[Fund and Mutual Aid In-Depth] ⑥ "Deficit Trap" for Government Employees Pension, Seeking Balance Beyond Stability to Profitability

Many Constraints on Asset Management Amid Fund Depletion
Maintaining a Conservative Approach While Initiating Overseas and Alternative Investments
Direct Management of Overseas Equities and Partnerships with Global Pension Funds
Expanding S

Editor's NotePension funds and mutual aid associations have long established themselves as key players in the capital markets. Beyond their fundamental differences-pension funds focus on securing retirement for the public, while mutual aid associations aim to grow members' assets and expand welfare-they also show clear distinctions in asset size, investment strategy, and organizational structure. This article provides an in-depth analysis of pension funds and mutual aid associations, which serve as major funding sources for both domestic and international institutional investors.

The Government Employees Pension Fund has faced a structural dilemma as the number of beneficiaries rapidly increases while premium (contribution) income remains stagnant, making profit generation through fund management a core challenge. The Government Employees Pension Service, which is responsible for securing stable pension resources for retired civil servants and addressing pension account deficits, has started to shift its focus from stability toward profitability. While maintaining its traditionally conservative stance, the Service is gradually implementing strategic changes in stages.

Jeju Seogwipo City Government Employees Pension Service Building. Government Employees Pension Service

Proven Defensive Strength in Crisis... But Trapped by Structural Deficits

Established in 1982, the Government Employees Pension Service operates retirement benefits and welfare programs for civil servants, funded by contributions from active civil servants and government subsidies. Since the amount of pension paid out exceeds contributions, the number of subscribers has steadily increased, and the number of pension recipients has surged rapidly due to accelerated aging.

Meanwhile, the contribution rate has remained fixed for a long time, resulting in chronic pension deficits. As a result, the Government Employees Pension Fund, which was depleted as early as 2002, has had to rely on government finances (taxes) every year to cover its deficits. As of the end of last year, the Government Employees Pension Fund managed financial assets totaling 9.7223 trillion won, which is overwhelmingly smaller than other domestic pension funds, thus limiting its investment capital.

To minimize losses, the Government Employees Pension Fund has maintained a management policy that prioritizes stability over other large pension funds. For a long time, it adhered to a conservative diversification principle, maintaining a 1:1:1 ratio among bonds, stocks, and alternative investments. This strategy resulted in relatively lower returns during market booms. Last year, the fund's mid- to long-term asset (bonds, stocks, alternative investments) return was 7.5%, lagging behind the National Pension Service (15.0%) and the Teachers' Pension Fund (11.63%).

However, the value of conservative management was demonstrated during turbulent markets. In 2022, when both stock and bond markets plummeted and global financial markets were engulfed in uncertainty, the Government Employees Pension Fund recorded a loss rate of -6.00%, minimizing losses compared to the National Pension Service (-8.22%) and the Teachers' Pension Fund (-7.75%), thereby proving its "defensive strength in crisis." As of the end of August this year, the fund's asset allocation remained largely unchanged, with 24.7% in bonds, 28.1% in stocks, 15.3% in alternative investments, and 31.9% in short-term funds.

Shifting to Profit-Oriented Management, Strengthening Overseas Stocks and Alternatives

However, the Service realized that defensive management alone could not fully address the challenge of expanding structural deficits, and gradually chose to shift toward profit-oriented investment. The core strategy centers on increasing allocations to overseas and alternative investments. Overseas markets, which have demonstrated higher performance and risk diversification compared to domestic assets, have been designated as key strategic assets for the medium to long term.

The most notable change is the introduction of direct management of overseas stocks. Since the Service began investing in overseas stocks in 2013, it had relied exclusively on external mandates, but since June last year, it has adopted direct management, embarking on an aggressive experiment. The results were immediate: with a new investment of 315.3 billion won, the Service achieved a return of 28.4% and a profit of 33.5 billion won, marking a successful soft landing. The Service plans to continue expanding the proportion of direct management to enhance agility in responding to market changes and improve investment performance.

However, there are concerns that the investment environment remains inadequate to support such an aggressive strategy. The number of dedicated overseas investment staff within the Service is still in the single digits, raising concerns about increased work burden and the need to secure greater expertise as direct investment expands. Restructuring the investment organization remains a prerequisite for the shift toward profit-oriented management.

Securing global investment opportunities and diversifying the portfolio is being accelerated through joint investments with overseas pension funds. The Service is focusing on building customized portfolios suitable for pension funds by jointly investing in assets managed by the Teachers Insurance and Annuity Association of America (TIAA), leveraging TIAA's global deal sourcing capabilities. This is regarded as a key strategy for steadily increasing overseas alternative assets and obtaining timely investment information.

In its asset allocation targets for 2025-2029, established last year, the Service set the proportion of alternative investments at 34%. An official from the Service stated, "We are expanding the proportion of alternative investments while maintaining the existing 1:1:1 diversification principle, in order to maximize profitability based on risk management."