[EDITORIALS]Pension funds and stocks

The government showed its determination to allow public funds, including the national pension fund, to invest in securities. President Roh Moo-hyun said he would mobilize pension funds to defend the management rights of Korea Telecom and Posco, and the deputy prime minister of finance, Lee Hun-hai, has confirmed that officially. Taking this as momentum, it is anticipated that the debate on the bill allowing public funds’ investment in securities will be accellerated at the National Assembly.
Whether to allow public funds to invest in stock markets is a difficult question to answer. If we follow economic logic or consider reality, it is inevitable. The reserve funds, including the national pension fund, amount to 136 trillion won ($125 billion) now, and they will snowball to hundreds of trillions of won soon. If the funds are invested only in bonds for safety, there will soon be no room for further investment, because the domestic bond market is limited. Then there is no alternative but keeping the money in the bank, enduring the loss from interest rates lower than inflation. That would certainly mean financial losses for policyholders. Investing in real estate is not desirable, so the only alternative is investing in shares.
But the situation is not that simple. Because there is danger of losing capital if the government mobilizes the funds like pocket money for boosting stock prices, as it did in the past. Seoul now talks about mobilizing the funds for Korean “New Deal” projects, so that is highly likely. In Korea, the social security net is meagre, so if the pension fund disappears into thin air, the damage will be passed on to the people. This is the reason why experts and the opposition party are against the government’s plan.
Despite such worries, however, we think it difficult to ban public funds’ investment in securities forever. Allowing limited investments will be unavoidable.
There should be safety measures. A risk management system, such as limiting investments in shares to a certain portion of total assets, is necessary. To prevent the intervention of bureaucrats and politicians, the independence of the funds’ operations, management and personnel policy should be guaranteed. Strengthening the professionalism and the transparency of fund management are also prerequisites. Even though they are invested in stocks, pension funds should be protected.