NPS in crosshairs over susceptibility to pressure

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NPS in crosshairs over susceptibility to pressure

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The National Pension Service, the country’s biggest and most influential institutional investor responsible for the financial security of many Koreans after retirement, is under fire for lack of responsibility and being used by Korea’s biggest business, Samsung.

As accusations mount that the pension service sacrificed its own profits for the sake of Samsung group owners - leading to the arrest of former Health and Welfare Minister Moon Hyung-pyo - the fund management committee’s independence has been called into question.

By law, the management of the pension fund is supposed to be the responsibility of a fund management committee. This means that neither the head of the fund management department nor even the Health Minister can call shots on significant issues of how or where the pension fund should invest.

However, the Choi Soon-sil scandal has strongly suggested that the management committee failed to do its job and the service was used for political interests and to help Samsung.

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The nation’s pension fund amounted to 545 trillion won ($453.8 billion) as of the third quarter 2016 and the NPS accounts for 6.55 percent of all investments made on the equity markets.

When breaking down the investments that NPS made as of the third quarter of this year, 18.4 percent were in local stocks while 52.5 percent were local bonds. Overseas stock investments accounted for 13.7 percent and overseas bonds took up 4.1 percent.

Even among the investments it made on the local stock market, NPS investments are heavily concentrated in conglomerates, including Samsung and Hyundai Motor Group, according to a study released by a Minjoo Party lawmaker in September 2015.

Of the 91 trillion won investment it made in Korea stocks as of January 2016, the NPS had invested 57 trillion won in large companies.

The NPS’s investments in Korea’s 28 conglomerates accounted for 63.38 percent of all its investments. The same ratio for all other investors was only 53.23 percent.

That’s 10.15 percentage points more than the overall investments the stock investors made on 28 business groups that the Fair Trade Commission labeled as conglomerates traded on the stock market.

On the flip side, investments in smaller companies amounted to roughly 33 trillion won or 36.62 percent for the NPS compared to 46.8 for other investors.

Among the investments the pension fund had in conglomerates, Samsung accounted for the most at 23.92 percent, or roughly 21 trillion won. This was 2.57 percentage points higher than the market’s 21.35 percent concentration in Samsung stocks. NPS’ Hyundai Motor investment came in second with 8.86 percent or roughly 8 trillion won followed by SK and LG.

The NPS’s influence is expected to grow further as it gets bigger. The pension fund is expected to reach 1,000 trillion won in 2020.

The NPS has had huge influence on the decisions and fates of major Korean conglomerates, including SK Group.

In June, SK Group was hoping to merge SK with SK C&C. However, the NPS opposed the merger because it disagreed with the valuation of the two companies’ shares.

Critics are saying that the NPS’s fund management committee - consisting of government officials, private sector representatives, labor representatives and experts - has been loosely run, which allowed outside influences to affect important decisions.

The biggest accusation has centered on the NPS’ approval of the merger of Samsung C&T and Cheil Industries, which was done to solidify the control of Lee Jae-yong, the heir to Samsung Group, over the group.

Critics say the NPS approved the merger even though it wasn’t in its own interest as a shareholder of both companies.

Samsung is currently being investigated by an independent counsel and the National Assembly for giving bribes to President Park Geun-hye’s close friend Choi Soon-sil and her daughter in exchange for the NPS’s approval of the merger.

A recent study by the JoongAng Ilbo found that the fund management committee has been run pretty loosely despite its influence in the market.

Since 2010, there have been only 36 meetings that took place among the committee members, an average of five a year. Each meeting took around two hours, which shrunk since 2015 to an hour and 45 minutes.

Some government officials on the committee rarely showed up such, as the agriculture and fishery vice minster and the industry minister, who only attended two meetings.

The fund management committee is made of 20 members. It is co-chaired by the minister of health and welfare and the chairman of the National Pension Service. Also on the committee are the vice ministers of government economic departments, including the Ministry of Strategy and Finance and the Ministry of Employment and Labor.

It also includes business representatives such as the Korea Employers Federation, the Federation of Korean Industries, Korea Federation of SMEs; a representative from the Federation of Korean Trade Unions; agricultural and fishery representatives; a representative of the self-employed; consumer groups and market experts.

The current chairman is former Health Minister Moon Hyung-pyo, who was arrested Thursday on charges of coercing the NPS to approve the merger of Samsung C&T and Cheil Industries.

“Meeting five times a year and having a two-hour discussion over a meal and failing in its role as the most important decision making body managing investments exceeding 500 trillion won just doesn’t make sense,” said Joo Eun-seon, a professor of social welfare studies at Kyonggi University.

One official, who asked not to be named, said he felt as though the committee members feel like they play less than a supporting role.

“There have been no issues that have been canceled because of opposition [from the committee members],” the official said.

Lack of expertise was another issue raised. The position reserved for a representative of the self-employed has been vacant for the last three years, while the representative for consumers is a person who specializes in social studies. The representatives of labor are people who have a long history and influence on labor unions, and committee members from the agricultural and fishery cooperatives have no expertise in asset management.

The economic ministries’ officials barely participates.

“As the members on the committees are mainly there to represent their own interest group, there are many who lack expertise [in asset management],” said Yeon Gang-heum, a Yonsei University economics professor, who was on the committee for a year in 2015.

Lax management in its decision making is not only suspected of opening opportunities of outside influences but it is believed to have an effect on the fund’s profitability.

The average yield for the Korean pension fund between 2011 and 2015 amounted to 4.7 percent. This is far lower than other pension funds in other markets including Japan’s government pension investment fund (with 6.3 percent), the U.S.’s California Public Employees Retirement System (10.7 percent) and even Canada’s pension plan investment board (10.6 percent).

BY LEE HO-JEONG, KO RAN [lee.hojeong@joongang.co.kr]

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