South Korea's NPS: A Dual-Role Player in FX Stability and Pension Fund Returns

South Korea's National Pension Service (NPS) has emerged as a pivotal actor in navigating the delicate balance between safeguarding long-term investment returns and stabilizing the Korean won amid persistent foreign exchange (FX) volatility. With a total asset under management (AUM) of 1,269 trillion won ($941 billion) as of mid-2025, the NPS's strategic asset allocation and policy coordination efforts have become critical to both its financial performance and broader macroeconomic stability. This article examines how the NPS has adapted its hedging strategies and collaborated with the Bank of Korea (BOK) and government ministries to mitigate FX risks while maintaining a robust pension fund.

Strategic Asset Allocation: Balancing Risk and Return

The NPS's strategic asset allocation framework, which allocates approximately 55% to equities, 30% to fixed income, and 15% to alternative investments through 2029, reflects a deliberate effort to balance growth and stability. However, the depreciation of the Korean won-dropping from an average of 1,184 won per dollar in September 2021 to 1,402.90 won per dollar by September 2025-has introduced significant challenges. Alternative investments, such as private equity and real estate, have been particularly vulnerable to foreign exchange translation effects and unrealized fair-value adjustments, contributing to losses of -2.86% in the first half of 2025.

To counteract these pressures, the NPS has maintained a strategic hedging limit of 10% of its overseas portfolio while adopting a flexible execution plan to adjust to market conditions. This approach has allowed the fund to capitalize on domestic equity outperformance-31.34% in H1 2025-while mitigating the drag from global fixed-income and alternative asset losses. The NPS's ability to pivot its hedging strategies underscores its commitment to preserving long-term returns for its members, even as it grapples with volatile FX markets.

FX Hedging and Policy Coordination: A Collaborative Framework

The NPS's FX hedging initiatives have been bolstered by close coordination with the BOK and government ministries. In December 2025, the NPS extended its strategic currency hedging period through the end of 2026, a move mirrored by the BOK's extension of a $65 billion currency swap agreement. This swap line, first established in 2022, enables the NPS to borrow U.S. dollars from the BOK's foreign exchange reserves, reducing selling pressure on the won and stabilizing the currency during periods of volatility.

The collaboration extends beyond bilateral agreements. A four-party consultative body comprising the Ministry of Economy and Finance, the Ministry of Health and Welfare, the NPS, and the BOK was formed in late 2025 to evaluate the impact of overseas investments on FX markets and strengthen policy coordination. This mechanism reflects a structural effort to align the NPS's investment strategies with national economic priorities, as noted by the U.S. Treasury, which has observed the arrangement as a model for managing currency sensitivity amid global uncertainties.

The Dual-Role Dilemma: Returns vs. Stability

The NPS's dual mandate-securing retirement income for its members while contributing to FX market stability-has required nuanced decision-making. For instance, the fund's extension of hedging measures in 2024 and 2025 followed sharp exchange rate fluctuations, including a 4.08% return in H1 2025 despite global fixed-income losses of -5.13%. By prioritizing a flexible hedging approach, the NPS has managed to limit foreign exchange losses while maintaining a cumulative excess return target of 0.248 percentage points for the 2022–2026 period.

This balancing act is further complicated by the NPS's exposure to alternative assets, which are inherently more sensitive to FX movements. According to a report by , the NPS faces potential $4.5 billion in losses on alternative investments due to the won's depreciation. Yet, the fund's strategic hedging limit and collaboration with the BOK have mitigated these risks, demonstrating the effectiveness of its coordinated approach.

Conclusion: A Model for Resilience

South Korea's NPS has positioned itself as a dual-role player by integrating strategic asset allocation with proactive policy coordination. Its flexible hedging strategies, extended swap agreements, and consultative frameworks with government entities highlight a forward-looking approach to managing FX volatility. As global economic uncertainties persist, the NPS's model offers valuable insights into how pension funds can align financial performance with macroeconomic stability.