UEH UNIVERSITY

BUSINESS SCHOOL
BANKING DEPARTMENT
---------  -------

ASSIGNMENT
PRINCIPLES OF FINANCE AND BANKING

Class: NQ001 – K46

Full name: Dang Hieu Nghi
Student code: 31201022495
Number of words: 2982

Lecture: Doctor. PHAM QUOC HUNG

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 Acknowledgement
First, I would like to express my deep gratitude to UEH College of business
for bringing “principles of finance and banking” into the curriculum.
I would also like to express my special thanks of gratitude to the lecturer –
Doctor. Pham Quoc Hung. During the time, he taught dedicatedly and imparted
valuable knowledge to me. Principles of finance and banking is an extremely
interesting and useful subject. Thanks to his constant guidance and willingness
to share his vast knowledge. I have had access to a lot of useful and necessary
knowledge for my project and study.

Yours sincerely,

Dang Hieu Ngh

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 --QUESTION--

Savings for retirement is a growth area and represents a significant

proportion of the assets accumulated in the financial system.
(a) Why has there been such growth in retirement savings?
(b) Private pension funds are popular choices in advanced economies. How do
you think about the potential growth of those funds in Vietnam?

--TABLES OF CONTENTS--
I. Introduction……………………………………………………………..2
II. Methodology…………………………………………………………...3
1. Savings retirement…………………………………………………...3
1.1 Savings retirement: nature, content, and meaning……………….3
1.2 Savings retirement represents a significant proportion of the assets
accumulated in the financial system…………………………………………4
1.3. The reasons for the growth of retirement savings....................... 5
2. Private pension funds………………………………………………
2.1 Private pension funds in advanced economies……………………
2.2 The potential growth of private pension funds in Vietnam…………
III. Conclusion………………………………………………………………
IV. Appendix.................................................................................................
IV. References……………………………………………………………….

-- LIST OF TABLES--

Table 1. Income Replacement Needs in Retirement
Table 2. Key reasons why people save
Table 3. The comparison of payment of social insurance and private pension funds
Table 4. The development of a famous private pension fund - Sun Life

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 I. INTRODUCTION
- The change of population has a great impact on the economic and social activities of
countries, regions, and worldwide. Nowadays, the change of population is visible, especially
in the rapidly aging population. The proportion of elderly people in the total population
increases rapidly due to declining birth rates and increased life expectancy. The aging of the
population requires government have to spend a lot on retirement, health, and medical care,
and so impact on government budgets, pension funds, and financial sustainability. The aging
population becomes serious considering the PAYG pension plan (1) with benefits predefined.
- The need for retirement savings is increasingly being recognized concerning all
financial products. Savings for retirement is a growth area and represents a significant
proportion of the assets accumulated in the financial system. This essay focuses on the
reasons for the growth of retirement savings, and the potential of private pension funds in
Vietnam. Retirement planning includes a lot more than simply how much you will save
and how much you need. It takes into account your complete financial picture, not only
assets and income but also future expenses, liabilities, and life expectancy.
- In Vietnam, the provision of income at retirement is experimenting with structural
changes like many developing economies around the world. In the DB pension plan and
DC pension plan, income at retirement is typically not guaranteed; instead, employees
finance their retirement from the assets they have accumulated in their pension account
through their working lives. The size of those assets depends on their own lifetime
contribution and investment decisions. This has created an opportunity for the
development of private pension funds. Private pension funds are seen to promote
investment, through their role as enhancers of financial deepening: by accumulating
savings, private schemes would mobilize a greater amount of ‘funds’ available to be lent
out to support real investment, thus favoring economic growth. - Along with that, there
are protection mechanisms to ensure high safety for the capital of enterprises and
employees contributing to the fund, because this is a type of long-term working fund
closely associated with employees throughout the working time until they retire.

