UPDATE 1-S.Korea's pension fund adjusts rules to raise domestic equity allocation

(adds background, official comment)

SEOUL, April 9 (Reuters) - South Korea’s National Pension Service (NPS), the world’s third-largest pension fund, on Friday adjusted rules to raise domestic stock allocation for the first time in a decade, in a move to reduce pressure to sell local equities.

“The NPS raised the strategic asset allocation (SAA) limit for domestic equity from the current 2.0 percentage points to 3.0 percentage points,” Health and Welfare Minister Kwon Deok-cheol told a meeting.

Under the new rules, the NPS can hold domestic stocks in a range of 13.8%-19.8% of the total assets, from the current band of 14.8%-18.8%.

The SAA limit allows pension managers to hold positions without selling assets even if the proportion deviates from the preset target ratio due to changes in asset prices. This year’s target is 16.8%.

The tactical asset allocation (TAA) limit was unchanged at 5 percentage points.

“The change comes as the limit for domestic stocks has been low compared to other assets, the frequency and size of deviations has been rising over the past three years and given that (NPS holdings of local stocks) continuously exceeded the upper cap from December,” health ministry official told reporters.

The adjustment of the SAA limit for local stocks is the first since the rule was introduced in 2011.

“The NPS will review the portfolio rebalancing periodically going forward to improve the pension fund’s profitability and stability,” the official added.

As of end of January, the NPS had 180 trillion won ($160.67 billion), or 21% of its total 855.3 trillion won portfolio, invested in local stocks, according to its website. (Reporting by Jihoon Lee, Joori Roh; Editing by Alex Richardson and Pravin Char)