Perhaps most of you have read about the collapse of Prudential Life Plans Inc. (PPI). Another pre-need company went down the gutter. The confidence on pre-need plans is in tattered....way back when CAP collapsed.
It was not so long ago, when the pre-need industry's growth was skyrocketing. One company after the other sprouts like mushroom to take advantage of the popularity of the pre-need plans in the Philippines. Today, it is no longer the case as even pioneers of the industry went bust.
Pioneers Folded
The Pacific Plans, Inc. (formerly known as Pacific Memorial Plan, Inc.) is the first pre-need company that started in 1966. It offered memorial or life plans to the public. The business prospered until 2002 when it experienced difficulty meeting its maturing obligations. In 2005, Pacific Plans filed for rehabilitation with the Makati RTC. In 2009, Noel Onate, an investment banker bought the company for Php 250 million.
Professional Pension Plan (which became Professional Financial Plans) started the pension plan in 1976. It's plan holders are entitled to received benefits upon retirement or maturity of the plan. It is currently under rehabilitation.
College Assurance Plan pioneered the educational plan in 1980. It enjoyed unparalleled success in the educational plan sector until it's collapse in 2004 when it's issued checks were dishonored. In 2005, it filed for rehabilitation with the Makati RTC.
Only 20 remain out of 92 pre-need companies
To date, there are only 20 pre-need companies which are legally and licensed to sell educational, life and pension plans based on Insurance Commission website. At its peak, there were 92 pre-need firms operating in the Philippines.
In order to avoid getting scammed by closed or revoked pre-need companies, below is the list of 20 pre-need companies that are still licensed to sell pre-need plans. When I say pre-need plans, it means that the company can sell life plan, educational plan and/or memorial plan depending on their license.
Pre-Need Plans are contracts which provide for the performance of future service/s or payment of future monetary consideration at the time of actual need, payable either in cash or installment by Planholders at prices stated in the Contract with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve.
If the insurance company offering you a pre-need plan is not included in the list, then you can report it to the proper authority.
Causes of Collapse
It was not so long ago, when the pre-need industry's growth was skyrocketing. One company after the other sprouts like mushroom to take advantage of the popularity of the pre-need plans in the Philippines. Today, it is no longer the case as even pioneers of the industry went bust.
Pioneers Folded
The Pacific Plans, Inc. (formerly known as Pacific Memorial Plan, Inc.) is the first pre-need company that started in 1966. It offered memorial or life plans to the public. The business prospered until 2002 when it experienced difficulty meeting its maturing obligations. In 2005, Pacific Plans filed for rehabilitation with the Makati RTC. In 2009, Noel Onate, an investment banker bought the company for Php 250 million.
Professional Pension Plan (which became Professional Financial Plans) started the pension plan in 1976. It's plan holders are entitled to received benefits upon retirement or maturity of the plan. It is currently under rehabilitation.
College Assurance Plan pioneered the educational plan in 1980. It enjoyed unparalleled success in the educational plan sector until it's collapse in 2004 when it's issued checks were dishonored. In 2005, it filed for rehabilitation with the Makati RTC.
Only 20 remain out of 92 pre-need companies
To date, there are only 20 pre-need companies which are legally and licensed to sell educational, life and pension plans based on Insurance Commission website. At its peak, there were 92 pre-need firms operating in the Philippines.
In order to avoid getting scammed by closed or revoked pre-need companies, below is the list of 20 pre-need companies that are still licensed to sell pre-need plans. When I say pre-need plans, it means that the company can sell life plan, educational plan and/or memorial plan depending on their license.
Pre-Need Plans are contracts which provide for the performance of future service/s or payment of future monetary consideration at the time of actual need, payable either in cash or installment by Planholders at prices stated in the Contract with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve.
If the insurance company offering you a pre-need plan is not included in the list, then you can report it to the proper authority.
 |
| Source: Insurance Commission |
1. The Education Act of 1992
The Education Act of 1992 is often referred to as the main reason of the collapse of the pre-need industry. The Act deregulated the education industry and the 15% capped tuition fee increase was removed. As a result, educational institutions increased their tuition fees tremendously.
Ten years after the Education Act of 1992 was enacted, the cost of a four year educational plan increased by 1200 percent. The yield on investments by the pre-need companies cannot cope up with the tuition fee increases. Consequently, pre-need companies incurred deficiency in their trust fund.
2. The 1997 Asian Financial Crisis
During the 1997 Asian Financial Crisis, the stock market went down dramatically together with real estate values. As such, the investment values of pre-need companies reduced considerably and impaired their capability meeting their maturing obligations.
Take a look at the chart below.
From record high of 3,447.60 in early 1997, it plunged down to 1,075, a decrease of almost 70%! Such is the heightened risks and volatility in stock market. It can kill an investor in a year.
