"Target Yield Surpasses Fourfold" Government Employees Pension's Investment Principles Broken by Bull Market, Restoring 'Balance' with Secondaries [Fund & Mutual Aid Analysis] ⑦

Key Words for Operation Amid Chronic Deficits: 'Stability' and 'Balance'


Stock Market Boom Disrupted Proportions, but Gradual Recovery Underway


"Maintaining a Moderate Risk-Return Portfolio Strategy"

Editor's NotePension funds and mutual aid associations have long established themselves as core players in the capital market. In addition to their fundamental difference—pension funds securing citizens’ old-age income, mutual aid associations aimed at boosting asset growth and welfare for members—they also display notable distinctions in asset scale, investment strategies, and organizational structure. This article provides an in-depth analysis of pension funds and mutual aid associations, which are key funding sources for major institutional investors both domestically and overseas.

The Public Officials Pension Fund, which has been struggling with chronic deficits, continues to operate under its top priority of minimizing risk and maintaining ‘stability.’ Although this year’s stock market boom has broken the fundamental 1:1:1 allocation principle between equities, bonds, and alternative investments, the Fund is planning to restore balance by increasing its proportion of alternative investments in the second half of the year.

The change in allocation ratios is even more pronounced compared to three years ago. At the end of 2023, the medium- to long-term assets were allocated nearly evenly: 36.3% bonds, 31.3% equities, and 32.3% alternative investments. By the end of May this year, the respective ratios were 32.4%, 47.4%, and 20.2%. The Public Officials Pension Fund is turning to secondary funds as a card to rebalance its portfolio.

Strong Stock Market Performance, but a Disrupted Balance

The Public Officials Pension Fund is expected to record its best results ever this year. As of the end of May, the total financial assets—combining medium- to long-term assets with short-term funds—stood at 17.2209 trillion won. Based on average balance yield, as of the end of May, the total financial asset yield was 15.6%, and the medium- to long-term asset yield excluding short-term funds was 23.0%. Comparing year-end figures, the medium- to long-term asset yield was 9.6% in 2021, -6.0% in 2022, 11.5% in 2023, 7.5% in 2024, and 17.2% in 2025, meaning that within just five months, the yield has surpassed four times the target yield (approximately 5%).

The proportion of equity assets has also temporarily increased, disrupting the intended 1:1:1 balance between equities, bonds, and alternative investments. As of the end of May, the Fund held 3.8727 trillion won in bonds (22.5%), 5.6587 trillion won in equities (32.8%), and 2.4054 trillion won in alternative investments (14.0%), or roughly a 2:3:1 ratio. Excluding these medium- to long-term assets, the Fund held 5.2841 trillion won in short-term funds, accounting for 30.7% of all assets.

The balance of alternative investments increased from 2.0910 trillion won at the end of 2021 to 2.4054 trillion won at the end of May this year. However, during the same period, equities rose from 2.3213 trillion won to 2.44 times that amount, resulting in a decreased proportion for alternatives. If equities had remained at the end-2023 level (2.0999 trillion won), the alternative investment share at the end of May would have been estimated at 28.7% rather than 20.2%.

It is also not the case that equities have only risen in a single direction. The equity holdings fell from 5.1271 trillion won in February this year to 4.5054 trillion won in March, a decrease of 621.7 billion won in just one month, before climbing back to 5.6587 trillion won in May. With market volatility expected to intensify in the second half, risk management units like the Risk Management Division are closely monitoring the situation. As interest rates are expected to rise, the Fund also plans to continue acquiring high-quality bonds. Indeed, bond holdings increased by 414 billion won from the beginning of the year until May.

Alternative Investment Focus in the Second Half—Emphasizing Secondaries

Relying on ‘stability,’ the Fund will continue to operate its assets in line with the 1:1:1 principle in the second half. In particular, it aims to raise the proportion of alternative investments, which fell due to a sharp rise in equities in the first half. Increasing allocation to medium-risk, medium-return alternative investments over highly volatile stocks aligns with the Fund’s character. The medium- to long-term financial management plan for 2025–2029, announced in 2024, also stated that in the event of financial deterioration, the share of alternative investments would increase from 30% to 34%, and overseas investments from 29.6% to 36%.

