NPS heads into new era
Korea’s largest pension fund quickens pace of globalisation
By Tan Lee Hock
It has been nearly a year now that Dr. Jun Kwang-Woo has been at the helm of the National Pension Service (NPS), the world’s fourth largest pension fund, as its chairman and chief executive officer. Dr. Jun was previously the chairman of the Financial Services Commission between 2008 and 2009, steering the financial services industry through the global financial crisis. Korean financial institutions, by and large, coped well during the financial downturn, a testimony to their resilience. The lessons of the last financial crisis in 1997 and 1998, in particular, have been well learnt.
Among his other assignments, Dr. Jun had stints as chairman of the board of directors of POSCO and from 2001 to 2004, he was vice-chairman of Woori Financial Group, Korea’s first and largest financial holding group. Prior to that, he worked for the World Bank for 12 years in various capacities following a professorship at Michigan State University.
Barely a year into his three-year term, the NPS under his leadership has made significant headway in international markets, both in indirect and direct investments. The fund has made several high profile investments, acquiring trophy properties in Australia, United Kingdom and Germany. Moreover, as a testimony to his influence and standing, Dr. Jun has been able to push through several important initiatives. The fund is about to open its first overseas office in New York next year. The end of this year, some 20 investment professionals will join the NPS, significantly boosting the talent pool of the fund. It is the largest single recruitment exercise ever undertaken by the NPS to date. Dr. Jun wrote a book entitled Beyond the Crisis, Korea’s emergence from the global financial storm of 2008 that was published this year.
In early September, Asia Asset Management sat down with Dr. Jun in his downtown office in Seoul to learn more about his vision, his agenda, and his priorities in helming the 300 trillion won fund.
AAM: In a few more months, you will have completed your first year at the NPS. What has the experience been like and coming directly from the regulatory agency, how did you find the transition?
Jun: Well, this position is certainly important and indeed it is becoming more important than ever, not just because of the growing size of the fund but also its impact on various parts of the economy. So the impact is just not due to direct inflows into the capital market, but the fund’s activities also affect the wider financial services industry, in particular the asset management sector.
I was of course honoured to be appointed to this position last year. This post did not carry as much weight previously. In my previous position as chairman of the Financial Services Commission, I was in charge of financial policy and supervision and obviously these are critical functions. Here at the NPS, we are more practical oriented and this goes beyond finance and managing investments. We have to understand and to work out how best to assist the elderly in this country, the retired people and the less privileged. After all, the NPS is a safety net for the country. When I speak to my colleagues, I often tell them that I have to have a cool head and a warm heart. In my previous assignments, it was more of the former.
AAM: Given the nature of the job and its profile, the public’s expectations are indeed high. How do you manage the challenges and expectations?
Jun: There is no doubt that this position is a challenging one. However, in my 30-year professional career, I am energised when I face challenges and that does not bother me too much. I think undertaking public service is a great cause and this job allows me to do that which I find very rewarding.
AAM: At this stage in your career, what motivates you?
Jun: That question comes up for everyone at some stage in their career; for me, at this point, I think the motivation comes from a point as I look back at my record some years later, what sort of legacy I will have left behind. That gives me added impetus to work harder and to do things right.
AAM: Let us turn to the management of the NPS; what sets the agenda for the fund and how do you manage the perception in managing the fund’s huge portfolio?
Jun: I would like to emphasise two issues here. The first is that at the NPS, I have to maintain our investment principles and independence and secondly, when the NPS makes its investments, it is based purely on economic and financial merits. There are no political or policy considerations to take into account. This is important as the way we manage our money could be adversely affected when we do not stick to those principles.
AAM: How then do you avoid potential landmines when the fund undertakes its investments, direct and indirect, overseas?
Jun: The NPS is not a sovereign wealth fund and that is a qualitative difference. And as mentioned previously, we base our investment decisions solely on economic and financial considerations. A sovereign wealth fund may have a different agenda but here at the NPS, it is the people’s money that we are looking after. We have a fiduciary duty to manage this money for the interest of the people so we have to abide by our investment principles consistently. We try to convey this message as clearly as possible to both domestic and the international media.
AAM: How would you describe your management philosophy? How hands-on are you in the day-to-day management of the fund?
Jun: As chairman and chief executive officer, I need to look at the big picture and from a long-term perspective without paying too much attention to the micro issues. I leave them with our professional managers. When you are overseeing a fund with 300 trillion won in assets, it is a little too much to micro manage. Moreover, I have 5,000 staff under me so I simply cannot do that. This is the same approach that I adopted when I was at the FSC and Woori where there were some 20,000 employees.
AAM: Briefly, what is the vision that you can share with our readers?
Jun: Given the profile of the fund and its special position in the country, it is the ultimate goal of the NPS to maximise its investment return while securing its financial stability over the long-term. To this end, it is crucial that we stick to the fundamental principles of investment, which are to focus on the long-term value, to seek higher return within the risks given and to manage such risks with utmost diligence.