3. Inappropriate Accounting Practices
Some pre-need companies sugarcoated their financials to cover their deficiencies. It was found out that they do not have sufficient assets to pay for their future obligations.
Below is an excerpt from Congressional Planning and Budget Department House of Representatives:
According to the SEC, the entire pre-need industry used aggressive accounting practices which understated liabilities and tended to present a rosier financial picture than warranted. As a corrective measure the SEC in 2002 imposed the use of the PreNeed Uniform Chart of Accounts (PNUCA) as a standard for reporting of finances and liabilities. With the PNUCA in place, pre-need educational and pension plans were no longer treated as investment contracts but as insurance contracts, subject to the Actuarial Reserve Liability (ARL) scheme.
In addition the SEC imposed circulars instituting ARL as method of valuation for pre-need industry. Circular # 6 sets the standard for valuation of the ARL for pre-need plans, Circular # 7 requires pre-need companies to provide information relevant to actuarial valuation report and Circular # 8 sets the responsibilities of actuaries in the pre-need actuarial reserve valuation. These, according to the PFPPCI have caused major difficulties to their members.
These changes in accounting methods further weakened the financial statements of the pre-need companies, and effectively constrained their investment activities.
4. Weak Regulation
SEC was assailed for being remiss in its duties to closely monitor the pre‐need companies and act decisively on their problems. Its weakness as a regulator is considered to be an important factor why the pre‐need industry is now in distress.
Here is an excerpt from Senate Economic Planning Office's Policy Brief:
5. Independent Trustee
Some of the pre-need companies' trustee were affiliates. Pacific Plans' trustee is RCBC, both are under the Yuchengco Group of Companies. CAP's trustee is Bank of Commerce, both have Sobrepeña affiliation. Ayala Plans trustee is BPI, both under Ayala Corporation, Philam Plans trsustee is Philam Savings. Cocolife trustee is UCPB; and First Union's trustee is Union Bank. There is a possibility that a collusion between these two related companies may occur.
Excerpts from Congressional Planning and Budget Department House of Representatives:
Collusion between pre-need companies and their affiliates could result in possible diversion of the trust fund into business ventures other than the intended investment specified by the SEC.
In 2005, Senator Serge Osmena, during committee hearings, mentioned about CAP and PPI impropriety in handling their trust fund. Specifically, he pointed to the questionable investment of CAP in its affiliates company such as the Fil-Estate Management, Inc (FEMA) and PPI appointment of Rizal commercial Banking Corporation (RCBC) as its trustee bank. Likewise, Atty. Maricel Lopez, counsel for CAP planholders accused CAP’s executives of diverting P25 billion of its trust funds to its affiliated corporations (Camp John Hay Development Corporation, Metro Railway Transit and Fil-Estate Company).
As a result, CAP had incurred P1 billion loss in bad investment in FEMA alone, a holding company of the Sobrepeña family, which also controls CAP. Moreover, CAP engaged the trust fund in a 14 wrong mix of investments from related parties at questionable prices. On the other hand, PPI and its trustee bank, RCBC, both owned by the Yuchengco Group of Companies (YGC), have interlocking officers. While PPI is in financial distress, the YGC has earned a whopping 1055% ROI on its P165 million investment in just 8 years.
Planholders Holding the Empty Bag
As pre-need companies collapse, plan holders were left holding the proverbial empty bag. Their hopes were dashed. If you browse some of the forums on educational plan, you'll read nasty comments about these plans. Anger, rage, resentment and fury enveloped the mood of the forums. Typical questions "What to do now? How can I recover my hard earned money? How can I contact them?" filled the thread.
Solution
1. Stop Open Ended Plan
When tuition fee skyrocketed after The Education Act of 2002 was passed, yields on investments cannot cope up with the increase in tuition fees. Forecasting the pre-need's maturing obligations in the future became difficult. An open ended plan requires the pre-need company to pay the tuition fee charged by schools regardless of cost.
Before the Education Act of 2002, the maximum tuition fee increase is 15%, can you imagine the increase when the education sector is deregulated? The increase of tuition fees for ten years since 2002 was 1,200%! Now, the pre-need companies needs to find a way to compensate this increase in tuition fees which was not factored anyway in their initial investment programs.
Stock market offers the highest yield on any investment. It is also the riskiest. The average return of the stock market for 20 years is 14% compounded. If a pre-need company went to the stock market to cover the increase in tuition fees, it is not enough.
A fixed value educational plan on the other hand will sway other prospective clients into doing their own investment plan to cover their children's education in the future. However, majority of the working Filipinos have little technical knowledge on investments. Dipping in this new territory will be challenging for them.