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 II. METHODOLOGY
1. Savings retirement
1.1 Savings retirement: nature, content, and meaning
Savings retirement is a financial institution that manages the voluntary and contractual
retirement funds of individuals, companies, and governments. The provision of retirement
income takes different forms across countries and even professions. Most pension systems
are based on three tiers: (i) government or social security benefits, (ii) occupational
schemes, and (iii) individual savings. The pension fund daily collects contributions from
employers and employees, as well as pays retirees. Retirement funds specialize in long-
term investments such as stocks, corporate bonds, government securities, and real estate.
 Retirement plans determine the extent of benefits (DB): employers ensure that
employees receive a certain number of benefits in retirement, regardless of the
outcome of contributions made. The employer is responsible for specific
pension payments to the retiree (the amount is determined by a formula, usually
based on income and years of service), and if the assets in the plan. The pension
is not enough to pay the benefits, the company is responsible for the rest of the
payment.
 Contribution-determined retirement plans (DC): Employers implement worker-
specific contribution plans, often matching varying levels of contributions to
employee contributions. The ultimate benefit that employees receive depends
on the return on investment of the program. The liability of the company is
limited to paying a specific contribution.
Savings retirement has long been known as a policy to ensure the benefits of employees
after the end of working age. Not only consolidating financial resources in old age, but
savings retirement also brings many other useful benefits to participants. They are non-
pension, retirement products, such as insurance products, tax-incentivized savings, etc.
Up to now, the pension fund is gradually seen as an investment fund. According to the law of
some countries such as Vietnam, the retirement age includes 60 years old for men and 55
years old for women.
1.2 Savings retirement represents a significant proportion of the assets
accumulated in the financial system
- Saving is a key factor shaping the economic well-being of individuals and the
nation. Households need to save for a variety of reasons, including emergency savings (to
protect against huge, unexpected bills or job loss), asset accumulation for significant
purchases, and retirement planning. National saving helps to increase the quantity of
capital available for production and, as a result, economic growth at the macroeconomic
level. It also helps individuals maintain stable finance as pre-retirement.

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 Table 1: Income Replacement Needs in Retirement
 As we can see based on the chart – the more income you make, the less we can
expect to receive from Social Security as a percentage of our pre-retirement
income. So, obviously, the more you make, the more you will be reliant on your
savings.
 One observation, there is a noticeable difference in pre-retirement spending and
post-retirement spending. I think this is especially true early on in retirement when
many retirees travel abundantly. They may see an increase in spending.
1.3 The reasons for the growth of retirement savings
- The importance of personal retirement schemes is elicited by demographic and
economic trends. The accumulation and investment of retirement savings, undertaken
from an early age, throughout working life, and even during retirement, is probably the
best example of the potential for long-term investing by individuals. More specifically,
financially literate Americans are more inclined to plan for their retirements, and planners
are better equipped for retirements than nonplanners, with much greater asset levels.
- It is clear that this issue has an impact on society as a whole. According to the
National Economics University, retirement benefits account for more than a third of the
household income of retirees. Letting this source of income dry up will increase the
proportion of the elderly in poverty. In addition to the obvious social impacts, there are
still many other aspects that need to be considered.

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 - According to a survey of 20,000 people ( from 35-65 years old) by Works that Work
magazine, 84% of Americans say they are very interested in savings retirement because of
the following benefit: reduce the amount of tax you pay on your income for each year you
invest in it. It allows you to delay or even avoid the taxes you owe on the income accrued
from your investments. It generates income on income, creating a double effect not found
in regular savings accounts.
- People save for various reasons as illustrated in the pie chart below:

Table 2. The key reasons why people save (2009)

 One common reason why people save is for retirement or old age.
Retirement savings not only ensure that you live comfortably in retirement
but also help you avoid being a burden to your relatives in old age. The
aim is to not go through one’s golden years without the gold. In addition,
some of the benefits include:
 Monthly tax relief of up to Kshs 20,000 or 30% of your salary whichever
is less – this lessens the total PAYE deducted from your earnings
 Contributions earn compounded interest – the earlier you start
contributing, the more your money grows
 Lastly, pension savings are accessible before the retirement age in the
event of job loss or job migration.

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 The Covid-19 should serve as a wake-up call on why we should save and plan in
advance. Just remember Covid-19 is temporary and can change but once you retire
there is no going back. During this period, there is a great need for flexibility in terms
of retirement savings. One can revise down their contributions or temporarily suspend
contributions if they no longer have an income during this period.
“Retirement will treat you the way lockdown is”. It implied the Covid-19
pandemic and retirement are different situations cut from the same cloth. It is clear that
the pandemic has been rough on all of us – from income disruption, education is
almost at a standstill, negative returns on investments, transport heavily affected,
sectors crippled to actual health effects, and even death. However, every adversity
presents a learning opportunity.
- The story of "paying and enjoying - duties and rights" with two "primary
characters" is the employee - the user, in the face of the budget reality and efforts to
enhance and harmonize the legal system. Many problems remain about work in the
context of decades of "compulsory and optional involvement in social insurance." .
Phan Van Men, Director of Social Insurance of Ho Chi Minh City, said: In 2020, the
number of people participating in voluntary social insurance in the area is 56,348
people, reaching 100.91% of the plan, an increase of 139.13 % compared to 2019. This
can be seen that there are many reasons for the growth of retirement savings, which
significantly affect the social and financial problems of most countries.
2. Private pension fund
2.1 Private pension funds in advanced economies
- Private pension funds and their asset demand are highly important in shaping
financialization in developed countries. Private pension funds are seen to promote
investment, through their role as enhancers of financial deepening: by accumulating
savings, private schemes would mobilize a greater amount of ‘funds’ available to be
lent out to support real investment, thus favoring economic growth. Holzman and Hinz
(2005) argue that significant long-term saving in the CS supports innovative securities
markets that can deliver growth of a private fixed-capital investment.
- In developed countries, most of the population follows a centralized system. It
is as follows: Parents give birth to children. Parents who raise children and work to
pay taxes to the retirement fund. Then children grow up to work. When parents reach
old age, they receive retirement money. Children have independent lives, pursue their
dreams without the burden of paying filial piety to their parents. In addition, elderly
parents don’t need it.

