I’ve talked at length about a variety of pension reserve funds on this website, such as the Canada Pension Plan Investment Board, the New Zealand Superannuation Fund, and the Irish National Pension Reserve Fund. But I don’t think I’ve ever written a post on Korea’s National Pension Fund (NPF). That’s an odd oversight, as the NPF is the fourth largest pre-funded pension in the world. It’s valued at close to $270 billion dollars!
Anyway, today’s the day, as Woochan Kim and Fiona Stewart of the OECD have just released an interesting new paper entitled “Reform on Pension Fund Governance and Management: The 1998 Reform of Korea National pension Fund.” The paper tracks the design process for the big pension reform in 1998. And, for those of you out there who just fell asleep, it’s actually a fascinating topic. Seriously.
“First, better governance and management structures can improve the returns on NPF and this, in turn, can postpone the year of its complete depletion. Second, by limiting the amount of funds government can borrow from NPF, governance and management reform measures can act as a fiscal disciplinary mechanism against the government. A strong fiscal position will become critical in later years when NPF gets completely depleted and Korea needs to proceed to a pay-as-you-go system. Third, a mega-sized fund with a long investment horizon following global best practices in investment management can have a positive spillover effect to the local asset management industry. For example, external managers complying with the investment performance reporting standards set by NPF and new types of asset management companies emerging with NPF‘s increased investment in alternative asset classes are just a couple of examples. Fourth, a governance environment that mandates NPF to solely pursue the best interest of its pension participants/recipients can place NPF in a better position to engage in shareholder activism, which, in turn, improves the governance of public corporations in Korea.”
Agree to agree with all of that. Moreover, if you’ve nailed the governance and management set-up, then you can start to play around with some of the more fun (i.e., risky and illiquid) assets, such as private equity and infrastructure. And, as I’ve said a number of times, these are the assets that align best with SWFs’ innate characteristics.
The really interesting bit in this paper, however, is how the NPF has managed to stop the (previously endemic) political intrusions into the fund’s operations. Recall that the pre-funded component of the Korean pension dates back to the National Welfare Pension Act of 1973. Now, you would be forgiven for assuming that the establishment of the Korean pension fund was based on the notion of providing pensions…it wasn’t. Instead, President Park thought a pension fund would be a useful mechanism for mobilizing domestic capital in the service of his industrialization program. As such, political influence and intrusion within the fund was institutionalized from the start. That may be good for local industry, but it’s definitely bad news for pensioners.
Pension reform in 1998 contained the government’s unprincipled intrusions. This was done by refocusing the fund’s operations towards maximizing the welfare of the beneficiaries (and not its political masters) and establishing a variety of nomination and appointment procedures for getting a seat on the NPF’s board of directors.
“The 1998 Reform outcomes institutionalized, meaning they were not reversed in later years. It is true that there were attempts from other government ministries, especially from MOFE, to use NPF reserves for other policy purposes. But, most of the attempts failed. Overall, the NPF Management Committee exercised its exclusive power over the management of NPF for the sole purpose of maximizing the interest of pension participants.”
Well played, NPF.
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