I am doing my own educational plan for my daughter through stock market. Once she reaches college, she'll have enough to pay for her tuition fees and other expenses.
Thus, fixed value plan still offers significant value to prospective clients if pre-need companies will just explain how their monthly payments compounded into ten percent can result into significant value in the future and cover the majority of the tuition fees.
2. Independent Trustee
As mentioned above, there could be a possibility that a collusion between affiliate companies may happen if the pre-need company and trustee are related. In order to avoid this, the regulator must strictly implement the policy of having an independent trustee.
3. Sound Investment Policies
What is a sound investment policy in the first place? Risks must be assessed and considered in investment decision. The Asian financial crisis in 1997 reduced some of the pre-need companies' trust fund value considerably. I believe that you should not invest more than 25% of the fund in stock market because of the heightened risks associated on it. The portfolio must be a mix of various investments which should include real estate, stocks, government bonds, corporate loans, various projects.
4. Pre-need Insurance
Similar to a bank whose deposits are insured to certain extent, a portion of the premiums paid by planholders must be insured. This is to ensure that plan holders who typically belongs to the lower income bracket of our society are sure to get at least a portion of their hard earned money.
5. Strong Regulatory Implementation
According to the Senate Economic Planning Office, one of the major reasons of the pre-need industry's collapse is the lax monitoring of SEC and its failure to act decisively on a troubled pre-need company.
Sources:
http://www.senate.gov.ph/publications/PB%202009-02%20-%20%20What%20the%20pre-need%20industry%20needs.pdf
http://www.congress.gov.ph/download/cpbd/07-Pre-Need.pdf
http://www.oecd.org/finance/private-pensions/2763673.pdf
http://newsinfo.inquirer.net/488207/ppi-collapse-dashes-dreams-of-245000-policyholders
http://newsinfo.inquirer.net/488919/plan-holders-seek-to-defer-liquidation-of-preneed-firm
http://newsinfo.inquirer.net/489799/only-20-preneed-firms-remain-out-of-200-plus
http://business.inquirer.net/143337/list-of-distressed-preneed-firms
http://www.abs-cbnnews.com/business/01/20/09/pacific-plans-gets-new-lease-life
During the 1997 Asian Financial Crisis, the stock market went down dramatically together with real estate values. As such, the investment values of pre-need companies reduced considerably and impaired their capability meeting their maturing obligations.
Take a look at the chart below.
3. Inappropriate Accounting Practices
Some pre-need companies sugarcoated their financials to cover their deficiencies. It was found out that they do not have sufficient assets to pay for their future obligations.
Below is an excerpt from Congressional Planning and Budget Department House of Representatives:
According to the SEC, the entire pre-need industry used aggressive accounting practices which understated liabilities and tended to present a rosier financial picture than warranted. As a corrective measure the SEC in 2002 imposed the use of the PreNeed Uniform Chart of Accounts (PNUCA) as a standard for reporting of finances and liabilities. With the PNUCA in place, pre-need educational and pension plans were no longer treated as investment contracts but as insurance contracts, subject to the Actuarial Reserve Liability (ARL) scheme.
In addition the SEC imposed circulars instituting ARL as method of valuation for pre-need industry. Circular # 6 sets the standard for valuation of the ARL for pre-need plans, Circular # 7 requires pre-need companies to provide information relevant to actuarial valuation report and Circular # 8 sets the responsibilities of actuaries in the pre-need actuarial reserve valuation. These, according to the PFPPCI have caused major difficulties to their members.
These changes in accounting methods further weakened the financial statements of the pre-need companies, and effectively constrained their investment activities.
4. Weak Regulation
SEC was assailed for being remiss in its duties to closely monitor the pre‐need companies and act decisively on their problems. Its weakness as a regulator is considered to be an important factor why the pre‐need industry is now in distress.
Here is an excerpt from Senate Economic Planning Office's Policy Brief:
Section 16 of RA 8799 or the
Securities Regulation Code vested the SEC with regulatory powers over the pre‐need
companies. It authorized the SEC to prescribe rules and regulations governing
the registration and sale of pre‐need plans. Some of these
important rules are the following:
·
A minimum paid‐up
capital of PhP100 million as a buffer for trust fund performance fluctuation;
·
A minimum trust fund equity
requirement of not less than 45 percent of the amount collected for life plans
and 51 percent for pension and education plans. For installment payments, the minimum
limits of the deposit contribution to the trust fund shall be in accordance to
a schedule (Table 4). Should the SEC discover a deficiency in the trust fund,
it shall give notice to the pre‐need company, and
require it to make additional deposits within 30 days. The SEC may also demand
for a higher deposit as determined by the actuary;
·
An investment portfolio mix for trust funds.