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 2.2 The potential growth of private pension funds in Vietnam
- In developing countries, many families (especially in rural areas) have many
children, because they have to do so so that their children can raise them later. Now,
it's not as much as before, but that's the way of life from ancient times to the present.
Many families (especially in rural areas) have many children because they have to do
so so that their children can raise them later. Now, it's not as much as before, but that's
the law of life from ancient times to the present. It would be better if we had a more
centralized and universal pension system. Because children can be free, and parents
can live comfortably. Instead of having to emphasize filial piety like now.
- The government also introduced a social insurance policy to subsidize the elderly
when they retire, but that support is not enough to meet the financial and health needs
of some workers. In the meantime, a private pension fund not only brings certain
benefits to employees, businesses but also the development of the country. Therefore,
many Vietnamese who have conditions and wish to accumulate for a retirement plan
should join this fund early to enjoy their old age.
- In fact, the coverage of social insurance is lower than required, the portion of
people who participate in the Social Insurance Association of Vietnam has
continuously increased over the years but is still very limited, accounting for only 20%
of the labor force and about 80% of people are eligible to participate in social
insurance. The number of people receiving government pension is 2.3 million, but the
number of people over 60 years old is 10.21 million. In that challenge, private
pensions in Vietnam have seized the opportunity and grown stronger over time. Many
popular investment vehicles, such as individual retirement accounts (IRA) (4) and
401(k)(5) allow retirement savers to grow their money with certain tax advantages.
- According to studies by the World Bank (WB) and the International Labor
Organization (ILO), to maintain the standard of living before retirement, each
individual needs to have an income equivalent to 70-75%. The average income in the
last 5 years before retirement. Meanwhile, pension payments from social insurance
cannot reach this level of income, as the rate in Vietnam is a maximum of 45%. Thus,
to maintain the same standard of living as before retirement, another source is needed
to cover the difference between the demand 70-75% and the supply from social
insurance, 40-45%.

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 Good
level

Average
level

Low
level

Table 3. The comparison of payment of social insurance and private pension funds
 The survey on retirement income corresponding to the standard of
living after retirement by HSBC bank shows that: at a basic level, each
person needs 4.8 million VND/month to pay for the most essential needs in
life. ; need 8.8 million dong/month if you want to live comfortably and will
need 14.4 million dong/month - at a well-off level you can eat, or travel.
Statistics also show that currently only a quarter of people worldwide
regularly save for retirement.
- In addition, the economic downturn has resulted in a loss of public trust in pensions
from social insurance, which must be rectified to encourage people to save for retirement.
At the same time, population aging, and an economic climate marked by poor growth, low
returns, and low-interest rates pose a threat to the financial sustainability, solvency, and
adequacy of social insurance. Efficient regulation and management of pension systems are
essential to withstand these pressures and to build trust in private pensions
- In recent decades, private pension funds have emerged as important players in
financial markets across many emerging economies, including Vietnam - one of the fastest
aging countries. The regulations on the voluntary supplementary retirement program are
specified in Decree 88/2016/ND-CP. Clause 2, Article 3 of this Decree explains as
follows: “Private pension funds is a voluntary social insurance policy aimed at
supplementing income for fund participant upon reaching retirement age in the form of
individual retirement accounts, invested in and accumulated under the law.”

