Vietnam pension reform held up by turf war

The country's labour and finance ministries are fighting over control of the introduction of corporate pension funds.
Vietnam pension reform held up by turf war

The introduction of a private pension system for companies in Vietnam is being held up by a battle over which ministry will be able to control it.

Buy-side executives in Hanoi say both the Ministry of Labour and Social Affairs (MoLSA) and the Ministry of Finance (MoF) have circulated draft laws for the introduction of private pension schemes. The drafts are similar in most respects, but differ with regard to tax incentives, licensing and supervision, according to individuals who have seen the drafts.

“I hope we’ll see draft legislation introduced before the end of the year,” said Avinash Satwalekar, chief executive at Ho Chi Minh City-based Vietcombank Fund Management, in which Franklin Templeton holds a 49% stake. “That’s what we’ve been told [by the ministries].”

The introduction of corporate pensions has been under discussion for over two years, and while Prime Minister Nguyen Tan Dung has asked the ministries to provide a consolidated proposal this year, the government has a track record of missing such deadlines.

The issues said to be holding up a government proposal entail both a naked power-play between the ministries and a fundamental philosophical difference.

The labour ministry is keen to provide coverage to factory floor workers and middle management, and wants the tax authority to provide a more generous incentive to companies that sign up workers. The finance ministry’s priority is for companies to use pensions to provide incentives to senior managers and, as the overseer of the tax authority, wishes to limit the giveaways.

In both cases, however, the ministries are keen to shift the burden of funding retirees to the private sector, and the workers themselves. The spur for reform has been awareness that the Vnd300,000 billion ($13.3 billion) Vietnam Social Security’s social insurance funds, a government scheme for civil servants, will be depleted by 2030.

“They need to make a harder push,” said Le Thi Le hang, CEO at SSI Asset Management in Hanoi. “They know the pension reserve will be spent, so they need to start [private-sector schemes] now.”

Early discussions regarding the introduction of private schemes had also envisaged a reform of the VSS, although industry players say this may go untouched, particularly if the MoF wins the pensions turf war.

Both MoLSA and MoF drafts propose the creation of a pension fund scheme that would centralise assets under a single administrative body, which would outsource mandates to onshore fund managers. Big companies may also have the freedom to find their own fund managers. One possibility is that, if the MoLSA has its way, the VSS bureaucracy could serve as the administrator.

The system will be voluntary, and executives expect the initial choice of investments to be narrow and conservative. The funds industry and the government both want to ensure the system gets off to a safe beginning. Moreover, Vietnam’s capital markets are immature, so it is likely that pension money will have a high allocation to government bonds.

The licensing of eligible administrators or fund managers has yet to be finalised. It could include banks, insurance companies, fund managers or specialist companies; no one yet knows how this will be finalised.

The industry’s biggest fear over pension reform is that both ministries will have their way, meaning duplicate licensing and supervision. That would drive up costs and hassle for service providers, and possibly make it uneconomical for them to set up a pensions offering.

Although the expected legislation is a first for Vietnam, the finance ministry did help enable insurance companies to offer retirement products to consumers.

These have not sold very well, perhaps due to the tight constraints on the first generation’s asset allocation, which required 80% be invested in government securities, according to Satwalekar. This lowers returns and renders such products unattractive to many younger people, although more recent products now have a higher allocation to equities and to corporate bonds.

Multinationals and progressive private companies are expected to take up corporate pension schemes. Employee turnover in Vietnam is very high, particularly among those sectors such as textiles and electronics experiencing rapid growth. Companies are keen to find ways to extend employee tenure.

Fund managers also view the introduction of pensions as a strategic driver of their business over the medium term; last year the country introduced open-ended mutual funds, but uptake of these has been slight, as few Vietnamese have investing experience. The total open-ended funds industry today has just over $100 million of assets under management.

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