The Board of Audit and Inspection has recently told the National Pension Service to fire an executive and sanction two others for tampering with performance evaluations of brokerage companies that carry out stock transactions on behalf of the NPS.
The board’s action is disturbing as it suggests some of the fund managers at the NPS have problems with their integrity. Given the huge amount of assets left in the hands of the managers ― 341 trillion won ― the issue is a matter of concern that the NPS needs to address promptly.
The NPS, like other stock investors, invests in stocks through brokerages. It allocates its funds to 34 brokerages that are selected from among more than 60. Brokerage selection is made quarterly on a performance basis. These brokerages sell and buy stocks on behalf of the NPS and offer investment advice based on in-house research. They are paid transaction fees that amount to 0.15 percent of the turnover.
According to the BAI report, the NPS executive altered the performance evaluation scores of brokerages 58 times between 2008 and 2010. In some cases, he elevated the grades of certain companies to help them remain on the list of 34 firms. The reason: his friends were employed at those brokerages.
He also raised the scores of the brokerages that recruited former NPS employees as asset managers, helping them continue to do business with the NPS and earn commission incomes.
In one case, the official cut the rating of a brokerage and eliminated it from the NPS list. It was payback for tipping off the National Assembly about the NPS’ pressure on brokerages to purchase memberships at a resort it operates.
Following the release of the BAI report, press reports alleged that brokerages use corrupt lobbying practices to get favors from fund managers and research analysts at the NPS and other pension funds.
They quoted brokerage officials as saying that they entertain fund managers at hostess bars and massage parlors and play golf with them on weekends. Brokerage officials also said they offer hefty cash gifts to fund managers on special occasions such as the weddings of their children.
The NPS assets should be invested strictly based on such criteria as safety, profitability and liquidity. If investment decisions are influenced by lobbying or personal considerations, the value of the assets could be eroded. The NPS should strengthen internal governance to ensure that its fund managers follow rules strictly without succumbing to cronyism or corrupt lobbying from brokerages.