Even When National Pension Sank by -8%, They Smiled... Government Employees Pension Service Stays Positive for Four Years Amid Crash [In-Depth Fund & Mutual Aid Analysis] ⑤

Total Assets Reached 33.8 Trillion Won Last Year, 9.4% Return
FX Hedge Ratio Lowered from 90% to 50%, Increased Currency Exposure Except for Yen
Expanding Private Credit and Reducing Real Estate to Enhance Liquidity
Guarding Against U.S. Co

Editor's NotePension funds and mutual aid associations have long established themselves as key players in the capital markets. While their fundamental roles differ—providing old-age security for the public (pension funds) and expanding members' assets and welfare (mutual aid associations)—they also show clear distinctions in asset size, investment strategies, and organizational structures. We take an in-depth look at the finances and strategies of these major institutional investors, both domestically and internationally.

The Government Employees Pension Service has chosen a strategy that further segments investment regions and products while maintaining the existing 'barbell strategy' that combines stable cash flow assets with growth assets. Getty Images

The first half of the year brought impressive results for institutions. As of the end of May, the National Pension Service posted 26.18%, and the Teachers’ Pension Service was in the 23% range. This was largely driven by domestic equities.

The Korea Local Finance Association (KLFA) was relatively left out of this thrilling surge. Although its proportion of equities (including overseas stocks) rose from 8.55% last year to 12.27% this year, KLFA started from a different baseline compared to the Teachers’ Pension Service, where nearly half of assets are in equities, or the National Pension Service, which had 29.4% in domestic equities alone.

Then, over just two months, the KOSPI plunged from 8,476.15 to 5,663.24 (-33.19%). Criticism such as 'rebalancing missteps' was largely avoided by KLFA. This is another example of KLFA’s unique '36.5-degree' approach to management: neither too hot, nor too cold.

KLFA is especially wary of excessive concentration in a single asset class. When performance in a particular asset class becomes large enough to decide the overall return, portfolio balance is lost and volatility increases. This is why KLFA maintains its existing 'barbell strategy'—combining stable cash flow assets with growth assets—while pursuing a more segmented approach to investment regions and products. Overseas investments, formerly focused on the US and Western Europe, are now being expanded into Asia-Pacific markets such as Japan and Australia.

Assets grow by 15 trillion won in 4 years... Improvement in funding ratio

KLFA was established in 1975 under the Korea Local Finance Association Act. It manages membership contributions from local government employees and regional public sector workers in order to promote their financial security and welfare. Starting with 80,000 members and 1.2 billion won in assets, KLFA had grown by the end of last year to total assets of 33.826 trillion won and, as of the end of June this year, 381,507 members. This is a 15 trillion won increase over 4 years, compared to assets of 18.9883 trillion won at the end of 2021.

Alternative investments accounted for the largest share with 23.7093 trillion won (70.1%), followed by equities at 4.1515 trillion won (12.27%), short-term funds, etc., at 3.6547 trillion won (10.8%), and bonds at 2.3104 trillion won (6.8%). By region, overseas assets made up 21.919 trillion won, or 64.8% of the total.

Last year’s return of 9.4% exceeded the long-term target return of 5.4%, but was still only about half that of the National Pension Service (18.82%) or the Teachers’ Pension Service (18.93%), and slightly lower than Korea Teachers' Credit Union (10.6%).

However, KLFA’s target is not to reach the top ranks. The goal is to exceed a long-term target return of 5.4% while never posting a negative annual return. In 2022, when both equities and bonds collapsed—leaving the National Pension Service at -8.22%, the Teachers’ Pension Service at -7.75%, and the Government Employees Pension Service at -6.00%—KLFA still achieved a positive 3.9%. Returns have continued to rise: 5.1% in 2023, 9.1% in 2024, and 9.4% last year. There have been no years of major victory, but also no losses.

The scores are visible on the financial statements as well. In the last fiscal year, operating income was 1.8136 trillion won and net income stood at 567.9 billion won, up 45.9% from the previous year's 389.3 billion won. The funding ratio—showing asset levels versus principal and interest owed to members—rose from 112.6% in 2024 to 115.7% last year. This means the reserves have grown even after paying promised interest to members.

Hedging only half the currency risk... Seeking ‘alpha’ in Japan and Australia

KLFA maintains a barbell structure with 70% of assets in income-generating investments (interest and dividends) and 30% in capital gain-oriented assets. As nearly two-thirds of its activities are overseas investments, exchange rates have a major effect on effective returns. Since 2022, KLFA has lowered its overall currency hedging ratio from around 90% to about 50%. Overseas equities are fully exposed to forex risk, equity-type assets such as private equity and real estate are hedged around 30%, while bonds and interest-bearing assets are hedged at 70-80%. Currencies where hedging carries a premium, such as the yen, are maintained at higher hedging ratios. Again, there are no moves to either fully open or close hedges.

Heo Jang, KLFA’s Chief Investment Officer (CIO), said, "We do not set investment region or currency allocations based on exchange rate forecasts. Instead, we apply differentiated hedging ratios reflecting the characteristics and expected returns of each asset class." He continued, "While it may be irrational to shoulder long-term hedging costs for alternative investments, excessive impact on returns from currency swings is also undesirable given the nature of mutual aid association funds."

The investment universe is also widening. Japan and Australia have been selected as key markets. While the U.S. is leading AI innovation and its capital markets are too large to replace, a degree of diversification beyond specific countries and asset managers is needed. Japan is shaking off long-term deflation and the government-led expansion in fiscal spending is expected to boost economic growth. Australia, on the other hand, has low economic correlation with the U.S. and Europe, as well as institutional stability and population growth. KLFA plans to increase its Asia-Pacific weighting across private credit, real estate, infrastructure, and listed equities, as well as to identify small- and mid-sized specialist asset managers in those regions.

Expanding private credit, scaling back real estate... but the membership is aging

Among asset classes, private credit has been selected as the top area for expansion. This will go beyond traditional direct lending to companies, extending into asset-backed finance, structured credit, and credit secondaries. By contrast, KLFA plans to continue reducing exposure to real estate. As sluggish trading delays asset recovery, rebalancing will also slow, since real estate assets only shrink when sold.

The long-term challenge is liquidity. As retirees begin to outnumber new members, demand for cash to pay benefits will grow. Already, of KLFA’s 380,000-plus members, 44,043 are 'special members' who continue to use KLFA products after retirement. Alternative investments can earn an illiquidity premium, but can be hard to monetize at the right time if markets are depressed. When 70% of the portfolio is in alternative assets, a mismatch between cash demand and asset liquidation can cause problems regardless of overall performance.

To address this, KLFA plans to utilize tradeable alternative assets such as securitized bonds, listed REITs, and listed infrastructure, and to expand the use of separately managed accounts (SMAs), which allow more flexible timing of investment and asset sales.

Chief Investment Officer Heo Jang stated, "KLFA faces the inherent challenge of achieving relatively high returns with low volatility—two aims that rarely align. In preparation for changes in contribution structure, we will structurally enhance the liquidity and flexibility of our portfolio through asset-liability management."

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