The National Pension Service of South Korea (NPS) has decided to leave its active return target unchanged at 0.22 percentage points after considering the impact of the Covid-19 pandemic on investments and concerns about a staff shortage.

It is the third successive year that the 807.3 trillion won ($727 billion) pension fund’s management committee has kept the active return target at the same level.

An active return is the excess return above a benchmark, and the active return target is calculated by multiplying the fund’s information ratio target by a tracking error target. It is determined each year with the aim of ensuring that long-term returns exceed the benchmarks.

According to minutes from the December meeting that were released last week, the management committee members were divided on whether to keep the active return target at the same level or raise it. One committee member supported leaving the target unchanged, citing difficulties in hiring professionals – due to the pension scheme having its headquarters in a rural area, distant from Seoul – and limitations in managing the fund because of its role as the country’s biggest pension fund.

However, another committee member argued that raising the target would be in line with continued efforts by the NPS to enhance long-term returns, which included hiring more staff and increasing its allocations to overseas assets.

NPS earned active returns above its target in both 2019 and 2020, but some members noted that the results were not entirely attributed to active investing but other factors such as dividend tax refunds. Concerns were also raised that a slowdown in investments due to the pandemic could affect the fund’s performance this year.

“In 2019 and 2020 we benefited from inefficient markets, which was considered exceptional. But in more efficient markets, the 22 basis-point active return target would be very hard to achieve,” said Ahn Hyo-joon, chief investment officer of NPS.

“This is especially true when considering a staff shortage versus growing assets, which could limit the fund’s capabilities for active investing and force us to shift to a passive investing approach,” Ahn added.

“Returns on alternative investments significantly contributed to achieving the active return target in 2020, but in 2021, we are likely to see the impact of a slowdown in overseas investments due to pandemic lockdowns on the fund’s performance.”

Ahn also expressed concerns that an increase in the active return target, combined with the fund’s continued effort to boost alternative investments abroad, would cause more stress for fund managers, which could result in an exodus of staff. He said that retaining experienced and skilled workers is “a big challenge” for the fund.

The management committee also decided to start a review of how the information ratio target and tracking error target are calculated so that the active return target can be determined on a more consistent basis. (Reporting by Hee-yeon Han)