As South Korea's stock market plunges day after day, criticism is mounting that the National Pension Service (NPS), entrusted with the retirement savings of the nation, has failed both to maximize returns and to serve as a buffer for the market. On the 15th, the KOSPI closed at 5,554.22, down 7.57% from the previous day, while the KOSDAQ fell 7.65% to 760.82. Foreign investors and institutions led the decline, net selling more than 5 trillion won and 2 trillion won worth of shares, respectively. The panic was severe enough that both markets triggered sell-side sidecars, which temporarily suspend program sell orders, along with first-stage circuit breakers, which activate on declines of 8% or more. The KOSPI has tumbled 34.5% in the second half of this year alone.
The causes of the plunge are varied, but the NPS is not free of responsibility. The fund abruptly suspended rebalancing, or the reallocation of assets, in January, and in May raised its ceiling for domestic equity holdings to 20.8% from 14.9%, an increase of 5.9 percentage points. When share prices were surging at the time, it should have trimmed its holdings gradually in a way that minimized market impact. It did the opposite. In the recent selloff in particular, the NPS should be absorbing the shock as a breakwater, but it has already hit its equity ceiling and lost that capacity. The rebalancing principle it broke itself has become a self-inflicted wound.
The cost of abandoning its investment principles has been steep. According to the office of Rep. Baek Jong-heon of the People Power Party, cumulative returns on domestic equities fell to 158 trillion won at the end of July from 283 trillion won at the end of June, erasing 124 trillion won in paper gains in a single month. That makes a mockery of the position taken by the government and the ruling party, which, encouraged by the share price surge and improving pension returns, had argued the fund's depletion could be delayed by as much as 33 years and showed little urgency about structural pension reform. It is reason to doubt whether the NPS has been faithful to its mission as the last line of defense for the nation's retirement savings.
This episode should be the occasion for a thorough overhaul of the NPS's investment principles and governance structure. The first priority is to set strict standards so that investment principles are never shaken by political pressure or outside influence. Under the current structure, in which the health and welfare minister chairs the Fund Management Committee and bureaucrats fill its ranks, independence and autonomy at the NPS are hardly to be expected. Options worth considering include turning the committee into an independent body or staffing it with outside experts. It is troubling that the NPS, which should be worrying about the public's retirement, has become a source of worry itself.