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 - Macroeconomic: Vietnam economy is expected to continue in the group of developing
countries fastest in the world in 2021. The goal of the Government this year is to grow
6.5%, equivalent to Money Fund forecast International Monetary Fund (IMF), but still
lower than the forecast of the World Bank (6.8%), Moody's (above 7%), or Fitch (8.6%).
However, the possibility of accomplishing this goal is also hidden. There are many risks if
the world economy recovers slower than assuming the vaccine will be successfully
deployed in many countries.
- Vietnam's capital market has been developing at a rapid rate in recent years. Despite
the strong growth in scale, the participation rate of institutional investors with long-term
capital is still very modest. With the bond market, it is still mainly credit institutions that
hold outstanding government bonds. The participation of investment funds, including
voluntary pension funds, is still very limited. With the current structure of the investor
base, the bond and stock market still lacks sources of long-term investment capital,
especially capital to invest in the development of socio-economic infrastructure.
- Currently, the important issue is to implement synchronous solutions to develop the
investor base system, especially long-term investors in the capital market. Experience in
the world shows that the pension fund is a financial intermediary organization that plays
the role of mobilizing long-term capital from the people to invest in the financial market,
making an important contribution to the development of this market.
- In particular, the private pension fund is one of the largest investors in the bond
market in developed countries. Therefore, the establishment and operation of the
voluntary pension fund system in Vietnam, in addition to the role of diversifying the
social security system, also contributes to the development of a long-term investor base
in the capital market. Funds from retirement funds formed from the contributions of
employees, individuals and employers will be invested in financial products on the
capital market, thereby contributing to the development of the country. this market,
especially the Government bond market in a sustainable way.
- Since 2013, Vietnam has only had 6 out of 18 life insurance companies eligible to
deploy voluntary retirement insurance according to the law, namely Prudential Vietnam,
Bao Viet Life, Manulife, and AIA Vietnam. , Dai-ichi Vietnam, PVI Sun Life (now Sun
Life Vietnam).As a case in point, Sun Life – one of the popular private pension funds
increase revenue and customers annual .

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 Table 4. The development of a famous private pension fund - Sun Life
 In 2019, Sun Life Vietnam continues to hold the position of the leading
private pension fund manager in Vietnam in terms of both asset size and total
mining revenue. Total assets of Sun Life pension fund reached VND 1840
billion as of December 31, 2019. With the aim of protecting financial safety
for life and enjoying a healthier life, Sun Life Vietnam constantly deploys and
introduces more convenient services as well as strictly implements risk
management measures to Private pension funds that continue to grow steadily.
- Through the analysis results, the study shows that increasing communication and
raising awareness of individuals about private pension insurance, private pension fund
and participating in these fund need to be focused to attract the interest and participation
of individuals in private retirement programs. Thereby, the savings reserve in the
population is expected to increase, contributing to providing the foundation for
providing retirement savings into personal accounts, forming voluntary retirement fund
assets in addition to income sources from investing the assets of the voluntary pension
fund on the stock market, contributing to increasing the asset size of the voluntary
pension fund. Moreover, the current policy to encourage the development of private
retirement programs (private retirement insurance products and private pension funds)
in Vietnam only focuses on tax and fee incentives but still relatively low compared to
other countries applying this incentive mechanism. The reason is that in other countries,
the part of income that is exempt from tax when joining a voluntary pension fund is
usually set at a minimum equal to GDP per capita. Therefore, the Ministry of Finance
needs to consider and compare it with Vietnam's GDP per capita for a more appropriate
tax exemption regulation, which cannot be at the current level of 1 million VND/month
because this is difficult to create motivation for participation voluntary pension fund for
employees.

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 III. CONCLUSION
- To sum up, in both developed and developing countries, aging population trends are
driving to the widespread acceptance of retirement plans as the most significant vehicle
for retirement savings. The so-called three-legged stool of home provision, pensions, and
sustainable Social Security and Medicare systems all contribute to the overall sufficiency
of retirement resources in a country. Many people combine their retirement savings and
Social Security income to support their retirement. This is a wise investment that not only
helps employees feel safer about their money and health when they become older but also
boosts the economic growth of the country.
- Private pension funds are at the core of the latest stage of capitalism in Vietnam. The
main arguments behind the policy pressures leading to their rise have been based on the
fiscal pressures that are generated by the aging crisis, as well as the promise of increased
saving, based on the (neoclassical) argument that this will be causing investment. There
are many potentials for the development of private pension funds in Vietnam. However,
Vietnam needs to learn from these experiences in the process of synchronously
implementing solutions to promote the formation of the private pension fund, before
proceeding to the formation of this fund system in the near future.
- This essay used statistical models – models based mainly on data available and
hypothetical projections of the population, economy, and pension system – to make
forecasts. The establishment of the private pension funds is a "mini bomb" that is
exploding, changing the perspectives of employees, companies, and the government, and
bringing benefits to a large number of participants. As a result, employees feel secure in
their old age. Employers are assured of retaining talented people in the fierce competition
period in the coming time. The government lightens the burden for people who will retire
later. With the great benefits mentioned above, the private pension funds have enormous
potential in expanding and developing the scale of operations.