I envision the NPS, being the fourth largest pension fund in the world, to be one of the leaders and a true global fund with world class investment capabilities.
AAM: What are your medium to long-term priorities for the fund?
Jun: First of all, diversification of investment in both domestic and international assets will continue and the enhancement of long-term returns would be my primary objectives. In order to do so, we are planning to expand our investments in the alternative area in which we are able to actively seek new investment opportunities and to build the foundation for higher returns. Also, equity investment, both domestic and international, will be gradually increased because we can expect high returns over the long-term despite their short-term volatility. Moreover, in order to effectively manage the associated risks, we will improve on our risk management systems in order to boost our competency, which is expected of a truly global investor.
We are gradually re-balancing our fixed-income oriented portfolio to more of international equity and alternatives. At the same time, we are expanding our investments in Germany, France, Australia, and Canada. We will also actively seek investment opportunities in global industry leaders, cutting-edge enterprises and energy companies.
I am proud to say that we thoroughly engage ourselves in managing investment risks based on pre-emptive and close monitoring of changes in different market places.
AAM: What is the fund’s return objective over the next three to five years and what is your asset allocation strategy over the same period?
Jun: Korea is one of the fastest ageing countries in the world. The NPS is a partially funded pension system that was first introduced to prepare for the ageing society in 1988 and was amended several times. However, there are still some concerns about the long-term stability of pension finance because the pension scheme could not be fundamentally corrected on its low contribution and high benefit structure, in spite of several adjustments in the past. On top of that, the average life expectancy has been increasing considerably. At the moment, the target return on investment of the NPS should exceed the sum of the rate of real economic growth, inflation and adjustments in order to contribute to the long-term stability of pension finance. However, there are many difficulties in achieving the target because the expected return on actual investment has been decreasing.
The NPS is pursuing maximum possible investment returns based on financial stability, since raising the target rate of return can be rather threatening to pension finance due to most risks involved. NPS plans to increase its investments in domestic and international equities as well as alternatives over the next five years. Equity investments will be increased by more than 30%, alternative assets by more than 10% and international investments by more than 20% of the fund.
AAM: Attracting and retaining talent is a key element in the management of a pension fund. What are your views on this?
Jun: It is absolutely crucial to secure the necessary expertise in fund management and to attract global talents and retain them in order to protect and manage the reserve fund for people’s post-retirement. To help our talent generate strong performance, we have made a stronger connection between investment performance and compensation. We are also running key employee education programmes in which various overseas training programmes are offered. In addition, in order to stay ahead of the current financial issues and trends, the NPS will continue to make strenuous efforts to enhance its global asset management capabilities by recruiting and training competent professionals and to build strong networks with global institutional investors.
AAM: In investing overseas, how important is it for the NPS to have a physical presence in some of the world’s financial centres?
Jun: We started our first in-house investment in international equities in late 2009. There are difficulties in overseas investment, such as lack of information, time difference between Korean and international markets and lack of experience. In order to respond to the rapid changes in the international financial markets and to reinforce our asset management capabilities, the NPS is moving forward with a plan to establish overseas branch offices in some of the key locations abroad. The first of this will be in New York. We expect the office to open in July 2011.
The NPS has become a more visible global player by acquiring some of the landmark properties such as the HSBC headquarters in London and the Sony Centre in Berlin.
AAM: The NPS has several strategic partners; how have these relationships worked and how do you think such alliances can be made to work more effectively?
Jun: At the moment, we are reviewing our existing strategic partnership alliances. We will most likely expand these relationships with others over the next few months.
I think that these partnerships have been helpful, especially during the early stages of international investments where we lack the internal resources and manpower to rapidly increase our activities. It has been good to capitalise on the expertise of the leading international firms. We will continue to draw on them for assistance as we are diversifying our investments.
AAM: As a key institutional investor in Korea, what can the NPS do to provide leadership in the area of corporate governance? Indeed, for socially responsible investing, is there a particular agenda for the NPS to adopt?
Jun: Today, corporate social responsibility (CSR) is being emphasised nationally and internationally. Socially responsible investment (SRI) is a trend that is required of institutional investors as a way to induce CSR into corporations. SRI is a complex investment style which considers CSR such as the environment and corporate governance and corporate sustainability simultaneously in addition to financial indicators of corporations. It aims to maximise long-term investment through minimising investment risk. The NPS officially signed up to the United Nation’s Principles for Responsible Investment in June 2009 and internal and external demands for expansion of the NPS’s responsible investments are growing.
At the moment, the NPS has some domestic external managers who are managing SRI funds and the funds have grown to 1.7 trillion won in size as of end June 2010. The funds have produced an average excess return of over 6% against their benchmark, the KOSPI, since its inception in 2006. Going forward, the NPS will continue its gradual approach, return-oriented mindset in selecting managers and seeking stronger cooperative relationships with other international pension funds in terms of SRI investments. In addition, the NPS will continue to strengthen transparency and fairness in investing and exercising shareholders’ rights in order to eliminate any unnecessary debates on pension fund socialism due to the expansion of SRI investment.