Side Effects of the National Pension Fund’s Investment Management Monopoly

The National Pension Service has once again announced that it will reduce the share of outsourced management of overseas equities. Since this is intended to raise the share of direct management to more than 50%, there are concerns about the side effects and harm that could result from a monopoly over asset management. The operating structure of the National Pension Fund needs to be reexamined.

Until now, the fund has been able to maintain stability and profitability because it has centered on outsourced management. Changing the structure so that the National Pension Service monopolizes more than 50% of fund management is highly likely to lead to poor fund performance and undermine trust in the Service’s management of the fund.

Public distrust and anxiety over the National Pension are high. Younger generations are deeply concerned that they may not receive pensions because of the deterioration of the fund. Nevertheless, by increasing the share of direct management, the Service appears to be thinking only of its own institutional interests. Rather than increasing its grip over the pension, it should give priority to the sound management of the public’s retirement funds.

In a situation where the Service already monopolizes the National Pension, seeking to monopolize its management as well is excessive greed. The harm caused by monopoly will only grow worse. At the very least, fund management should follow the principles of choice and competition in order to reduce the damage caused by the Service’s monopolistic structure.

The continued rise in the share of direct management is a result of the Service’s tendency to “expand its own ranks.” All government organizations seek to expand their own influence and size. This is called “Parkinson’s law.” The Service, as a government organization, is no exception. If left unchecked, it will create a monopolistic structure of more than 50% and ultimately move toward a 100% monopoly.

As recently as 2002, the Service outsourced 100% of fund management. The outsourced share had fallen to 89% by 2011, and it was then lowered by another 10 percentage points in 2017, with plans to reduce it again after 7 years. The Service’s self-expansion process is difficult to stop on its own. Unless the law sets an upper limit on the direct management ratio, or the public keeps watch, this pattern of organizational expansion will continue.

It would be reasonable to separate entrusted oversight and asset management within the Fund Management Headquarters and turn them into independent corporations. Because it both manages assets directly and handles outsourcing functions, it has developed an intention to monopolize management.

The Service offers various reasons to argue that it should manage assets directly. But its real intention is obvious. There is no meaning in presenting justifications after having already decided on the answer. It is also far-fetched to argue that a government organization is better at investing money.

The scale of Korea’s fund is enormous. Like other countries’ public funds or sovereign wealth funds, it enjoys both the advantages of long-term investment and economies of scale. Taking this into account, it has favorable conditions to generate higher returns than smaller-scale investments. Therefore, efforts should also be redoubled to improve the investment environment so that outsourced managers can raise investment returns through long-term investment and economies of scale.

The National Pension Service should raise the share of outsourced fund management again rather than lowering it. It should also prioritize improving the outsourcing model rather than increasing the number of employees for direct management. We want to see the Service place the management of the public’s retirement funds above its own interests.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 국민연금 운용 독점의 부작용

Author: Sung-no Choi

Date: 2024-07-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=2&idx=26753