[In-Depth Look at Funds and Mutual Aid Associations]⑥ "Alternative Investments, Charge Forward" Military Mutual Aid Association Aiming for 30 Trillion Won in Assets

Alternative Investments to Account for 85% by 2030
The Only Fund with a Dedicated CIO for Construction
Falling Returns and 'Korea Military Academy Network' Governance Controversy

Editor's NotePension funds and mutual aid associations have long established themselves as key players in the capital market. In addition to their fundamental differences—pension funds secure the public's retirement and mutual aid associations focus on expanding welfare and asset growth for members—they are also distinct in terms of asset size, investment strategy, and organizational structure. We take an in-depth look at pension funds and mutual aid associations, which are also the main financial backers for major institutional investors both at home and abroad.

The Military Mutual Aid Association decided last March to maintain its retirement benefit payment rate at an annual 4.9%. At the time, the Bank of Korea's benchmark interest rate stood at 2.50%, and average regular deposit rates at commercial banks were in the high 2% range.

Like any manufactured good, financial products such as retirement benefits have an underlying cost. Last year, the Military Mutual Aid Association's funding rate was 4.53%. Only returns above this line ensure a surplus to be delivered to members; anything below means the more funds are operated, the greater the loss. There is virtually no way to consistently exceed a 4.53% return through government bonds or high-quality corporate bonds. Over the past four years, the association’s bond yields ranged from 2.1% to 4.3%. Although equities offer higher expected returns, they are volatile—2022, for example, saw a return of -8.8%. Thus, the guarantee to pay 4.9% annually is a significant burden.

This is why the Military Mutual Aid Association has turned to alternative investments. At the end of last year, 74.8% of its managed investment assets were placed in alternative investments and real estate. Its mid-term portfolio target for 2030 is a staggering 84.8% in these assets.

A Commitment to 4.9%: Neither Bonds nor Equities, but 'Alternative Investments'

Members join mutual aid associations voluntarily and can leave at any time. There is only one way to keep them: offering interest rates higher than those at commercial banks. The Military Mutual Aid Association offers two main products. One is a retirement benefit—a lump sum provided upon discharge in return for monthly contributions during service; the other is a lump-sum entrusted savings plan, where a large amount is deposited for six months to two years. Annual returns are 4.9% and 4.0%, respectively.

In the past three years, it was the lump-sum entrusted savings that fueled the association’s growth. The balance surged from 3.1091 trillion won in 2022 to 7.2460 trillion won last year, surpassing members’ monthly contributions (5.1896 trillion won). Costs were managed through this product. The funding rate dropped from 4.90% in 2024 to 4.53% in the previous year, but the flagship retirement benefit rate of 4.9% was left untouched. Instead, the interest rate on the lump-sum entrusted savings product was reduced twice: from 5.0% in May last year to 4.5%, and then again to 4.0% in July.

The structure that sustains this model is built on alternative investments. Of the portfolio, 68% are private equity (PEF) and venture capital (VC) funds, with much of the underlying assets in corporate finance and private debt. Real estate exposures consist of real estate funds (57%) and project financing (PF) loans (28%). These assets have contractually defined cash flows. The design aims to lock in a spread of just over two percentage points above the funding cost, minimizing risk of fluctuation.

Since its launch in 1984 with assets of 22.4 billion won, the Military Mutual Aid Association has grown in areas outside of the stock market: infrastructure (SOC), real estate development PF, and unlisted equity. In 2003, it held a 50% stake in Kumho Tire, and invested 200 billion won as an early backer in the establishment of Macquarie Korea Infrastructure Fund the same year.

Among domestic pension funds and mutual aid associations, the Military Mutual Aid Association is the only one with a dedicated Chief Investment Officer (CIO) responsible for construction and tangible assets. Last year’s strong performance reflected this legacy and organizational structure.

A Military Mutual Aid Association representative stated, "Alternative investments offer higher diversification compared to traditional assets, as well as premiums and more predictable cash flows that come with illiquid assets."

