billion pension fund may be spun off to run money more professionally.

South Korea's National Assembly is considering giving the country's W133 trillion ($130 billion) National Pension Corporation more independence in how it runs its affairs and manages the nation's retirement assets.

Cho Koog-jun, executive director and CIO of the NPC's fund management centre, says a decision may be made by the end of this year. The NPC's fund management centre would then be spun off with the aim of professionalizing how it manages money, while the NPC itself would carry on with contribution collection and benefit payments.

The proposal was mooted by the government in September but has stalemated between the ruling Uri party and the opposition. The government, with the support of the Ministry of Health and Welfare, is hoping to pass the reform this month during a special session of the National Assembly. But given the logjam, it is possible the initiative could languish all year.

The NPC already hires all its managers from professional, private-sector firms by its own process, rather than take seconded bureaucrats from the government. But, say people familiar with the NPC, the Ministry of Health and Welfare still exerts a strong influence over the hiring process. Moreover, the government wants to allay suspicions that it uses the National Pension Fund for fiscal purposes, possibly at the expense of members' interests. Spinning off the management centre would improve transparency and head off political influence.

The Korean government submitted a proposal to amend the National Pension Law last year in an effort to cope with ever-increasing concerns among the public that the National Pension Fund is headed for a fiscal crunch, with benefits outpacing contributions, and that it needs to improve investment returns.

MoHW would continue to serve as regulator, but the NPC would be free in areas such as hiring and remuneration. The idea would be to pay its fund managers along private-sector lines, not as government functionaries, and reward merit - although NPC officials say they are already compensated along private-sector lines.

If these changes go through, this should be music to fund managers' ears. The huge size of the NPC means it is increasingly going to rely on external fund managers, particularly for global investments. Both NPC management and fund houses would welcome a more professional atmosphere, one less dependent on political considerations.

Cho made it clear that the National Assembly and the NPC have no intentions to manage funds on behalf of third parties.

The life insurance sector offers a recent precedent for spinning off fund management units. Samsung Group led the way two years ago when it removed most asset management activities from Samsung Life and Samsung Fire and Marine and put them in the hands of Samsung Investment Trust. The idea was that employees of an insurance company weren't good at managing money, and it was culturally very difficult to start paying some staff high wages and rewarding them for taking investment risks. Instead, this work was hived off into an organization that could pay people higher salaries and reward professional money management skills along private-sector lines.

Since then other insurance companies such as Kyobo Life have done the same.

The NPC is not planning new international mandates this year. It has been a year since it funded its first international mandate. Capital International, Fidelity Investments and State Street Global Advisors now manage global equities for NPC, while Wellington Capital Management is in the process of obtaining the necessary licenses.

Last year the NPC also awarded six more mandates, three in global equities (ING Investment Management, Morgan Stanley Investment Management and UBS Global Asset Management) and three in global fixed income (Goldman Sachs Asset Management, Pimco and Western Asset Management). These mandates have yet to be funded.

"Our thought is that we should initially establish a stable base of external managers and not attempt risky strategies," says Cho. "Afterward we can try to add other strategies."

The main innovation this year will be domestic, where the NPC has earmarked W350 billion for private equity funds. It is now in the process of evaluating domestic private equity funds, a number of which have cropped up in recent months. The NPC is also on the lookout for domestic infrastructure opportunities.

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