Long-term asset allocation policies national pension plan in Korea

Abstract

The reserve fund size of national pension system is closely related with scheme design and maturity of pension system. Since Korean national pension system is not in mature stage size of reserve fund is increasing due to excess inflow of premium contribution comparing to outflow of pension benefits. It is often called as “partially-funded system” to differentiate it with pay-as-you-go system and fully ?funded system. The value of reserve fund will reach its peak in 2043 as 1,685 trillion won from 400 trillion won in 2013. However reserve fund will face drastic decline phase after 2043 and will eventually be depleted in 2060. Since depletion of fund is a result of generous pension design, contribution from asset management side is very limited. Still, improvement in investment returns will help delaying timing of depletion up to 6 years according to analysis of this paper. An issue related to improving investment returns is upper bound of risk level that National Pension Fund of Korea should consider in asset allocation. Decision making in asset allocation of National Pension Fund of Korea is made through reviewing Mean Variance Optimization(MVO) Model with consideration of policy conditions to bypass coherent corner solution problem. However, MVO model can’t consider all the risk factors derived from partially-funded public pension system. Therefore more comprehensive qualitative decision making process is required to accommodate special characteristics of National Pension Fund of Korea. This research project is committed to explain special circumstances of National Pension Fund of Korea and to enhance understanding of nature of asset allocation model and process for committee members and interest groups of National Pension Fund of Korea.