[Viewpoint]Diversifying the retirement fund‘Wag the Dog” was the title of a Hollywood film released in 1998. It means that the tail wags the dog instead of the dog wagging the tail. The expression was originally used in the stock market. The futures market is supposed to be based on the spot market, but the futures often control the spots. In politics, “wag the dog” refers to the tactic of diverting the public’s attention and obscuring the substance. The movie was about a similar political maneuver.
An American president’s sex scandal breaks out right before an election, so a White House adviser starts a virtual war. When citizens focus their attention on the war, the scandal is forgotten and the president is re-elected, winning an overwhelming 89 percent of the vote. The movie’s message is that we all need to be alert if we want to avoid being wagged by the tail.
The controversy over the national pension fund’s equity investments is somewhat ominous. By any measure, the tail seems to be wagging the dog. It all started from a news conference given by Park Hae-chun, president and CEO of the National Pension Service. He said the pension fund’s equity investments would be increased from the current 17.5 percent to 40 percent by 2012.
Meanwhile, the fixed income portion will be decreased from 80 percent to 50 percent. He also made improving the profitability of the fund’s portfolio by 2 percentage points a goal. By 2012, the national pension fund will grow to 420 trillion won ($389.3 billion). If everything goes as planned, we surely welcome his proposal.
However, his comments were immediately attacked. The national pension fund is the main source of retirement income for the elderly, making it too risky to invest 40 percent on volatile equities.
Choi Yeong-hui, chairman of the United Democratic Party’s policy coordination committee on welfare, said he suspects that the Lee Myung-bak administration is encouraging equity investment to boost the stock market.
The Ministry for Health, Welfare and Family joined the offensive, arguing that the National Pension Fund Operation Committee should decide how to invest the fund, and Park has no say in the matter. Of course, the National Pension Fund Operation Committee is chaired by the Minister for Health, Welfare and Family.
The offensive is ugly because both the ministry and the opposition party are being selfish. Expanding equities in the national pension investment portfolio was decided by the welfare ministry during the last administration. The National Pension Fund Operation Committee voted to raise the equity portion of the fund investment to “more than 30 percent” by 2012 at a meeting presided over by acting minister Byeon Jae-jin on May 25, 2007.
Park went too far by raising the margin to 40 percent. Critics don’t make a convincing case when they argue that Byeon’s “more than 30 percent” is acceptable but Park’s 40 percent is too risky.
Expanding the equity portion of retirement fund’s portfolio is an unavoidable trend. The era of low interest is likely to continue for a while. Investing in government and public bonds with 5 to 6 percent yield will barely maintain the principal when inflation is taken into account.
Moreover, the size of the pension fund is growing day by day. It would not be possible to put all the fund’s holdings in the domestic fixed income market even if the agency wanted to.
Until last year, there was little opposition to the idea of increasing the equity portion of the national pension fund investment because the stock market was so brisk. However, the mood changed completely when the market turned sluggish. The opposition party is ready to pounce on the 4.3 trillion won loss from equity investments in the first half of the year. Unless the stock market bounces back in the second half, Park will be summoned to the National Assembly and the welfare ministry and held accountable.
The tail is, indeed, wagging the dog. If you evaluate the profitability of the 230 trillion-won fund by its performance over six months or a year, even the likes of Warren Buffett cannot succeed.
Unless you see the National Pension fund as a short-term speculative entity, it only makes sense to evaluate investment on a time horizon of at least five years. I wonder if politicians can afford to wait five years when they are so desperate to attack the prey in front of them.
*The writer is a deputy business news editor of the JoongAng Ilbo.
with the Korea JoongAng Daily
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