The national pension exists to secure retirement income

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The national pension exists to secure retirement income

Published: 08 Dec. 2025, 00:04

Audio report: written by reporters, read by AI

Kang In-soo

The author is a professor of economics at Sookmyung Women’s University and head of the Reset Korea economy subcommittee

For more than two months, the won–dollar exchange rate has hovered in the 1,400-won range and is now pushing toward the threshold of 1,500 won. Korea has rarely encountered such levels outside the foreign exchange crisis of 1997 and the global financial crisis of 2008. Yet the anxiety today is different. Those past episodes were “black swan” shocks, while the current situation resembles a chronic condition born of weakening domestic fundamentals and a structurally strong U.S. economy.

An exchange booth in Myeongdong, central Seoul, displays currency rates on Dec. 7 as the strong dollar trend continues. [NEWS1]

Amid concern that the high exchange rate may become entrenched, the Ministry of Economy and Finance, the Bank of Korea, the Ministry of Health and Welfare and the National Pension Service (NPS) recently announced a new framework aimed at improving pension returns while stabilizing the foreign exchange market. Finance Minister and Deputy Prime Minister Koo Yun-cheol stressed that the government was not preparing to mobilize the pension fund to defend the won. But markets see the plan as a signal that national retirement assets could be used as a tool for currency intervention.

The urgency of the government’s position is understandable. The NPS holds about 1,322 trillion won ($900 billion) in assets, with approximately $530 billion of that invested overseas. That figure exceeds Korea’s foreign exchange reserves of roughly $420 billion. Because the fund converts large amounts of won into dollars every year to finance overseas investments, officials have long viewed it as a structural factor pushing the exchange rate higher. For policymakers, the temptation to use this “second reserve” to relieve market pressure is strong.

But the NPS is not a piggy bank the government can tap when needed. Its purpose is to grow assets and secure stable retirement income for millions of Koreans. Raising the fund’s foreign exchange hedge ratio may provide more dollars to the market in the short term, but it comes with substantial opportunity costs. If the strong dollar trend continues, increasing hedging now means selling more dollars and forfeiting future currency gains. Hedging also incurs additional costs. Sacrificing the investment returns of 22 million subscribers for macroeconomic stabilization is a decision that invites criticism.

The rise in the exchange rate also cannot be blamed solely on the NPS. Korean retail investors have purchased a net $30.1 billion in U.S. stocks this year. Since the pandemic, Korea’s money supply has grown twice as fast as that of the United States. Korea’s policy rate is 1.5 percentage points higher than the United States. Under the tariff agreement with Washington, Korea will send $20 billion in cash to the United States each year for a decade. The spread of “Trump trade” positioning has further amplified dollar demand. Global macroeconomic shifts, not just domestic portfolio flows, are driving the market.

Using the NPS to counter these forces is merely symptomatic treatment. Selling dollars in the forward market to hedge, or borrowing dollars from the Bank of Korea through a swap for new investments, may temporarily increase dollar supply. But such steps are painkillers, not cures. They cannot reverse a trend driven by weaker fundamentals. Worse, if the moves are interpreted as political interference, the fund’s independence could be compromised. Over time, this would erode investment returns and undermine foreign investor confidence.

In the short term, cooperation between the NPS and the Bank of Korea should focus on smoothing excessive volatility through flexible swap lines. Mechanical increases in hedge ratios or administrative intervention in asset allocation should be avoided. Decisions on investment strategy must remain with the fund’s independent management committee.

National Pension Service's headquarters in Jeonju, North Jeolla. The NPS is Korea's largest institutional investor. [YONHAP]

In the long term, Korea must become a more attractive investment destination. That requires improving the performance and stability of domestic capital markets. The corporate value enhancement program must become more effective and labor and corporate regulations must be eased to raise Korea’s potential growth rate. The most reliable path to exchange rate stability is to strengthen industrial competitiveness so that foreign capital flows into Korea on its own.

As the exchange rate approaches 1,500 won, the government should resist the easy option of leaning on the pension fund. Instead, it must pursue the difficult reforms needed to change the structure of Korea’s economy. Only then will the won find lasting stability and the National Pension Service remain focused on its core mission: securing the retirement income of the people.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.