The National Pension Service (NPS) needs to strengthen its independence and the quality of its governance structure, according to the 2019 Fund Management Evaluation Report.

The report – released by the South Korean Ministry of Economy and Finance (MOEF) on June 1 – upgraded a rating for the NPS investment execution process, one of the qualitative metrics in the evaluation, to “good” from “normal” a year earlier.

The pension scheme’s governance improvement initiative that started last year, was “a good starting point to fix longstanding problems of the fund’s governance structure”, the report said.

As part of the initiative, the fund management committee made changes to its structure earlier this year to create three sub-committees in charge of investment policy, responsible investment and governance, and risk management, performance and compensation.

The committee also introduced an expert adviser system by appointing three private specialists in February to provide technical advice to each of the three sub-committees.

The report also highlighted continued efforts by NPS to improve the efficiency of its alternatives investment unit and the investment process.

NPS last year overhauled its structure to create three alternatives investment teams based on asset type – private equity, real estate and infrastructure – followed by additional changes earlier this year to divide each team into three sub-groups based on regions of Asia, Europe and the Americas. The pension fund also introduced a fast-track process to shorten the time spent on making decisions concerning alternative investment opportunities.

However, the report pointed out that NPS needs to make a more effective effort to strengthen its independence while focusing more on the quality of its governance structure as the fund’s growing assets under management have a bigger impact on the financial markets than before.

“The Fund Management Committee and the Fund Evaluation Committee should consist of more qualified members in an aspect of their expertise, while the government officials serving as ex-officio members could weaken the fund’s independence,” said the report, adding that communication between the committees should be improved for an efficient decision-making process.

The report also noted that the fund needs to improve the qualification of advisers and their compensation system.

The number of investment specialists responsible for the fund’s overseas and alternative investments has been slightly reduced, which is at odds with their growing importance in achieving the fund’s return objective, the report noted. NPS overseas offices need additional staff as their role within the pension fund is increasing gradually.

The report also urged a change in perspective on overseas investments as a key source of yield, rather than a supplementary role to domestic investments, in line with recent trends of asset owners expanding their exposure to overseas markets. Overseas passive strategies can be an alternative when considering human and other resources available to the fund.

Overall NPS received a “good” rating, a one-notch upgrade from “normal” a year earlier, in the evaluation based on both qualitative and quantitative measures. A fund management evaluation team, formed by the MOEF and composed of 35 private experts, evaluated 45 domestic funds including NPS. (Reporting by Hee-yeon Han)