Lee "National Pension Service currency hedging is to protect retirement assets"

'Refuting the "mobilization for exchange-rate stability" controversy'

**"Also consider profitability when paying pensions

the need for strategic ambiguity in currency hedging"

Following Koo Yun-cheol, pressure on the National Pension Service

Lee Chang-yong, Governor of the Bank of Korea, on the 27th addressed the controversy that the National Pension Service would be mobilized to stabilize the won–dollar exchange rate, saying, "It's not about sacrificing the public's retirement assets but about the need for a new frame to protect them."

At a press briefing held immediately after the Monetary Policy Committee's policy direction meeting that day, he said, "If you consider the time when (the National Pension Service sells) overseas assets and brings them back, wouldn't there be a need to secure profitability while also hedging (risk avoidance)?" This aligns with Koo Yun-cheol, Deputy Prime Minister and Minister of Economy and Finance, who at a press briefing the previous day said, "We will prepare fundamental alternatives to maintain foreign exchange market stability without undermining the National Pension Service's profitability."

The heads of foreign exchange authorities have emphasized for two consecutive days the need for the National Pension Service's currency hedging, appearing to pressure the National Pension Service for a strategic change.

He stressed that currency hedging is necessary in preparation for the timing when the National Pension Service would sell overseas assets to pay benefits. He said, "The expansion of the National Pension Service's overseas investments can act as a factor weakening the won, and later when funds are repatriated it can act as a pressure strengthening the won, increasing return volatility," adding, "Realizing gains when the exchange rate rises and securing profitability through hedging is, in the long term, the way to protect the public's retirement assets."

He also mentioned the need to revise the National Pension Service's strategic hedging rules to improve short-term exchange rate concentration. He pointed out, "When to start hedging overseas assets, and when to unwind a hedge after putting it on are the National Pension Service's confidential matters," and said, "It's confidential, but in fact the pattern is all known." He explained that the activation and cancellation conditions of strategic hedges being fully exposed to the market increase exchange rate volatility and concentration.

To address these issues, he said the strategic ambiguity of currency hedging should be increased and discretion widened so that those in charge can operate flexibly. He explained, "A pattern has been formed where no one wants to take responsibility because if losses occur they are held accountable, but even if things go well there is no reward," and, "(Because hedging is done mechanically) the exchange rate skews to one side, and foreign investors know this very well."

He also mentioned the need for the National Pension Service to change its asset allocation strategy as it expands overseas investments. He said, "Unlike when the National Pension Service first invested overseas, individuals are taking out a lot of (assets) abroad," and, "There is a need to consider the country's overall optimal (best) portfolio." It was interpreted to mean that the National Pension Service should adjust the pace of its overseas investments.

Jwa Dong-wook, reporter leftking@hankyung.com