Korea’s pension fund short of experts to manage alternative investment

2023.05.24 12:15:02 | 2023.05.25 09:49:17

[Photo by Lee Seung-hwan]이미지 확대

[Photo by Lee Seung-hwan]

South Korea’s National Pension Service (NPS), the world’s third-largest pension fund, is increasing alternative investment in line with the trend of global pension funds.

Alternative investment tends to yield high returns, but requires large amounts of funds over a long period of time. This is why global pension funds are increasing alternative investment as they can mobilize large-scale funds and make long-term investments. The Canada Pension Plan Investment Board (CPPIB) holds as much as 59 percent of the alternative investment proportion and the Netherlands’s largest pension fund ABP holds 33 percent.

Considering that the NPS has a low proportion of alternative investments compared with major overseas pension funds, it has more leeway to expand investment in alternative assets with relatively low yield volatility to increase long-term profits, an NPS official said on Tuesday.

What is at issue is to secure experts who can properly understand and manage alternative investments. Compared with overseas pension funds, NPS’ fund management arm manages a significantly larger amount of alternative investments per capita, raising concerns over poor verification in the investment process. Given the nature of alternative investment that requires a lot of time and legwork to make an investment decision, it is urgent to expand human infrastructure at the NPS.

The state fund entered the alternative investment market through indirect investment in venture investment associates for the first time in 2002, but it committed only 4.8 trillion won ($3.64 billion), or 2.2 percent, of its fund assets as of 2007. Since then, however, the NPS expanded the amount to 152.2 trillion won, or 16.2 percent, at the end of February this year.

By sector, at the end of last year, the state fund’s private equity investment accounted for 40.9 percent of total alternative investments at 59.8 trillion won, representing the highest proportion, followed by real estate investment at 46.4 trillion won and infrastructure investment at 38.5 trillion won.

The pace of external growth in the NPS’ alternative investment has accelerated, but its fund management personnel are in short supply. According to data obtained by Representative Choi Young-hee of the People Power Party from overseas pension funds, Canada’s CPPIB manages about 285.6 trillion won in alternative assets, with 502 management personnel, which means that the amount of assets under management per person is 570 billion won. CPPIB succeeded in defending its return rate in alternative investment at minus 5 percent last year through continued reinforcement of asset management personnel with a lot of expertise in the field, according to the data.

[Photo by MK DB]이미지 확대

[Photo by MK DB]

In contrast, the number of personnel engaged in alternative investment at the NPS is only 114, but the actual number is lower at 96. It is nearly 20 people short of the required number, according to the data. Considering the volume of alternative investments under management at the end of last year was 146.2 trillion won, the actual amount of assets under management per person is 1.52 trillion won, three times that of Canada. Furthermore, as many as 36 people have resigned over the past five years.

“Alternative investment managers tend to be overloaded with work and there is even an atmosphere where they are trying to shun asset management,” said an official familiar with internal affairs at the state fund. “Since alternative investment takes more than 10 years to exit, we need to create an environment where those with a lot of expertise in the field can do their job for a long time.”

It is crucial to cultivate human resources for alternative investments which are carried out using thoroughly private information based on human networks. As the NPS is aggressively increasing alternative investments, it is critical to secure competent manpower, but the reality is that it has to worry about the outflow of human resources due to complicated treatment issues.

The NPS said that it will strengthen its alternative investment capabilities, including hiring more experts at overseas offices. However, the prevailing opinion is that it will be difficult for the state fund to increase alternative investment at a time when its manpower outflows occur frequently. There is also concern that the state fund may fall behind in competition with major overseas pension funds to secure high-quality alternative investment assets.

The amount of alternative investment contracts for the state fund, meanwhile, has increased by more than 50 trillion won from a year ago at the end of 2021, exceeding 200 trillion won.

By Kim Jung-beom and Yoon Yeon-hae

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