NPS counts cost of political tinkering – again

When politics and pension investments mix, the consequences are often costly. Korea’s government has received yet another reminder of this, courtesy of the scandal engulfing National Pension Service (NPS), the country’s largest pension fund.

On December 28, a special team of prosecutors arrested NPS chairman and chief executive Moon Hyung-pyo and launched a special investigation into allegations of corruption at the fund. The far-reaching nature of the probe – which is linked to a corruption scandal that led to the impeachment of president Park Geun-hye – has reportedly crippled the ability of many NPS investment executives to do their jobs and raised mistrust in its investment committee.

It’s the last thing the W545 trillion ($451 billion) pension fund needed, coming just a year after it suffered another scandal involving senior executives.

With its investment operations stifled, the ultimate victims of this sorry affair are likely to be Korea’s retiring civil servants.

The thrust of the investigation lies around the allegation that Moon, in his previous role as minister of health and welfare, ordered NPS’s investment management department, to vote in favour of a merger of two of Samsung Group’s units in 2015. The pension fund was an 11.6% shareholder of Samsung C&T Corporation and also owned 5% of Cheil Industries, and as of November it owned 5.78% of the combined company.

Its vote helped Samsung, the largest Korean conglomerate, push through the merger. The move was seen by some as unfair to Samsung C&T shareholders, and a means to help the Samsung Group consolidate control over their disparate subsidiaries.  

Moon (pictured left) denies the charges. But whether he is found innocent or guilty, the fact remains that major questions have been raised about NPS's vulnerability to political pressure, and the associated investigations are disrupting its investment operations. The team spearheading the investigation has reportedly banned several executives from overseas trips and demanded that some submit to hours of interviews on a daily basis.

While chief investment officer Kang Myoun-Wook and his team will be able to monitor NPS’s portfolio, it’s likely they will have their hands tied when it comes to making any ambitious investments or shifts in strategy. According to Korean Investors, the fund also indefinitely postponed a December 30 committee meeting, during which it was slated to discuss its investment plans for 2017, including external asset allocations.

All this will impact NPS’s return on investment this year at the very least, with allegations of political interference likely to dog the institution for a lot longer.

Political legacy

The current woes are part of a disturbing trend of political tinkering at NPS. A previous political scandal just over a year ago at the fund led to Moon’s appointment.

In October 2015 the previous NPS chairman, Choi Kwang, refused to extend the two-year tenure of then CIO Hong Wan-sun. His decision led health and welfare minister Chung Chin-youb to accuse him of overstepping his remit by not referring the decision to NPS’s ultimate master – his ministry.

What may have exacerbated the confrontation was Choi’s opposition to the health and welfare ministry’s desire to effectively turn NPS’s investment arm, the Fund Management Centre, into a state-owned enterprise.

Choi and Hong were subsequently forced to step down in November 2015. The government then installed Moon, who had stepped down as health minister in August 2015, as chief executive on December 31, 2015. Kang was then hired as CIO in February last year.

As AsianInvestor wrote in January 2016, the entire affair underlined the dangers of imposing contractual limits for employees and allowing political interference into financial organisations that should be free to pursue their primary purpose: funding the pensions of their members.

Moon’s appointment was cautiously welcomed by market participants because, despite his government background, he was strongly supportive of the idea that NPS Investment Management be spun off from NPS proper and independently run. And industry observers viewed particularly positively the hiring of Kang, who previously ran local firm Meritz Asset Management.

He helped NPS make strides last year, expanding its operations and investment personnel and making strong returns as it sought to diversify assets. As of October, the pension fund’s investment management arm reported a 4.7% year-to-date return on its local equity investments, 1.6% on overseas equities, 3.1% on domestic fixed income and 5.4% on overseas fixed income. 

AsianInvestor rewarded NPS for making so much progress, naming it both the top asset owner in Korea and the leading institution for investment capabilities regionally in our Institutional Excellence Awards in November. Unfortunately, the investment momentum that NPS was building under Kang is now poised to collapse, courtesy of the Korean government’s obsession with ensuring political appointees run NPS according to its whims.

The scandal hasn’t just disrupted daily operations and the 2017 strategy – it’s also likely to make it more difficult for the fund to hire and retain quality investment personnel. That had already been made harder by the government’s baffling decision to move NPS’s headquarters this year to Jeonju – a city that is around a three-hour drive from Seoul. Reuters reported in November the decision had already led 20 investment managers to leave the fund.

There are no easy ways to resolve NPS’s problems. Seoul could start by working with the institution to drastically improve its levels of governance. That would ideally include the health and welfare ministry playing a strictly passive role in its oversight of the fund, while giving NPS the freedom to hire its own executives on terms it deems fit, with oversight from an independent committee.  

Following through on the idea of making the investment management arm a genuinely independent entity would be a sensible end-goal.

First and foremost, though, Korea’s government must stop treating NPS as a political treasure chest.