NPS Eases 'Sell-Off Bomb' Fears but Raises New Concerns... Long-Term Diversification Put to the Test

5th NPS Fund Management Committee: Asset Allocation Adjusted
Reduced Overseas and Alternative Investments, Increased Domestic Equity Share
"Volatility Risks for Retirement Funds Rise in Case of Market Correction"

The National Pension Service (NPS) has significantly raised its target allocation for domestic stocks from 14.9% to 20.8%, alleviating concerns over large-scale selling pressure in the stock market for the time being. This adjustment was made because the surge in the KOSPI pushed the proportion of domestic stocks in the portfolio well beyond the previous allowable range, prompting the NPS to align its target allocation with reality and temporarily expand the Strategic Asset Allocation (SAA) range.

However, this decision brings some new uncertainties. To reduce its selling of domestic stocks, the NPS has lowered its allocations to foreign stocks, domestic bonds, overseas bonds, and alternative investments. While this move has lessened the immediate market shock, there are concerns that it could weaken the diversification benefits of retirement funds for Korean citizens over the long term.

Reduced Burden of 200 Trillion Won in Sales... SAA Expansion Scope Not Disclosed

As the KOSPI surpassed the 8,000 mark this month, concerns arose in the market that the NPS's excess holdings of domestic stocks may have ballooned to around 200 trillion won. With the latest decision by the Fund Management Committee to raise the target allocation for domestic stocks and temporarily expand the allowable range for Strategic Asset Allocation (SAA), the likelihood of this volume flooding the market as short-term sell orders has decreased substantially. This is because, under the previous criteria, much of this volume would have faced selling pressure, but now a significant portion is absorbed within the new target allocation and expanded permissible range. However, the specific extent of the SAA's expansion will not be disclosed, as it could impact market stability and the fairness of fund management.

The NPS views the core of this measure not as "the NPS will buy more domestic stocks," but rather as "creating more institutional leeway so that the NPS does not have to rush to sell domestic stocks." Minister of Health and Welfare Jeong Eun-kyeong explained, "This decision reflects changes in recent market conditions and aims to enhance the long-term profitability and stability of the NPS fund, while also considering its impact on the financial market."

Foreign Stocks and Bonds Reduced to Protect Domestic Stocks

The issue is that as the allocation to domestic stocks increases, the shares of other asset classes have shrunk. In the 2026 asset allocation adjustment plan, the target for domestic stocks increased by 5.9 percentage points, from 14.9% to 20.8%.

Conversely, the allocation for foreign stocks dropped by 2.5 percentage points, from 37.2% to 34.7%. Domestic bonds decreased by 1.8 percentage points, from 24.9% to 23.1%. Alternative investments fell by 1.0 percentage point, from 15.0% to 14.0%. Foreign bonds decreased by 0.6 percentage points, from 8.0% to 7.4%. In other words, the 5.9 percentage point increase in domestic stocks was offset by reductions in the other four asset classes.

This is positive for the domestic stock market in the short term. If concerns about the NPS dumping large volumes of domestic stocks subside, individual investors who had been worried about pension fund flows may also regain confidence.

In fact, the NPS is one of the most influential institutional investors in the domestic stock market, so even a shift in target allocation can change market sentiment.

Namwoo Lee, chairman of the Korea Corporate Governance Forum, said, "Given that recent amendments to the Commercial Act and the Capital Markets Act have reduced both the risks and the attractiveness of Korean stocks, it is not excessive to increase the allocation to domestic stocks."

Concerns Over Diversification Principle for Pension Funds... Overseas Pension Fund Cases

However, from the perspective of NPS subscribers, the question may be different. Foreign stocks offer opportunities that differ from the Korean stock market, and bonds help protect portfolios when equity markets are volatile. Alternative investments, including real estate, infrastructure, and private equity, diversify sources of returns. Reducing these allocations means the NPS portfolio will become more sensitive to the performance of domestic stocks.

If the domestic stock market continues to rise, this will boost returns. However, if the market undergoes a correction, the volatility of retirement funds could increase. This is why the latest decision is seen as one that eases fears of a "sell-off bomb" but sacrifices some investment diversification.

Even when compared to overseas pension funds, the NPS's home bias is not insignificant. Looking at just five countries whose major pension funds the NPS itself cites as benchmarks, Japan's GPIF has set its domestic stock target allocation at 25% of total assets. In the United States, CalPERS is reportedly allocated more than 60% to domestic stocks. However, these figures reflect specific market circumstances: the U.S. dollar and Japanese yen are considered safe-haven currencies, making foreign investments less attractive. Furthermore, given the size of the U.S. and Japanese stock markets relative to the global market, these absolute allocations are not seen as particularly high.

In contrast, Norway's GPFG, whose home market is much smaller relative to the world market, has a strict diversification policy and allocates 0% to domestic stocks. The Netherlands' ABP allocates just 2.1%, and Canada’s CPPI is in the 9% range. The Korea Capital Market Institute, in its 2025 report, noted, "Domestic pension funds tend to have a somewhat high home bias in equity holdings," and emphasized the need for active asset allocation.

Minister Jeong stated, "Stable management of pension funds is a core task that protects the precious retirement savings of citizens and underpins long-term fiscal stability. We will continue to closely monitor market conditions to ensure that fund management balances principle and flexibility."

This content was produced with the assistance of AI translation services.