National Pension, Private School Pension, Government Employee Pension, Yellow Umbrella, Police Mutual Aid Association, etc. Have Short Terms
Focus Only on Short-Term Performance or Just Completing Terms Without Issues
"Need to Change to a System Suitable for Long-Term Investors and Improve Institutional Governance"
The terms of office for the chief investment officers (CIOs) of major pension funds and mutual aid associations are approaching one after another. Institutional funds are mostly invested for the long term, typically over 5 to 10 years. However, the CIOs who oversee these investments serve terms of only 2 to 3 years. Although reappointment is possible if their performance is recognized, concerns have been raised that the unstable position leads to inconsistency in investment policies.
CIO Terms Expire One After Another... Returns Have Recovered This Year
According to the investment banking (IB) industry, the term of Lee Gyu-hong, CIO of the Private School Teachers’ Pension, expired last month. The term of Han Jong-seok, CIO of the Police Mutual Aid Association, ends this month. The Private School Teachers’ Pension is currently conducting procedures to appoint the next CIO.
The term of the Private School Teachers’ Pension CIO is basically 2 years. The contract can be extended annually based on performance evaluation. Former CIO Lee Gyu-hong served a total of 4 years, having started on October 1, 2019, completed the initial 2-year term, and extended the contract twice for one year each. During his tenure, the returns were 11.15% in 2019, 11.49% in 2020, 11.95% in 2021, and -7.75% in 2022.
The term of Han Jong-seok, CIO of the Police Mutual Aid Association, also expires this month. Han, who took office in October 2021, will step down after a short 2-year term. The Police Mutual Aid Association recorded returns of 5.6% in 2021 and 5.0% in 2022, standing out in a challenging market environment.
Next, the terms of Lee Do-yoon, CIO of the Yellow Umbrella Fund, and Lee Sang-hee, CIO of the Military Mutual Aid Association, will both expire in May next year. Lee Do-yoon, who took office in May 2021, completed a 2-year term and is currently serving an additional year. The Yellow Umbrella Fund’s returns were 4.44% in 2021 and -1.88% in 2022.
Lee Sang-hee, who took office in 2021, will complete a 3-year term next year. According to the Military Mutual Aid Association’s regulations, reappointment is possible. The returns were 6.6% in 2021 and 5.7% in 2022.
Baek Ju-hyun, CIO of the Government Employees Pension, who took office in July 2022, has a term lasting until July next year. The term can be extended annually. Since Baek’s appointment, the return in 2022 was -4.4%. This year, returns have shown a recovery trend, reaching 6.4% as of August, the most recent figure.
Seo Won-ju, CIO of the National Pension Service, who took office last December, has a term until December next year. The term can be extended annually. The National Pension Service recorded a return of -8.22% last year but rebounded with a provisional return of 9.74% through July this year.
Heo Jang, CIO of the Administrative Mutual Aid Association, who took office in February last year, has a term until February 2025. Reappointment for an additional 3 years is possible. The return last year was 3.8%.
New Investment Approvals at Term Expiration Sometimes Cause Comical Situations
Among major institutions, the terms of CIOs at the National Pension Service, Private School Teachers’ Pension, Government Employees Pension, Yellow Umbrella Fund, and Police Mutual Aid Association are relatively short at 2 years. A CIO at Institution A said, "It takes over a year for proposed matters to clear internal hurdles and proceed," adding, "If the term is too short, the motivation to implement new investment ideas or change investment methods may weaken." In some cases, this can lead to a focus on short-term performance over long-term results or an incentive to simply complete the term without taking risks. Especially in public institutions, decision-making processes are lengthy, so it often takes a long time to gain consensus and execute new investments, sometimes resulting in approvals only coming through at the very end of a CIO’s term, which is an amusing but unfortunate scenario.
The short terms of CIOs are also linked to governance issues in domestic pension funds. Considering the current pension fund performance evaluation cycles, reward systems, and short terms collectively, it is insufficient to expect CIOs and portfolio managers, who are evaluated based on short-term returns, to manage long-term assets with conviction.
Although returns are compiled annually, it is problematic to evaluate CIO performance solely based on these figures. Institutional funds are mostly long-term investments, and this year’s performance is often the result of decisions made years ago. A senior official in the IB industry pointed out, "It is necessary to create a system that allows proper management as long-term investors and improve the governance of institutions," adding, "Talent management and development, performance evaluation cycles, and reward systems all need to be improved in an integrated manner." A senior official in the VC industry emphasized, "Extending the term is appropriate in terms of maintaining consistency in asset allocation," and added, "Especially in alternative investments, where the investment duration is long, the issue of CIO terms needs to be reconsidered."
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