[Institution Perspective] With Increased Public Servant Pensions, Managing 5 Trillion Won in Surplus Funds This Year

Scale of Surplus Fund Management Hits Record High of Around 5 Trillion Won
Last Year's Return Rate 7.3%, Operating Profit Up by 450 Billion Won
Expanding Overseas and Alternative Investments to Increase 'Gokgan'

The Government Employees Pension Service (GEPS) plans to manage nearly 5 trillion won in surplus funds this year, marking the largest scale ever. This is thanks to the ample reserves accumulated after turning the fund’s operating return from negative in 2022 to positive last year. In the mid to long term, GEPS is also pursuing a strategy to build a portfolio that diversifies investments equally among domestic, overseas, and alternative investments in a 1:1:1 ratio.

According to GEPS on the 29th, the scale of surplus fund management for this year was finalized at 4.9101 trillion won, a 10.4% increase from 4.4457 trillion won in 2023. Surplus funds refer to the money that GEPS invests in financial products such as stocks, bonds, and alternative investments to grow the fund. The scale of surplus fund management fell from 3.3114 trillion won in 2020 to 2.8708 trillion won the following year, then rebounded to 4.4617 trillion won in 2022. It slightly decreased last year but has now reached an all-time high close to 5 trillion won this year.

-4.4%→7.3%, Return Rate 'Reversal'

The significant increase in surplus funds is due to the ample reserves. GEPS’s return rate reversed from -4.4% in 2022 to 7.3% last year (based on data up to November). As GEPS’s financial assets stood at 6.2163 trillion won at the end of 2022, applying a 7.3% return rate suggests an annual operating profit of about 450 billion won. Consequently, the size of financial assets also surged to 8.4366 trillion won. Including the injection of surplus funds, the asset size grew by more than 2 trillion won in just one year.

Including December 2023, for which the return rate has not yet been finalized, GEPS’s operating profit and financial assets are expected to increase further. December was a period of a 'Santa Rally,' with a favorable stock market atmosphere. By asset class, stocks performed the best, buoyed by positive trends in global and domestic markets. The stock return rate was 16.8%, the highest among all. Compared to the stock return rate of -18.9% in 2022, this is a complete turnaround. Alternative investments (6.1%) and bonds (4.5%) followed.

Expansion of Direct Overseas Investment Management... Alternative Investments Also a Key Focus

Like other pension funds and mutual aid associations, GEPS faces the challenge of filling future reserves to cover increasing pension expenditures due to an aging population. The scale of retirement benefit expenditures is expected to grow from 19.8 trillion won in 2023 to 27.3 trillion won in 2027, an average annual increase of 8.4%. In this regard, GEPS aims to increase returns by expanding overseas and alternative investments as a mid-to-long-term goal to grow its reserves. Currently, the investment ratio in domestic financial assets such as stocks and bonds is 43%, overseas (stocks and bonds) is 24%, and alternative investments are 33%. By 2027, the portfolio will be adjusted to 33% domestic, 33% overseas, and 34% alternative investments. This is the so-called '1:1:1 (domestic:overseas:alternative investment) strategy.' The goal is to minimize risk through diversified investments spread across multiple baskets.

In particular, GEPS plans to focus on expanding overseas investments starting this year, and for overseas stocks, which have so far been fully outsourced, about 30% of the total management scale will be directly managed. This is a measure to reduce additional costs and time required for fund management. A GEPS official said, "Outsourced management has its pros and cons, but it is difficult to respond flexibly to changing markets. To reduce decision-making time and respond quickly to changing situations, we decided to start direct management for the first time this year." GEPS believes that swift responses are necessary this year as political events such as the domestic general election and the U.S. presidential election coincide with investment conditions.

Alternative investments, which played a key role in defending returns with double-digit returns (10.2%) even when the overall return rate was negative in 2022, are also considered an important investment sector. GEPS achieved a 35% return last year through its investment in the Samsung SDS Tower in Jamsil. This year, it is focusing on private real estate loans, which are in increasing demand due to the global commercial real estate crisis. Notably, Baek Joo-hyun, the Chief Investment Officer (CIO) who took office in 2022, was in charge of alternative investments at Samsung Life Insurance just before joining GEPS. The performance of GEPS’s alternative investment sector is attracting attention because its alternative investment ratio is much higher compared to the National Pension Service (13.4%).