[Reporter’s Notebook] The Role of the National Pension Service as KOSPI 5000 Approaches

The National Pension Service has taken the unusual step of convening an emergency meeting of its Fund Management Committee at the end of January. While the Ministry of Health and Welfare, which oversees the committee, explained that this is for a 'portfolio review,' the market expects that an agenda item to increase the cap on domestic equity holdings will be discussed.

As of the end of October last year, the National Pension Service's proportion of domestic equities was reportedly already approaching 18%. This far exceeds the target for this year, which was set last year at 14.4%. The concern is that if the current standards are maintained, the National Pension Service may be forced to mechanically sell stocks in response to index fluctuations, thereby increasing market volatility.

The key question is, "Why now?" The Fund Management Committee has typically met on a regular basis to review operations. This time, however, an emergency meeting has been called sooner than expected. The timing is noteworthy. With the KOSPI surpassing 4,900, the government’s much-emphasized goal of "KOSPI 5,000" is now within reach.

The legal and institutional role of the National Pension Service is clear: to ensure the long-term and stable returns of the public’s retirement funds. To achieve this, independence, political neutrality, and market neutrality are essential principles that must be upheld. Supporting the index is not a core responsibility of the National Pension Service. Of course, if this move is interpreted as a preemptive measure to prevent distortions in market pricing caused by mechanical selling triggered by allocation limits, one could argue that the National Pension Service is acting to preserve market neutrality.

Nevertheless, the question of "Did it have to be now?" remains. By utilizing tactical and strategic asset allocation, the National Pension Service could arithmetically increase its domestic equity share to around 19%. There are also technical options available, such as adjusting the pace of rebalancing and executing trades in tranches to mitigate market shocks.

With this move, both the market and foreign investors may become more convinced that the National Pension Service is being used as a tool to achieve policy objectives. In future downturns, or when new goals are set by subsequent administrations, the justification of "preventing mechanical selling" could be repeatedly invoked. As this perception spreads and precedents accumulate, the National Pension Service risks losing both its returns and its credibility.

Global investors are already turning their attention to the Korean stock market and its companies. In this context, the National Pension Service has a distinct role to play in achieving a healthy KOSPI 5,000. In any case, the National Pension Service is an entity far too large to be contained within the Korean stock market. Rather than intervening directly in market prices as an individual investor, it should focus on active shareholder engagement to improve the outdated corporate governance of Korean companies and enhance shareholder returns. Serving as a bulwark to reduce the "Korea Discount" is the most effective and convincing role the National Pension Service can play.

If the fundamentals of Korean companies improve, foreign investors will naturally show greater interest and find more incentives to invest. Ultimately, the index is not a goal but a result. What the National Pension Service must protect is not the numbers, but its principles.