Part 3: Pension funds in Vietnam

 Definition, classifications
- Definition: A pension fund is a pool of funds that have been contributed by
employers and their employees, and which is being invested to provide employees
with retirement benefits.
- Classifications:
+ Open and closed pension fund:
 Open pension funds support at least one pension plan with no restriction on
membership
 Closed pension funds support only pension plans that are limited to certain
employees. Closed pension funds are further subclassified into:
o Single employer pension funds
o Multi-employer pension funds
o Related member pension funds
o Individual pension funds
+ Public and private funds
 A public pension fund is one that is regulated under public sector law
 A private pension fund is regulated under private sector law
In Vietnam, there are two main types of pension program:
+ The pension program defines the level of the benefit: the employer ensures that the
employee receives a certain amount of benefit on retirement, regardless of the
outcome of the investments in contributions. The employer is responsible for a
specific pension payment to the retiree (the amount is determined by formula, usually
based on income and the number of years of service), and if the assets in the pension
plan are not sufficient to pay the benefits, the company is liable for the remainder of
the payment.
+ The pension program defines the level of contributions: employers implement
specific contributions plans for workers, often in line with varying levels of employee
contributions. The ultimate benefit the employee receives depends on the investment
efficiency of the program. The company's only responsibility is to stop paying a
specific closure.

 Sources and uses of capital

- Sources of capital: The introduction and operation of a voluntary pension fund
system in Vietnam, in addition to the role of diversifying the social security
system, also helped to develop a long-term investor base system in the capital
market.
+ Pension funds collect money from employers and employees to fund employee
retirement obligations. Pension fund providers look to long-term growth of capital
to support the needs of future retirees as the cost of living increases over their
working lives. This makes pension funds similar to insurance companies in the
desired composition of their investment portfolios.
+ Pension funds provide long-term mortgage capital and invest directly in real
property. In many cases, pension funds invest in joint ventures with real estate
operating companies to access transaction flow and the expertise of these
companies.

- Uses of capital:

The main investment style of a pension fund is diversification and prudence.

Pension funds aim for portfolio diversification, allocating capital to different
investment instruments (stocks, bonds, derivatives, alternative investments, etc.).
However, for many years, pension funds were limited to investments primarily in
government-backed securities, such as bonds with a high credit rating (investment-
grade bonds) and blue-chip stocks. Since markets evolve and given a constant
need for a relatively high rate of return, pension funds have been allowed to invest
in the majority of asset classes. Nowadays, many pension funds have transferred
from active stock portfolio management to passive investment instruments,
investing in index funds and in exchange-traded funds that track stock indexes.
Emerging trends are to allocate capital to alternative investments, specifically to
commodities, high-yield bonds, hedge funds, and real estate. Portfolios of asset-
backed securities, e.g., student loans or credit card debt, are new tools used by
pension funds to increase the overall rate of return. Private equity investments are
becoming more and more popular among pension funds. They are simply long-
term investments into privately-held companies. The goal of private equity
investments is to cash out (sell a business) when the business matures for
significant gains. Real estate investment trusts (REITs) are also quite popular
among pension funds, being passive investments in real estate markets.
Commercial real estate investments are also made in building offices, warehouses,
industrial parks, etc.

In Vietnam:
Regarding the form of participation, in the initial phase, the employee and/or
employer will make a periodic contribution to the fund in accordance with the
agreement between the worker and employer, and between the employer and the
fund management company. The amount of contributions depends on employee
policies and tax considerations.

In terms of payment methods, the amount of contributions and the entire

investment profit from contributions will be owned by the worker according to the
agreed pay policy between the employee and the employer. Employees can choose
to receive a one-time or a monthly receipt after retirement.

 Shortcomings in the current operation:

Risk of imbalance Pension fund:

According to the statistics of the Social Insurance of Viet Nam, between 2007 and
2012, more than 100,000 people each year receive monthly pensions; the average
retirement age is 53.2 years (men 55.1 years, women 51.6 years); the number of
people who retire at the right age represents a low percentage (40.5%), due to the
decline in working capacity of 61% or more represents more than 52%; the
duration of participation in the ministry is 30.8 years (male 32.4 years, female 29.5
years); and the average pension rate is 70% (men 68.5%, female 71.4%).
From 1995 to 2012, the annual income to the Pension Fund were greater than the
contributions. However, in the future, more and more retirees will benefit from the
Social Insurance Fund. Forecast that by 2023, the Pension Fund will be equal to
the number of contributions. From 2024 onwards, in addition to the annual
income, it is necessary to extract the positive balance of previous years to ensure
sufficient expenditure. By 2037, the year's social insurance earnings and stocks
started not to guarantee affordability. In the years that follow, the expenditure will
be much greater than the year's income. Therefore, the Pension Fund potentially
risk a long-term imbalance.
The main causes:
- The current retirement age is low. The average life expectancy for retirees is
73.04 years (men 73.95 years, women 71.2 years) and the average retirement
period is almost 20 years (19 men, women 20 years);
- The age for early retirement is too low (male 50 years, female 45 years, if you
have a full more than 15 years of work or a heavy job that is not dependent on
your age), so the retirement period for this subject is long, while the time of
contribution is small. Specifically, about 20 years, then 30 to 40 years.

- Growth investing Pension Fund, even though tight guarantees and safety, The
investment efficiency is not too high.
Currently, 6/18 life insurance companies are licensed to implement voluntary
retirement insurance are Prudential, Manulife, AIA, Dai-ichi, Sunlife and Bao
Viet Life.