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 IV. APPENDIX
(1). PAYG pension plan: A pay-as-you-go pension plan is a retirement arrangement
where the plan beneficiaries decide how much they want to contribute, either by having
the specified amount regularly deducted from their paycheck or by contributing the
desired amount in a lump sum. A pay-as-you-go pension plan is similar to a 401(k). The
employee can choose among the various investment options and decide whether they
want a higher return by investing in a more risky fund or a safer fund that provides steady
returns
(2) Social Security and Medicare are distinct programs serving older and disabled
Americans, but they have an important commonality: Social Security handles enrollment
for Medicare Part A (hospital insurance) and Part B (medical insurance). In this role, the
Social Security Administration (SSA) works with the Centers for Medicare & Medicaid
Services (CMS) to inform older Americans about their Medicare sign-up options, process
their applications, and collect premiums.
(3) Pension Protection Act of 2006 (PPA) that then-President George W. Bush called “the
most sweeping reform of America’s pension laws in over 30 years?” Legislators designed
this law to make sure that workers would receive the pensions that they were promised
and to improve options for funding their own retirement. The 2006 act expanded on the
protections provided by the Employee Retirement Income Security Act of 1974 (ERISA),
which requires plans to keep their participants informed and makes it harder for bad
actors to take advantage of people who are trying to save for retirement or earn a pension.
(4) An individual retirement account (IRA) is a form of "individual retirement plan",
provided by many financial institutions, that provides tax advantages for retirement
savings. It is a trust that holds investment assets purchased with a taxpayer's earned
income for the taxpayer's eventual benefit in old age. An individual retirement account is
a type of individual retirement arrangement as described in IRS Publication 590,
Individual Retirement Arrangements (IRAs). Other arrangements include employer-
established benefit trusts and individual retirement annuities, by which a taxpayer
purchases an annuity contract or an endowment contract from a life insurance company.
(5) 401(k) plan is an employer-sponsored defined-contribution pension account defined
in subsection 401(k) of the Internal Revenue Code. Employee funding comes directly off
their paycheck and may be matched by the employer. There are two types: traditional and
Roth 401(k). For Roth accounts, contributions and withdrawals have no impact on
income tax. For traditional accounts, contributions may be deducted from taxable income
and withdrawals are added to taxable income. There are limits to contributions, rules
governing withdrawals and possible penalties.

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 IV. REFERENCES
1. Mishkin, F. S., 2019, The Economics of Money, Banking and Financial Markets, 12th
Global Edition, Pearson Addison Wesley, Boston.
2. Assoc. Prof. Su Dinh Thanh and Dr. Vu Thi Minh Hang, 2008 Finance and Money
Book, Labour Publishing House.
3. Assoc. Prof. Nguyen Huu Tai, 2012, Financial and monetary theory, National
Economics University Publishing House.
4. Chairman of the Task Force, CEO, Nordea Asset Management Allan Polack, 2013,
Saving for retirement and investing for growth, Workforce Publishing House
5. Ed Slott, 2021, The New Retirement Savings Time Bomb: How to Take Financial
Control, Avoid Unnecessary Taxes, and Combat the Latest Threats to Your Retirement
Savings, Wall Street Journal
6. OECD Pensions Outlook (2020), Retirement savings and old-age pensions in the time
of COVID-19
https://www.oecd-ilibrary.org/sites/b698aae4-en/index.html?itemId=/content/
component/b698aae4-en#section-d1e670
7. OECD (2021), Financial education and saving for retirement
https://www.oecd.org/finance/private-pensions/39197801.pdf
8. Private pension fund activity report of Sun Life 2019
file:///C:/Users/DAVID/Downloads/bao-cao-tinh-hinh-hoat-dong-quy-huu-tri-tu-nguyen
%20(1).pdf
9. National Academy of Sciences (2012), Saving and Retirement Security
https://www.ncbi.nlm.nih.gov/books/NBK148839/
10. Hayden Adams (2020), New Retirement Savings Law: 6 Things You Should Know
About the SECURE Act
https://www.schwab.com/resource-center/insights/content/new-retirement-savings-law-6-
things-you-should-know-about-secure-act
11. Cytonn (2021), Why You Should Still Save For Your Retirement During This
Pandemic
https://cytonn.com/blog/article/why-you-should-save-for-retirement

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