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Investment Management

Investment Policy

The objective of the Government Employees Pension Fund is to carry out the role as a liability reserve for paying benefits to the government employees by growing the fund and maintaining adequate liquidity. As prescribed in Article 4 of the Fund Management Regulation, the fund is managed according to by four investment principles:

  1. 1) Stability which minimizes risk of loss in the event of fluctuating assets.
  2. 2) Profitability which maximizes surplus income while maintaining the value of the fund.
  3. 3) Liquidity which enables the smooth payment of pension benefits and self-supply of financial sources for investment.
  4. 4) Public welfare which contributes to the stability of life and greater well-being of government employees and families.

Every year, the GEP Service creates a five-year asset allocation strategy and fund operation plan, based on target return rate and risk limits. The asset allocation strategy thereby sets the allowable scope of investment to adequately reflect changes in financial situations.

Classification of the Plan Assets Investment

  • Financial Assets
    • Bonds (domestic, overseas/ direct, entrusted/ national, special, corporate, financial etc.)
    • Stocks (domestic, overseas/ direct, entrusted / stocks, outsourced in free style and social responsibility investment style fund etc.)
    • Alternative investment (real estate, private equity and SOC fund etc.)
    • Short-term fund (cash / short-term specific money trust, MMF, MMDA, deposit etc.)
  • Real estate
    • Government employees housing assets
    • Government employees facility assets
  • Pension Loan

Asset Allocation Strategy

Based on mid/long-term market projections, the Asset Allocation Strategy determines the portfolio of different assets. The process is split into two stages. In the first stage, the Asset Management Committee establishes the overall asset allocation strategy. This includes financial assets, loan assets, housing assets, facility assets and other assets. In the second stage, the financial asset allocation strategy is determined for bonds, stocks, alternative investment, etc.

1st stage
  • Overall asset allocation strategy
    • Financial asset, pension loan asset, real asset and other assets
↓
2nd stage
  • Financial asset allocation
    • Bond, stock, alternative investment, short-term assets

The fund was established to pay for annuities such retirement pensions, survivors’ pensions and disability pensions. The fund should, therefore, maintain and increase the value of the fund to secure long-term financial stability. The target return rate of mid/long-term assets is set at “real economic growth rate (GDP) + consumer price index rate (CPI).”

The allowable risk limit of the financial asset is set at the maximum of endurable risk against the decrease of the rate of return.

The tactical asset allocation is a process to adjust assets within the permissible scope of strategic asset allocation to address changes in the market conditions. In the case of financial assets, the Financial Asset Investment Committee conducts the tactical asset allocation within the scope of the ratio of strategic asset allocation set by the Asset Management Committee.

Risk Management

The ultimate objective of risk management is to secure the long-term financial stability of the fund and the soundness of assets by minimizing risks and to preventing fund shortages by identifying, measuring and controlling various risks (market risk, credit risk, liquidity risk, legal and regulatory risk, operational risk, etc.)

Risk types of asset management
  • Market risk: risk that value of retained securities decrease due to changes of market value of stocks, interest rate and exchange rate etc.
  • Credit risk: risk that investment principal and interest payment cannot be collected as agreed due to default of the other party of a contract.
  • Liquidity risk: risk that may occur because transaction at normal price cannot be made due to shortage of liquidity or thin trade in the market.
  • Law and regulation risk: risk that the fund may suffer loss due to errors in interpretation of law or in contract etc.
  • Operational risk: risk that fund may suffer loss due to improper internal control system or business processing procedures, errors in system and mistakes by staff.

Performance Evaluation

Performance evaluation aims to enhance efficiency and accountability in asset management. Evaluation results are reflected in the asset management and compensation system (i.e. feedback). To ensure transparency and objectivity in employees’ performance appraisals, the evaluation is conducted in conjunction with an external organization.

Disclosure of all Investment Results and Voting Rights

All results related to fund management must be disclosed at an accrual accounting basis, as per the recommendations of the Global Performance Evaluation Standard (GIPS). Necessary items for the public disclosure include the performance evaluation of more than five years’ period, the use of time weighted return rate, benchmarks, the use of leverage and derivative, the inclusion of fees, etc. Also, it is recommended to acquire verification by an independent third party to assess internal company matters (i.e. personnel movement, risk index, etc.) The following items are disclosed on the homepage of the GEP Service (www.geps.or.kr).

Major items for public announcement
  • Monthly and quarterly announcement: investment status and rate of earnings by investment products, etc.
  • Yearly announcement: financial status statement, statement of profit and loss, yearly income and expenditure, fund accumulation status, total investment status and rate of earning by investment products and fund operation guideline etc.
  • Ad-hoc disclosure:: items that the CEO deems necessary.

In accordance with Article 64 of the National Finance Act, the voting right of shares should be earnestly exercised in good faith for the benefit of the fund, and the content of its exercise should be disclosed too.

Investment Criterion

In accordance with Articles, 4 and 16 of the Fund Management Guideline, the investment management of financial assets aims to achieve performance above standard return rate, maintaining the following management principles: financial stability, profitability, liquidity and public welfare.

  • The decision-making system of investment management consists of committees (namely the 「Asset Management Committee」, 「Alternative Investment Committee」 etc, the Fund Operation Group, and an internal operation organization which oversees the actual implementation of the investment policy.
  • In accordance with the Government Employees Pension Act and its enforcement decree; the GEPS’ Fund Management Guideline and its enforcement regulation, financial investment assets should be invested separately in the bonds, stocks, alternative investment and cash reserve, etc.

Investment Portfolio of Financial Assets

Target Investment Portfolio Ratio and Allowable Scope by Asset Classes, 2017

(Unit: 100 million of won, %, %p)
Past Flows of the Financial Status and Plan Fund
Total Domestic bond Global bond Domestic stock Global stock Alternative investment
criteria Target ratio 100.0 40.3 5.0 22.8 10.9 21.0
Ratio criteria allowable scope - ±7.0 ±3.5 ±5.0 ±3.5 ±4.0
Amount 67,854 27,346 3,392 15,480 7,394 14,242
* Allocated by reflecting 16 implementation portfolio etc. of ’16~’20 mid/long-term allocation plan under the Financial Asset Operation Guideline

Target Return Rate by Asset Classes, 2017

(Unit: 100 million of won, %)
Target Return Rate by Asset Classes, 2017
Total Bond Stock Alternative investment Short-term asset
Average outstanding Amount 74,958 28,794 21,995 11,251 12,918
Target return 2,665 527 1,395 562 181
Target rate of return 3.6 1.8 6.3 5.0 1.4