'Assault' Challenges: Allocation Rises, Returns Decline

Last year, the Military Mutual Aid Association reported assets of 24.4635 trillion won and an operating profit of 1.0542 trillion won. For the first time since its establishment, operating profit exceeded 1 trillion won. Even after returning 645.1 billion won in member welfare funding, it recorded a net profit of 409.1 billion won. Its reserves ratio reached 125.5%, the highest among mutual aid organizations. The target is to surpass total assets of 30 trillion won by 2030.

However, several obstacles lie ahead. In contrast to the emphasis on alternative investments, their yield paradoxically dropped from 7.9% in 2024 to 6.2% last year. The overall investment management yield also has declined consecutively since 2023—from 7.80%, 7.00%, down to 6.90%. Korea Ratings·KR pointed to "valuation losses due to underperformance in some overseas alternative investment funds" as the cause. In fact, it was not alternative investments but equities, which make up 11% of the portfolio, that drove last year’s results with a return of 16.4%.

The membership base, while solid, is not without risk factors. Last year, the number of members reached an all-time high of 240,117, but most of the new members were enlisted soldiers. Of the 38,024 who joined, the total savings balance was 102.7 billion won, averaging 3 million won per person. Meanwhile, the number of retirement benefit members making long-term contributions dropped for the third consecutive year, from 175,000 in 2023 to 167,000 last year. This means more short-term money is flowing in as long-term funds are withdrawn—a structure driven by the irreversible decline in conscript resources.

Jung Hojun, an analyst at Korea Ratings·KR, stated, "The Military Mutual Aid Association offers members returns higher than market interest rates, steadily growing its membership and managing the base." He added, "The association will likely continue investment strategies focused on long-duration assets such as alternative investments and real estate, which are exposed to global financial market conditions."

'Military Academy Network' Controversy: Chronic Governance Noise

Alternative investments have a unique feature compared to listed assets. According to one mutual aid association official, "With listed equities, profits and losses are visible whenever the market opens, but for private equity and real estate, appraisal-based valuations can be deferred for months or years." This means a significant time lag before performance is confirmed. With three-quarters of the portfolio in such assets, internal procedures must ensure accountability for portions of the portfolio that the market cannot verify in real-time.

Despite this, the Military Mutual Aid Association is repeatedly troubled by chronic governance issues. On July 29, its management committee approved the reappointment of Yongseok Kim as CIO of construction investments. The extension was for three years, without any external recruitment process. Considering that the previous CIO of the finance investment division, Jaedong Kim, only had a one-year extension, the decision was deemed unusual.

Their backgrounds also differ sharply. Former CIO Insu Shin came from Doosan Engineering & Construction and Namkwang Engineering & Construction, later becoming the CEO of Daegu Dongbu Ring Road; former CIO Woogeun Shim spent more than 30 years overseeing development, finance, and risk management at Daewoo Engineering & Construction. Both were construction investment professionals selected through open competition. In contrast, current CIO Kim is a 43rd class graduate of the Korea Military Academy, has served as the engineering brigade commander of the Capital Corps and as chief engineer at the ROK-US Combined Forces Command, held a senior position in the association’s housing business division, and has been in his current post since August 2023 after heading the construction infrastructure division.

This has fueled suspicions that personal connections among academy alumni have influenced these decisions. CEO Jaegwan Jung, a graduate of the 38th class, ends his term in February next year. Industry observers have speculated, "Perhaps they're aiming to secure a position for the junior academy alumnus for three years before the CEO departs."

Although the only remaining step was approval by the Minister of National Defense, it was reported that due to controversy and subsequent review, the association recently reduced CIO Kim’s term to one year, following opposition from the minister. An official explained, "Since taking office, the new CIO Kim has achieved a 224% increase in operating profit and secured land for 4,749 housing units across six regions. The reappointment was carried out through unanimous agreement among the management committee members, as the need for an extension was recognized, and thus an external recruitment process was not adopted."

An investment banking (IB) industry insider commented, "For CIO positions overseeing trillions of won in assets, it is standard practice in other mutual aid organizations to recruit external investment experts openly. It’s unfortunate that avoidable controversy undermines the Military Mutual Aid Association's aggressive investment posture and its results."

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