April 19, 2024

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[THE INVESTOR] For most South Koreans, the national pension fund is the last bastion for their years after retirement.

Launched in 1988, the 28-year-old pension operator currently has more than 21 million subscribers contributing 9 percent of their income every month.

The power the National Pension Service yields in the capital markets is enormous. By size, the NPS is the world’s fourth-largest pension fund and has more than 5 percent of shares in about 290 companies.

However, the ongoing political scandal involving President Park Geun-hye and her longtime friend Choi Soon-sil exposed how the state-run pension operator seems easily swayed by political influence, raising questions about its political neutrality and independence in managing the 545 trillion won ($451 billion) it has amassed from the people.

NPS’ Seoul office as well as residences and officials involved in the case were raided by special investigators zeroing in on its dubious decision to approve a controversial merger between two Samsung affiliates last year.

The team led by independent counsel Park Young-soo suspects that Samsung may have wanted to use Choi’s connection to President Park to pressure the NPS to approve the deal, widely known as a crucial step for the group’s de facto leader Lee Jae-yong to consolidate power. 

Through a stock-for-stock transaction with a ratio of 1:0.35, Samsung C&T merged with Cheil Industries, despite strong opposition by individual shareholders led by US hedge fund Elliott Associates.

Questions have remained over the ratio of the merger, which was considered disadvantageous to Samsung C&T shareholders. Although Samsung officials explained the ratio reflected the market, critics have highlighted the timing of the merger announcement which took place when Samsung C&T’s stock price had been declining.

NPS was the largest institutional investor of Samsung C&T and is under the control of the Welfare Ministry. Before the merger, the NPS held an 11.6 percent stake in Samsung C&T and a 5 percent stake in Cheil Industries. The pension fund has reportedly lost 300 billion won over the merger.

There are also questions over the approval process by the NPS, as the decision came right after a review by an internal committee, not even by the National Pension Fund Management Committee, the top decision-making body of the fund.

The chairman of the committee then, Welfare Minister Moon Hyung-pyo, did not put the Samsung merger case to a vote, leaving then-former asset management head Hong Wan-sun to decide the matter internally, according to reports. Even if he did, the top decision-making body may have found it difficult to oppose the case, as it has been acting as a “rubber stamp,” a local report said, citing an industry source.

In a 2013 interview with The Korea Herald, former NPS head Choi Kwang, a free market economist, had said the committee needs more business professionals, implying that the body should embrace market principles and allow greater investment authority to raise funds in a fast-changing environment.

The 20-member committee, chaired by the welfare minister, consists of six representatives from the government, three from the business sector, another three from the labor sector, six from subscriber groups and only two investment experts.

The nation’s largest investor in bonds and stocks, however, is still mired in regulatory controls in its investment allocation and limited staff of financial experts. Unlike other pension operators in developed markets, the NPS has been conservative in terms of diversifying its investment portfolio, leaning greatly on big names like JP Morgan and Goldman Sachs.

“Pensions of developed markets are more sophisticated ... and they are more open-minded when looking for emerging managers, not just big names,” said a Hong Kong-based hedge fund manager who recently met NPS officials.

To cut off unnecessary political ties, the NPS may have to consider splitting the operation of the fund, said Kim Yong-ha, a professor at Soonchunhyang University, referring to Sweden’s four-fund structure. The Swedish National Pension Funds, operating four funds each with its own investment authority. It has seen an average of 8.6 percent of profits since 2011, higher than the NPS’ 4.7 percent.

By Cho Chung-un/The Korea Herald (christory@heraldcorp.com)