South Korean Pension Funds Increase Domestic Stock Allocation Target to 20.8%

The National Pension Service (NPS) of South Korea announced on Thursday that it has significantly increased its domestic equity holding target ratio to 20.8% by the end of 2026 from 14.9%, while simultaneously reducing its foreign stock allocation target from 37.2% to 34.7%. The new targets will officially take effect at the end of June.

The direct context for this adjustment is the historical surge of the KOSPI. This year, the KOSPI has risen by more than 94%, surpassing the 8,000-point mark, and has additionally increased by about 31% since the end of February. This means that NPS's actual domestic stock holding ratio has long exceeded the previous target cap of 14.9%—according to data from February, domestic stocks already account for 24.5% of its investment portfolio. Failure to raise the target would place NPS under pressure to massively sell off domestic stocks to rebalance, which would have a significant negative impact on the market.

The NPS management committee stated that this adjustment took into account market conditions since the beginning of the year, principles of fund profitability and stability, impacts on financial markets, and expert opinions. The aim is to enhance the long-term profitability and stability of the fund while reducing the market impact of rebalancing operations. The committee also noted that the adjustment reflects the judgment that the market may undergo structural changes.

With total assets of approximately 1610.4 trillion won (about 1.07 trillion US dollars), NPS represents 60% of South Korea's GDP and is the world's third-largest pension fund. Barclays analyst Son Bum Ki pointed out that the upswing in South Korea's semiconductor export cycle is expected to continue for two to three more years, and NPS tends to retain exposure to the associated upside; forced rebalancing would also conflict with the interests of domestic institutions and retail investors who are heavily buying South Korean stocks, which is politically sensitive.

It is noteworthy that reducing the target for overseas stock allocation will also have a side effect—relieving the depreciation pressure on the won. Since the outbreak of the Iran war, the won has been under significant pressure and has recently fallen below the 1500 mark. NPS and the Bank of Korea expanded foreign exchange swap arrangements last December to stabilize exchange rates, and this adjustment aligns highly with the aforementioned policy intentions.

For longer-term asset allocation planning, NPS has set its target ratios for the next five years (until 2031) at: equities 55%, bonds 30%, and alternative investments 15%.