The Kospi trap and the national pension trap

Ha Hyun-ock The author is an editorial writer at the JoongAng Ilbo. Korea's National Pension Service is effectively printing money. Last year alone, amid a rally in the domestic stock market, the fund earned 231 trillion won ($154 billion) at an exchange rate of 1,500 won per dollar, recording an annual return of 18.8 percent. This year's pace has been even stronger. With the Kospi approaching the 8,000 mark, the fund is estimated to have earned another 250 trillion won in just four months. On May 6, former Vice Health and Welfare Minister Lee Seu-ran said the pension fund's assets likely exceeded 1.7 quadrillion won. Compared with the 1.46 quadrillion won recorded at the end of last year, the gains accumulated in four months already surpass last year's investment profits. They are also nearly four times larger than this year's expected pension premium income of 63 trillion won. When the national pension's reserves grow, hopes for stable retirement security rise as well. Parametric reforms that increased contributions and benefits only delayed projected fund depletion by roughly 10 years. Even so, the pension fund is still expected to run out by 2057. Since a drastic increase in pension premiums is politically difficult, improving investment returns remains the only realistic way to delay depletion. According to the government's third long-term fiscal projection released in October of last year, raising the pension fund's target annual return from 4.5 percent to 5.5 percent would postpone depletion until 2073. Under a 6.5 percent return scenario, the fund would not be exhausted until 2090. Higher returns, in other words, could substantially extend the life of the pension system and ease concerns about long-term sustainability. Optimism is spreading. If current trends continue, the pension fund appears likely to post record returns for a fourth consecutive year. The biggest contributor has been domestic equities. Last year, while the Kospi rose 76 percent, the value of domestic shares held by the pension fund climbed 82.4 percent. As a result, the fund's average investment return from 2023 through 2025 rose sharply to 16.05 percent. Given that the Kospi has already gained about 74 percent this year, another record appears possible. Yet behind this "money-printing" boom lies a growing concentration in domestic stocks. As of February, Korean equities accounted for 24.5 percent of the pension fund's portfolio. Considering the recent market rally, the figure has likely climbed well above 25 percent. That is an unusually high level for a pension fund expected to prioritize long-term stability. Under existing guidelines, the pension fund's target allocation for domestic equities this year is 14.9 percent. Even after accounting for permitted ranges under strategic asset allocation and tactical asset allocation rules, the maximum allowed level is 19.9 percent. However, in January, the National Pension Fund Management Committee temporarily suspended the strategic allocation cap, allowing domestic stock holdings to exceed the target by more than 10 percentage points. Normally, the pension fund follows a mechanical rebalancing strategy. When an asset class rises above its target share, the fund sells part of it to realize gains and purchases relatively undervalued assets. In principle, domestic stocks should have been sold once their share exceeded 17.9 percent. But because the cap was suspended, rebalancing never occurred and domestic equity exposure expanded further. The problem may emerge next month when the temporary measure expires. Some analysts warn that if the pension fund resumes rebalancing, it could unleash a "sell-off shock" worth as much as 130 trillion won to 165 trillion won. That is why some policymakers argue that the new 2027–31 medium-term asset allocation plan, to be finalized on May 28, should raise the target allocation for domestic equities. But keeping stocks simply to prop up the market could endanger the ret...