National Pension Fund May Move to Hedge FX Risk as Authorities Launch Four-Party Consultative Body (Comprehensive 2nd Report)

(Seoul=Yonhap Infomax) Yoon Woo Shin – South Korea’s Ministry of Economy and Finance, the Bank of Korea, the Ministry of Health and Welfare, and the National Pension Service (NPS) have launched a four-party consultative body aimed at curbing the sharp depreciation of the won and stabilizing the foreign exchange market amid the NPS’s expanding overseas investments.

The Ministry of Economy and Finance announced on the 24th that the four institutions held their inaugural meeting and will use the consultative body to discuss ways to balance the NPS’s investment returns with foreign exchange market stability.

With the dollar-won exchange rate breaching the 1,470 won level—its highest since April—authorities are seeking closer cooperation with the NPS, a major player in the FX market, to bolster market stability.

Last year, when the dollar-won rate surged amid a state of emergency, the NPS contributed to stabilizing the exchange rate through currency swaps and FX hedging in coordination with authorities.

Currently, the NPS and FX authorities have a $65 billion currency swap agreement in place, valid through the end of this year. Market participants are closely watching whether the contract will be extended or its ceiling increased.

The key focus in the market is whether the NPS will implement strategic FX hedging. Strategic hedging is permitted for up to 10% of overseas assets and can be triggered if the exchange rate exceeds its long-term average for a certain period.

Previously, when strategic FX hedging was activated, sustained dollar selling by the NPS helped push down the dollar-won rate, making the fund’s moves a major market factor.

The NPS may also engage in tactical FX hedging at the discretion of its Fund Management Headquarters, up to 5% of overseas assets.

While currency swaps and FX hedging by the NPS are expected to have a stabilizing effect on the exchange rate, authorities must justify these actions to all stakeholders.

As the NPS manages the nation’s retirement assets, concerns persist that FX stabilization efforts could negatively impact investment returns, requiring alternative solutions.

Such concerns were evident at the 6th NPS Fund Management Committee meeting held on the same day.

Minister of Health and Welfare Jeong Eun-kyeong stated in her opening remarks, “Risks remain due to exchange rate instability and increased market volatility at home and abroad. The Fund Management Headquarters should respond swiftly based on thorough market analysis to safeguard the NPS’s profitability and stability.”

Heightened FX market volatility could undermine the NPS’s returns, making it necessary to respond appropriately while also considering the potential impact on profitability.

With the four-party consultative body newly launched, discussions are expected to intensify on concrete measures to achieve both FX market stability and robust NPS returns.

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ywshin@yna.co.kr

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