ASSIGNMENT PRINCIPLES OF FINANCE AND BANKING

Savings for retirement is a growth area and represents a significant proportion of the assets accumulated in the financial system.. Savings retirement………...3 1.1 Savings retirement: na

UEH UNIVERSITY BUSINESS SCHOOL BANKING DEPARTMENT

- 

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

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

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

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

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

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

- 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

 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

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%

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.”

Low level

Average level

Good level