A resilient pension fund fit for future demographics

Nick Aisnworth, chief marketing officer at Dragon Capital

Pension funds, provident funds, and retirement funds are supposed to offer some form of income in older age or retirement. The idea was started in Bismarckian Germany in the late 19th century and Britain in the early 20th century as a system funded by tax, designed to provide an annuity to retirees and to address the potential problems of poverty in older age.

State plans or public pensions are still common worldwide but are not always universal and are frequently inadequate as contributions and performance have failed to keep up with the demands on these funds, which is the current status of the social security fund in Vietnam.

Workers were required to contribute themselves along with their employers in the private sector and the defined benefit pension has largely given way to the defined contribution pension.

This places responsibility on the individual to opt-into the pension system and to pay in a part of their monthly salary over their working life: the employer pays in too and there are some tax benefits both to the individual and to the company in this kind of system which will vary from country to country.

While the demographics of Vietnam are currently favourable, by 2050 or so the over-60’s will be an important demographic, with 20 per cent of Vietnam’s population – now 96 million people – forecast to be in retirement by 2030 and 30 per cent by 2050 Vietnam needs to begin to address associated issues now.

Dragon’s team has been engaging with local regulators for a few years in an effort to channel private savings into retirement pools to meet this social need, reducing burdens on the state and households.

According to fresh data from the Ministry of Labour, Invalids and Social Affairs, the rate of pension enjoyment over the number of years of contribution in Vietnam is relatively high. The maximum level is 75 per cent for 35 years of contribution for men and 30 years of contribution for women, respectively.

These figures could be translated into around 2.14 per cent for each year of contribution for men and 2.5 per cent for each year of contribution for women, respectively. This rate is much higher than that of other countries in the region and the world. Vietnam’s retirement policy is considered by the International Labour Organization to be among the most generous in the world.

Voluntary pensions help to provide sufficient income for retirement. Retirement incomes equal to 70-75 per cent of average income in the last five working years can maintain living standards. The current state system, the Vietnam Social Security Fund payment, covers a maximum 45 per cent of an employee’s final five years of average income. Voluntary pensions provide a structure to save from monthly income and supplement the retirement.

This voluntary or private sector system is where Dragon Capital or our Dragon Capital Vietnam Fund Management (DCVFM) offers assistance. Earlier this year, Dragon secured Vietnam’s first voluntary supplementary provident plan licence.

Life insurers in Vietnam have had some success selling annuity type savings products in recent years, but those heavily regulated offerings invest almost exclusively in government securities, which are tied to life insurance plans and which may be beyond the reach of many. The DCVFM defined contribution plan, with government tax incentives for employees and employers alike, offers savers three fund options – a relatively high-risk 50-50 split between equities and bonds, a 65 per cent bond-35 per cent stock mix, and a conservative 80 per cent bond-20 per cent stock mix.

Savings can be withdrawn tax-free upon reaching retirement age, currently 62 for men and 60 for women. For Dragon Capital, the new retirement offering amounts to broadening our vision from being entirely focused on foreign institutions to also providing services to the local market at all levels of disposable income.

Ideally, we would like to think that this could be a universal offering for Vietnamese working people in all kinds of companies, from foreign-invested firms to local household brands and small and medium-sized enterprises. However, financial literacy is a major obstacle and one that we must assist in overcoming before that goal can be reached.

Therefore, our initial focus has been on international firms with operations across Vietnam whose corporate and social responsibility goals include provisions for retirement; on large local private enterprises; on industries where a pension might help in staff retention, among others.

We are at a very early stage in this journey and still formulating our marketing plans, but we see this as an important area of growth for our business at DCVFM and also a vital financial service for the future of the country.