Execution is already under way. The balance of alternative investments grew by 197.4 billion won, from 2.208 trillion won in January this year to 2.4054 trillion won in May—a sum 2.4 times larger than the increase (83.3 billion won) throughout all of last year, achieved in just five months.

The area attracting particular attention is secondary funds. In secondary transactions, the investor acquires fund interests or assets already held by another party. With blind funds, there can be years between capital commitment and the manager’s actual deployment of funds to investments; thus, the actual invested ratio increases only gradually. In contrast, secondaries involve acquiring an already assembled portfolio, enabling a much faster deployment of funds. For an investor looking to quickly close the gap between target and reality, the speed of deployment itself becomes the strategy.

Since the end of last year, the Public Officials Pension Fund has invested in private secondary funds, mid-market private equity, and real estate.

From a stability perspective, this approach also suits the nature of the Fund. Because assets are purchased with investment targets already identified, there is no risk of entrusting funds to be invested in unknown ventures, and the “J-curve” effect—where early-stage costs outpace returns—is shorter, bringing distributions sooner. Acquiring a broadly diversified portfolio also minimizes the risks associated with individual investment failures.

An official from the Public Officials Pension Fund said, “Following last year’s overseas infrastructure investment, we plan to invest in overseas infrastructure in the form of secondary funds this time. Since secondary funds require less time to deploy capital, we consider them advantageous from an execution standpoint, as well.”

‘Chronic Deficit’ Obstacle... Stability Is Essential

Since July last year, Youngjin Son has led the Fund’s asset management as Chief Investment Officer (CIO). Son previously headed asset management at Prudential Life Insurance and KB Life Insurance, and managed risk oversight at KB Asset Management. Under Son’s leadership, the Fund’s operations have continued to emphasize balance and stability.

This stance is rooted in the fund’s structural situation. The biggest obstacle for the Public Officials Pension Fund is the deficit. The Fund has been operated with government subsidies since 2001. The government’s support payment rose from 2.3189 trillion won in 2016, to 3.24 trillion won in 2021, and surged to 8.3173 trillion won last year. This is because annual pension outlays have exceeded income year after year.

Placing ‘stability’ as the number one management principle is therefore an almost unavoidable decision given the characteristics of a deficit fund. Since government funds are being used to cover pensions, it is necessary to generate investment returns while minimizing risk. The Fund continues to invest based on asset-liability management (ALM), prioritizing the securing of funds needed for payments as they come due.

The potential fiscal liabilities to be shouldered in the future are also substantial. According to the National Assembly Budget Office’s “2025 Fiscal Year National Financial Statement Analysis,” the pension liability of the Fund rose from 904.5 trillion won in 2021 to 1,076.4 trillion won last year. Pension liabilities represent the estimated total pension payments without factoring in future pension contributions.

Because the calculation adds all future pension payments owed to current retirees and incumbent public officials and discounts them to their present value, the scale becomes very large. Since all future obligations are reflected in a single point in time, a lower market interest rate—used as the discount rate—results in a higher reported liability, even if the actual future cash outflows do not increase.

However, unlike national government debt with fixed payment amounts and dates, pension liabilities are classified as contingent liabilities rather than definitive ones. They are therefore distinct from debts that must be repaid immediately. While they do not immediately translate into a tax burden, their large size signals the burden of long-term fiscal management.

Despite such structural challenges, the Fund faces the inevitable task of generating stable returns every year. A Fund official said, “Going forward, we plan to proactively identify new alternative investment opportunities. Even as the stock market stabilizes and yields revert to the mean over the medium to long term, the Fund will maintain its orientation toward a medium-risk, medium-return portfolio in the second half to ensure this asset mix remains in place.”

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