A dispute between rival parties is intensifying over how the National Pension Service's decision to suspend rebalancing — the realignment of asset weightings — affected the fund's returns. Kim Sung-joo, chairman of the National Pension Service, argued that carrying out the rebalancing as scheduled would have jolted the market through massive stock sales and dragged down the fund's returns. The People Power Party, by contrast, demanded the release of raw simulation data that would allow the effect of the suspension to be verified, repeatedly raising the suspicion that the pension fund had been mobilized to prop up the stock market for the government.
At a parliamentary audit of the National Pension Service by the National Assembly's Health and Welfare Committee on the afternoon of Oct. 14, Kim responded to a question from Rep. Park Jie-won of the Democratic Party of Korea about the effect of the suspension. "If you compare the case where rebalancing was suspended in late January with the case where it was not, the decision to suspend would have helped the fund's investment returns," he said. When Rep. Lee Man-hee of the People Power Party, who chairs the committee, pressed him again, asking whether he meant returns would have fallen further without the suspension, Kim replied, "That is my judgment."
Rebalancing refers to buying and selling stocks and other assets to realign portfolio weightings when they stray outside target ranges because of price swings. Amid concern that large-scale stock sales triggered by a surge in the domestic market could shock investors, the National Pension Service in January temporarily suspended rebalancing through the end of June and raised its target weighting for domestic stocks to 14.9% from 14.4%. In May it lifted the target further to 20.8% and widened the permitted investment range.
Kim said that had rebalancing proceeded as scheduled, the fund would have had to sell more than 800 billion won ($560 million) of domestic stocks a day. "If we had followed the original rules, we would have had to put more than 800 billion won a day on the market, more than 10% of total KOSPI trading value," he said. "It would have delivered an enormous shock to the market, and with share prices falling, both the pension fund and the public would inevitably have taken losses." He added: "When the market is changing rapidly, holding on to the shares you own is better for returns. Buying and selling with every swing only increases transaction costs and can hurt long-term returns."
The People Power Party pressed the fund to submit the raw simulation data comparing returns with and without the rebalancing suspension in order to test Kim's claim. "Submit the simulation results for the case where it was suspended and the case where it was not," Lee said. "The chairman's testimony and the written answers submitted by the service differ from each other."
Lee claimed in particular that the answers submitted by the service contained content indicating that excess returns would in fact have been generated had rebalancing not been suspended between February and June, the period of the suspension. That, he said, contradicts Kim's explanation that the suspension helped the fund's returns. "Since the material submitted and the chairman's answers differ, the simulation data must be submitted," Lee said again.
Kim said he appeared to have given the same explanation, but added that he would check the written answers again. He remained cautious, however, about releasing the simulation data. "If specific figures are made public, market participants could exploit the National Pension Service's investment patterns in reverse to make a profit," he said. "If that happens, both the pension fund and the public could lose out." He said he would consider whether to release the material to the extent possible if the ruling and opposition floor managers on the committee reached an agreement.
The People Power Party also raised questions about the independence and transparency of the fund's management. "The National Pension Service is being seen as a kind of universal remote control for the government," Rep. Kim Tae-ho of the People Power Party said. "The batteries in that remote are premiums the public paid with their blood and sweat, yet the public, who are the owners, have no way of knowing how the investment principles are being changed." He urged institutional improvements, including independent verification of investment decisions and transparent management of records of consultations with the government.
Kim replied that securing the public's interest is the first principle. "I agree that no objective other than the policy goal of guaranteeing retirement income for the public should be allowed to enter," he said. On the minutes of the National Pension Fund Management Committee, he said they are in principle disclosed after one year under the law, and that specific matters can be disclosed after four years following a resolution by the committee.
Kim also rejected the opposition's claim that the decision to suspend rebalancing was taken with the June local elections in mind. "The fund management committee that deliberates the medium-term asset allocation meets at the end of May every year, and this year the revision of the asset allocation was carried out according to that schedule," he said. "The local elections simply happened to be approaching. This is not a situation where the decision can be seen as having been made with the elections in mind."