Seoul:Korea's stock market has experienced a dramatic downturn, falling from record highs above 9,300 to the mid-5,000s within just four months. The KOSPI index has suffered multiple crashes, including a notable 7.57 percent drop on October 15, following a 5.46 percent decrease on October 13, which have caused significant investor losses and shaken market confidence. Despite a slight rebound on October 16, the situation remains concerning as many households see their savings diminish. Criticism has been directed at President Lee Jae Myung's administration for its handling of policies potentially exacerbating the market turmoil.
According to Yonhap News Agency, key issues revolve around the National Pension Service (NPS), Korea's largest institutional investor. The NPS is tasked with safeguarding retirement security through prudent management of contributions, balancing returns against risk. However, recent policy choices have raised doubts about whether these fundamental principles are being upheld. Earlier this year, President Lee suggested that the pension fund's domestic equity allocation was too low, prompting the NPS to increase its target allocation from 14.4 percent to 14.9 percent in January, and further to 20.8 percent in May. Additionally, the NPS expanded its strategic tolerance band and suspended rebalancing through June, aligning with a KOSPI surge.
Rebalancing is a crucial risk-management practice that prevents an asset class from dominating a portfolio post-rally. By selling assets whose weight has grown, a pension fund mitigates concentration risk and maintains the ability to buy when prices drop. The suspension of this discipline exposed the NPS to greater risk when valuations soared. Consequently, while foreign investors capitalized during the rally, many individual investors faced severe losses. Reports indicate the NPS saw its domestic equity valuations drop by over 120 trillion won ($89.7 billion) in July alone, with some estimates suggesting even larger losses.
The introduction of single-stock leveraged exchange-traded funds (ETFs) has also come under scrutiny for possibly intensifying market fluctuations. These ETFs amplify both gains and losses, escalating investor pain during sharp declines. Although global factors like concerns over artificial intelligence investments and persistent U.S. inflation have contributed to the sell-off, domestic policy decisions are also held accountable for increasing volatility.
The NPS contends that large-scale selling could destabilize the market and that frequent trading does not enhance long-term returns. However, these arguments do not justify ignoring established risk controls without clear, compelling evidence of benefits outweighing risks. Japan's Government Pension Investment Fund, for example, manages market exposure within a disciplined framework, demonstrating that a public pension fund can maintain independence from short-term political aims.
Concerns are heightened by the NPS's apparent lack of transparency. The organization has reportedly withheld minutes from a committee meeting that approved the rebalancing suspension until 2030. NPS Chairman Kim Sung-joo stated that the January and May decisions were unanimous and did not require a vote. Unanimity, however, does not ensure sound decision-making nor negate the public's right to understand policy rationales affecting national retirement assets.
President Lee's responses have been seen as insufficient. His remark that someone must have decided to introduce leveraged ETFs fails to meet the accountability standards expected of a head of government. Effective leadership requires clarity and accountability when policies fall short.
The government is urged to disclose the evidence and rationale behind these decisions, clarify risk assessments, and identify those responsible for any judgment errors. Strengthening the pension fund's governance is necessary to safeguard its independence from political influence. While market fluctuations are inevitable, the management of public retirement funds should remain steadfastly focused on long-term security. President Lee's administration must uphold the principle that the NPS serves the people, not political agendas, to prevent current market losses from deteriorating into a broader crisis of public trust and a threat to the retirement security of future Korean generations.