Market attention is focusing on why the National Pension Service (NPS) has decided to increase its investments in stocks in its mid- to long-term asset allocation plans. 

Market analysts said it was inevitable that the NPS would expand its investments in risky assets such as stocks to achieve the 5.2% high rate of return targeted in the period between 2021 to 2025. The NPS would find it difficult to rely on sovereign bonds at a time when aggressive central bank stimulus policies around the globe have driven bond yields down to zero or below, according to the analysts. 

On May 21, the Fund Management Committee of the NPS raised the proportion of holdings in stocks and alternatives to 65% of the total in the five-year period. This is up from 52.6% targeted for the end of 2020. 

The committee, which approves all investment plans for the pension service, also said that by the end of 2025 the NPS aims to have around 50% of its investments in foreign and local stocks, with alternatives accounting for 15% and bonds standing at 35%, up from the 39.6% holdings in shares and 13% holdings in alternatives targeted in 2020. 

NPS, one of the three largest pension fund operators in the world with assets reaching 737.4 trillion won ($599 billion) as of February this year, sets a five-year asset allocation plan every year reflecting changes in internal and external economic situations and outlook.

Analysts said that with the decline in birthrates and the growth in the elderly population, setting a high target rate of return of 5.2% is unavoidable for the NPS that is trying hard to push back the depletion period. The National Assembly Budget Office is expecting the fund to be depleted in 2057 under the existing system. 

The NPS is expected to surpass 1,000 trillion won around 2025 and to grow at an average annual rate of 8% by 2030. However, the fund is projected to start shrinking from 2042 after peaking at about 1,778 trillion won in 2041 and to be exhausted rapidly after 2050. 

“As NPS continues to grow. It is projected that it will be able to generate high returns through the purchase of undervalued assets even in the event of a plunge in the market, offsetting high investment risks,” said an official at the NPS. “The allocation of assets depends on the target rate of return, and as the target rate is set high, we have no choice but to increase the allocation of stocks with high expected returns in the portfolio.”

The NPS registered a preliminary return rate of minus 0.45% at the end of February, with the poor showing blamed on slumping domestic and overseas stock markets. This represents a sharp turnaround from a record yield of 11.3% last year. (Reporting by Jin-won Lee)