[Outlook]Change needed at pension fund

The pension reform bill was passed in the National Assembly in early July after four years of debate. To stabilize the finances of the pension fund, subscribers’ benefits were reduced from 60 percent of their salary to 40 percent. But the pension fund is expected to dry up by 2060, so the financial insecurity remains in place.
The benefits were lowered to the minimum limit, so the only way to prevent the fund from drying up is to raise health insurance premiums and to make more money when managing the fund. If the fund’s profits increase by 1 percent, the time when the fund dries up is prolonged by four years. Thus, if the fund makes more profits, there will be less need to increase health insurance fees.
The problem is the national pension fund does not yield much profit. For the past three years, the average profit was 6.7 percent, around half of Canada’s 13.8 percent and the Netherlands’ 11.3 percent. In Japan, the same fund creates a 10.5 percent profit even though the interest rate is low in the country. With this low profit, the only solution will likely be to increase health insurance fees.
There are debates whether the most important thing in running the national pension fund should be profits, but it is clear that making more profit becomes important.
The national pension fund amounts to 200 trillion won ($210 billion) this year. In 2010, it will be 300 trillion won and in 2020, 1 quadrillion won. In 2030, the fund will be 2 quadrillion won. The national pension fund will then be large by international standards. Thus, it is urgent to have an advanced management system to cope with the rapid growth of the fund.
Now, a committee under the minister of health and welfare decides how to invest the national pension fund. Based on the decision, a department at the National Fund Service runs the fund.
However, many doubt if the Ministry of Health and Welfare is the right government body to take responsibility for the fund. They wonder if the department that runs the fund has the professional knowledge to run a fund of 200 trillion won.
What’s most important is to make the department under the National Fund Service an independent body that takes responsibility for running the fund. This will boost its autonomy and professional knowledge and skills. The body must be restructured with professionals at the center. At the same time, measures to keep the body in check must be prepared.
But some argue that the prime minister, instead of the health and welfare minister, must take responsibility for the national pension fund. They also maintain that the Ministry of Finance and Economy and the Ministry of Planning and Budget must take a bigger role in managing the pension fund.
It is agreed that the Ministry of Health and Welfare is not the suitable body to run the fund.
But the Ministry of Finance and Economy and the Ministry of Planning and Budget borrowed money from the national pension fund at low interest rates under the pretext of managing it, or they insisted on spending the fund on other projects such as sustaining the economy. So, many distrust these ministries. The government’s role or influence must be reduced in managing the national pension fund.
The portfolio of the national pension fund is no longer focused on bonds. It is invested in stocks and other schemes besides conventional stocks, bonds and savings. It even dabbles in overseas investment. The ratio of investment into risky assets is increasing, and this trend will likely continue. For this type of investment, the government needs a good system to run the fund globally, foreign experts as employees and enforced cooperation with major investment institutions.
These days, the stock markets show short-term rallies, increasing insecure sentiment in the international financial market. Koreans are worried that the national pension fund is investing more on risky assets, so the pace of this change must be adjusted. As the national pension fund is invested in stocks, the companies increase their influence on the fund. The government must prepare measures for this side effect.
The national pension fund is the last safety net for the people to enjoy a stable life after retirement. And the fund is increasing its effects on the economy.
We must understand that the national pension is different from other ordinary financial assets.
Now is the time to develop a long-term vision and strategies to run the pension fund and to reform the management system of the program.

*The writer is a professor of finance and business at Soonchunhyang University. Translation by the JoongAng Daily staff.

by Kim Yong-ha