ASSIGNMENT PRINCIPLES OF FINANCE AND BANKING

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 i 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 ii --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 you think about the potential growth of those funds in Vietnam? --TABLES OF CONTENTS-I Introduction…………………………………………………………… II Methodology………………………………………………………… Savings retirement………………………………………………… 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 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 Income Replacement Needs in Retirement Table Key reasons why people save Table The comparison of payment of social insurance and private pension funds Table 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 Savings retirement II METHODOLOGY 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 longterm 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 workerspecific 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 nonpension, 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 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 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 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 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 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% Good level Average level Low level Table 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 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.” - 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 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 Table 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 million VND/month because this is difficult to create motivation for participation voluntary pension fund for employees 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 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 employerestablished 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 IV REFERENCES Mishkin, F S., 2019, The Economics of Money, Banking and Financial Markets, 12th Global Edition, Pearson Addison Wesley, Boston Assoc Prof Su Dinh Thanh and Dr Vu Thi Minh Hang, 2008 Finance and Money Book, Labour Publishing House Assoc Prof Nguyen Huu Tai, 2012, Financial and monetary theory, National Economics University Publishing House Chairman of the Task Force, CEO, Nordea Asset Management Allan Polack, 2013, Saving for retirement and investing for growth, Workforce Publishing House 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 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 OECD (2021), Financial education and saving for retirement https://www.oecd.org/finance/private-pensions/39197801.pdf 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 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: Things You Should Know About the SECURE Act https://www.schwab.com/resource-center/insights/content/new-retirement-savings-law-6things-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 ... 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... 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... 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