NPS Changes Its Core Asset Allocation Method - First Time in 18 Years

• NPS announced on 2 May that it will change its core asset allocation method, which aims to increase its purchase of risky assets including stocks and alternative assets.

• Under the new system, the proportion of risky assets will increase to 65% of the NPS' entire fund assets and the remaining 35% will be allocated to the safe assets.

• There is an increasing probability that a portion of the 24.6 trillion won (2.3% of AUM) could get allocated to risky assets including domestic equities.

National Pension Service (NPS) in Korea announced on 2 May that it will change its core asset allocation method, which would be the first major change in 18 years. The change involves a more simplified asset allocation system, which aims to increase its purchase of risky assets including stocks and alternative assets.

As of January 2024, NPS had 1,048.8 trillion won worth of assets under management (AUM). It is currently the third largest pension fund in the world. NPS is under a lot of pressure to deliver higher results. It is expected that NPS may start running a deficit as early as 2041 (17 years from now) and could be depleted by 2055 (31 years from now). If the rate of return of the NPS, which is set at 4.5% in financial projections, rises by 1 percentage point, the depletion period may be extended by 5 to 9 years.

The new asset allocation method will incorporate a 20 year asset allocation standard portfolio aiming to improve long-term profitability. The standard portfolio will separate classification of risky assets (stocks and alternative investments) and safe assets (bonds) with targeted return rates for a 20-year investment horizon.

The new 20 year asset allocation standard portfolio will be supplementary to the current five year strategic asset allocation (SAA) system which is based on mid-term targets for various assets including local stocks, local bonds, overseas stocks, overseas bonds, and alternative assets. Finally, within the strategic asset allocation, there is also the annual tactical asset allocation (TAA) targets.

Under the new long term standard portfolio system, the proportion of risky assets will increase to 65% of the NPS' entire fund assets and the remaining 35% will be allocated to the safe assets. The current asset allocation system which has been introduced in 2006, has not had long-term investment goals.