The National Pension Fund (NPF) is projected to grow enormously beyond the depth of the capital market in Korea. Future developments in the fund size raise concerns over the current management’s capability to handle the huge amount of domestic investments and its expertise required for diversification into overseas investment.
There have been discussions for reforming the NPF governance with an emphasis on the need for increasing the rate of return on investment. However, the previous attempts to reform governance have been futile owing to prevailing distrust in the financial experts who will control pension funds.
To advance the reform discussion further, it would be necessary to first establish the principles in designing pension fund governance structure. Above all, the top-notch financiers should be employed to achieve an optimal combination of risk and return in pension fund portfolio, but the set of the optimal combinations should be given beforehand from the highest level of governance. At the same time, the concerns over the potential conflict of interest among the fiduciaries should be adequately addressed by implementing a strong accountability framework.
One way to ensuring accountability is to set the long-term fiscal target of the National Pension Service (NPS). The long-term investment return of the Fund derived from the long-term fiscal target should provide the fund managers a clear mandate that guides their investment strategies. Hence, setting the fiscal target, which provides a link between the pension system and the pension fund governance, may be the first step to advancing the governance structure of the National Pension Fund.
A major overhaul of the Committee is also necessary. A new governing body independent of the government and the NPS, and consisting of the members having professional experiences and appropriate expertise should be established to control and oversee fund management effectively.
Finally, the governing body and the management have to be subject to regular external audit. As the duties and liabilities of the fiduciaries are statutory, the board members need be granted a legal authority to evaluate the staff and provide them a proper incentive for better performance.