A job with long-term objectives but immediate challenges is what Seo Won-joo has taken on as chief investment officer (CIO) at Korea’s National Pension Service (NPS). But Seo has already made his assertive mark by stating that NPS will be a more active shareholder - and shown that the world's third-largest pension fund stands by its word.
Besides delivering investment performance for the state pension fund, there are other issues and stakeholders to be mindful of. Still, one Seoul-based source within the investment industry said that Seo’s priority should be to enhance returns.
“Capital markets might suffer from high volatility, but that could provide opportunity in the long run. He should invest from a long-term perspective, but there will be lots of noise, which could hinder maintaining it,” the source told AsianInvestor on condition of not being named.
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Indeed, NPS — which is projected to run out of funds as early as 2057 — has been under scrutiny. Politicians and shifting governments have seen the NPS being used as a political tool, and sometimes with damaging consequences.
This was highlighted in November as a part of the South Korean government’s work to bring forward its projection of when funds in the national pension will be depleted. The process is part of an effort to reform the country’s pension system as the country comes under severe financial stress amid low fertility and an aging population.
“Today, six of the 20 members of the NPS’ Fund Management Committee — the fund’s top decision-makers in terms of actually handling the money — are government officials,” Jeong Woo-yong, a member of the NPS’ Fiduciary Liability Committee, said at a press conference held on November 7 at the National Assembly to improve the NPS’ governance structure.
He pointed out that the fund’s key decision-making bodies consisted of “too many” government officials and lacked economic experts. This, he said, was hindering the fund’s growth, increasing the fund’s vulnerability to being abused by different government projects and leading to lacklustre profitability.
“This makes it difficult for the NPS to be free from government intervention. The previous two administrations made attempts to use the state fund for its own projects, but they should not even think of touching the state retirement plan because it’s not their money,” Jeong added.
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Another example of political meddling that challenged the work of NPS was the decision to move the pension fund’s headquarters away from Seoul, the capital and financial hub, to Jeonju, a minor city 200 kilometres south and a three-hour drive away. Unsurprisingly, the relocation led to an exodus of staff that didn’t want to move or commute to Jeonju.
“We believe [Seo will] focus on securing qualified investment resources under their location in Jeonju,” one Hong Kong-based investment consultant advising Korean asset owners told AsianInvestor, on condition of not being named.
The investment consultant also pointed to increasing performance amid the current market situation as another major mission across Seo’s three-year term.
“He might also be increasing the shareholder engagements and sustainable investments in line with NPS’s market position,” the investment consultant added.
In fact, Seo had barely been announced CIO in late December before he made his and NPS’s voice heard as an active shareholder. At a press conference on December 27, Seo said corporates that don't have dominant stakeholders have to increase transparency and fairness in their CEO hiring processes.
Such corporates should be further open to external candidates for CEO positions to select the best person for the role, Seo added. "Some corporates still restrict outside professionals' applications for chief executives. Such practices limit their stakeholders' choices to approving or disapproving only one candidate.”
He also stressed that fair and reasonable processes for CIO elections will enhance shareholder value, including that of the NPS. The pension fund will strengthen its responsible investment and stewardship code for sustainable growth, he added.
On December 28, NPS expressed disagreement with Korean telecom giant KT's decision to make its current CEO Ku Hyeon-mo as the sole candidate to be its next chief.
"KT named current chief executive Ku Hyeon-mo as the sole candidate for the next CEO election on December 28. This does not meet the basic principles for a CEO election, which include transparent and fair procedures to select a candidate," the NPS fund management unit said in a statement on December 28.
"We will consider the matter when executing our shareholders' rights," the fund management unit added in the statement, indicating it will express opposition to Ku's consecutive term at the general shareholders meeting in March 2023.
The statement was considered the first time since its inception in 1999 that the fund management unit has openly expressed a view about a company's CEO recruitment. Whether this new, assertive approach will be implemented without political and public criticism remains to be seen.
A LONG HORIZON
The hope is now that NPS will gain some more runway to focus on a long-term strategy to ensure performance. The hope comes from the ongoing process of reforming the Korean pension system to mitigate the demographic challenges that the country faces.
The current government claims it will “pursue a pension reform that ensures financial sustainability, inter-generational fairness, and old-age income,” the Ministry of Health and Welfare said on January 9. The ministry said it plans to speed up reform talks to come up with a final plan by October this year.
President Yoon Suk-yeol, whose priority has been pension and health insurance reforms since he assumed office in May 2022, defined these two aspects as “universal welfare”. Yet, he said each individual will still have to cover parts of the cost, and “a thorough, scientific approach” is needed.
Details will be discussed, such as each individual’s contributions and private pension plans, as well as an increase to the country’s retirement age. In the meantime, Seo will hopefully be able to focus on implementing the long-term asset allocation strategy for NPS.