The government's "four-party consultative body to respond to a high exchange rate" also includes the National Pension Service and the Ministry of Health and Welfare. Minister Jung Eun-kyeong said, "The Ministry of Health and Welfare and the National Pension Service also have demand (to respond to the high exchange rate)." With the National Pension Service increasing overseas asset investments and thereby boosting dollar demand, which is pushing up the exchange rate, the ministry is weighing various options.
On this, an official at the Ministry of Health and Welfare said, "There are concerns that the National Pension Service, one of the world's three largest pension funds, could deepen a 'self-destructive structure' that falls into a vicious cycle due to exchange rate fluctuations." ChosunBiz looked into the circumstances on the 15th.
◇ National Pension Service's overseas investments exceed foreign exchange reserves… the bigger it gets, the higher the exchange rate goes
Of the 1,361 trillion won in assets under management at the National Pension Service, 605 trillion won (44%) is invested in overseas stocks and bonds. Including other investments such as real estate, an estimated 780 trillion won (57%) is invested overseas. This is larger than Korea's foreign exchange reserves (653 trillion won).
For the National Pension Service to invest overseas, it must convert the won paid in by contributors into dollars. The amount raised this way is estimated at $30 billion to $40 billion a year.
The problem is that as the National Pension Service expands overseas investments, it ends up repeatedly pushing up the exchange rate. For example, if the won-dollar rate is 1,000 won per $1 and the National Pension Service buys dollars on a large scale, the rate rises to 1,050 won. After that, the National Pension Service buys dollars at 1,050 won or higher, which in turn pushes the rate up to 1,100 won.
Such a scenario is actually possible because the National Pension Service has an enormous presence in the foreign exchange market. In 2022, foreign exchange authorities released $8 billion to $15 billion per quarter to curb a surge in the exchange rate. A simple calculation puts the annual amount at $46 billion. The scale at which the National Pension Service converts won into dollars in a year is almost the same. That's why it is sometimes called a "whale in a pond." Even a big breath causes strong currents.
An official at the Ministry of Health and Welfare said, "The foreign exchange market is small, and if the National Pension Service keeps expanding overseas investments, selling pressure on the won and buying pressure for dollars will inevitably build up structurally," adding, "The more you buy dollars, the more expensive they become, and that ultimately means paying more expense for investments."
◇ Concern over forex losses and reduced returns as baby boomers retire and begin receiving pensions
Last year, the National Pension Service's rate of return was around 15%, and there is an assessment that roughly 8 percentage points of that—about half—came from foreign exchange gains due to the rising exchange rate. When the exchange rate goes up, converting the value of assets purchased in dollars into won produces a figure higher than the actual rate of return.
However, if for any reason the exchange rate starts to fall, the National Pension Service will incur foreign exchange losses even if it does nothing. As soon as Apr. next year, when Korean government bonds are included in the FTSE World Government Bond Index (WGBI), a large inflow of foreign investment funds is possible. That is a factor for a decline in the won-dollar rate.
The Ministry of Health and Welfare also worries about what could happen when pension payments surge in the future. An official at the ministry said, "As time passes, there will come a time when we sell assets invested overseas and bring the profits and principal back to Korea, converting dollars into won," adding, "Excessive downward pressure on the exchange rate (won appreciation) will emerge."
In particular, when the baby boom generation (born 1964–1974) starts receiving National Pension benefits in earnest, there is a risk that realized returns will be sharply reduced. Right now, selling $1 worth of overseas assets can yield 1,470 won, but if the exchange rate falls due to the sale of overseas assets for pension payments going forward, that amount could be less. An official at the ministry said, "We need to prevent a situation in which the National Pension Service becomes a 'self-destructive structure' in relation to exchange rate fluctuations."
Recently, instead of selling won to buy dollars, the National Pension Service has been considering raising dollars by issuing foreign currency bonds. Mobilizing foreign currency bonds can avoid pushing the exchange rate higher.
The National Pension Service is also reportedly reviewing easing the rigidity of hedging by selling overseas assets to lower the exchange rate only once the won-dollar rate rises to around 1,480 won. The aim is to allow ad hoc sales of overseas assets depending on exchange rate conditions.
An official at the Ministry of Health and Welfare said, "The four-party consultative body to respond to a high exchange rate aims to establish a new framework for National Pension Service asset management from a long-term perspective," adding, "There will be no undermining of the National Pension Service's principles of profitability or independence."