To ensure that risks to the trust fund are managed, the fund shall observe a
certain investment mix (Table 5);
·
Liquidity reserve requirement of not
less than 10 percent of the net value of the trust fund assets per type of
plan. Loans, treasury notes or bills, Central Bank Certificates of
Indebtedness, repurchase agreements, savings or time deposits with government‐owned
banks or commercial banks, and investments in fixed income instruments shall
qualify as investments for the Liquidity Reserve Fund;
·
A trustee who will exercise due
diligence for the protection of plan holders, and who will have the exclusive
management and control over the funds, including the required liquidity reserve
fund. The trustee must be established independently with the trust department
of a trust company, bank or investment house doing business in the Philippines;
·
Strict compliance with the Pre‐Need
Uniform Chart of Accounts (PNUCA) for a more accurate accounting and reporting
of financial condition of pre‐need companies;
·
A limit to the payment of commissions
up to 10 percent of the contract price of the plans; and
·
Reportorial requirements such as the
monthly, quarterly and annual publication of financial condition and trust fund
statements, among others.
Should the SEC find that a pre‐need
company has violated any of the said Pre‐Need
Rules, has engaged in fraudulent transactions or does not conduct its business in
accordance with the law, or is insolvent, the SEC has the power to cancel the
pre‐need company’s registration and permit
to sell new plans.
However, it appears that the SEC
itself failed to follow its own rules. In the Senate hearings, it was revealed
that Legacy was still able to secure permit to sell new plans from the
Commission, ignoring SEC’s advisory to recapitalize as early as 2006. This was
also the case for CAP who was still able to get a permit to sell in 2001 even
after the SEC found a PhP2.6‐billion trust fund
deficiency the year before. Moreover, even with the regular financial reports submitted
to the Commission, the SEC is apparently still unable to keep track of
companies that are already having financial difficulties.
SEC officials explained that lack of
technical and financial capabilities, and not negligence, have been hindering
them from carrying out their mandate effectively. At present, the SEC only has
about 400 personnel and has no resident actuaries to do the counterchecking of
the figures and financial projections pre‐need
companies submit to them. It was further argued that the non‐passage
of a Pre‐Need Code has restrained
the regulatory powers of the SEC.
5. Independent Trustee
Some of the pre-need companies' trustee were affiliates. Pacific Plans' trustee is RCBC, both are under the Yuchengco Group of Companies. CAP's trustee is Bank of Commerce, both have Sobrepeña affiliation. Ayala Plans trustee is BPI, both under Ayala Corporation, Philam Plans trsustee is Philam Savings. Cocolife trustee is UCPB; and First Union's trustee is Union Bank. There is a possibility that a collusion between these two related companies may occur.
Excerpts from Congressional Planning and Budget Department House of Representatives:
Collusion between pre-need companies and their affiliates could result in possible diversion of the trust fund into business ventures other than the intended investment specified by the SEC.
In 2005, Senator Serge Osmena, during committee hearings, mentioned about CAP and PPI impropriety in handling their trust fund. Specifically, he pointed to the questionable investment of CAP in its affiliates company such as the Fil-Estate Management, Inc (FEMA) and PPI appointment of Rizal commercial Banking Corporation (RCBC) as its trustee bank. Likewise, Atty. Maricel Lopez, counsel for CAP planholders accused CAP’s executives of diverting P25 billion of its trust funds to its affiliated corporations (Camp John Hay Development Corporation, Metro Railway Transit and Fil-Estate Company).
As a result, CAP had incurred P1 billion loss in bad investment in FEMA alone, a holding company of the Sobrepeña family, which also controls CAP. Moreover, CAP engaged the trust fund in a 14 wrong mix of investments from related parties at questionable prices. On the other hand, PPI and its trustee bank, RCBC, both owned by the Yuchengco Group of Companies (YGC), have interlocking officers. While PPI is in financial distress, the YGC has earned a whopping 1055% ROI on its P165 million investment in just 8 years.
Planholders Holding the Empty Bag
As pre-need companies collapse, plan holders were left holding the proverbial empty bag. Their hopes were dashed. If you browse some of the forums on educational plan, you'll read nasty comments about these plans. Anger, rage, resentment and fury enveloped the mood of the forums. Typical questions "What to do now? How can I recover my hard earned money? How can I contact them?" filled the thread. Solution
1. Stop Open Ended Plan
When tuition fee skyrocketed after The Education Act of 2002 was passed, yields on investments cannot cope up with the increase in tuition fees. Forecasting the pre-need's maturing obligations in the future became difficult. An open ended plan requires the pre-need company to pay the tuition fee charged by schools regardless of cost.
Before the Education Act of 2002, the maximum tuition fee increase is 15%, can you imagine the increase when the education sector is deregulated? The increase of tuition fees for ten years since 2002 was 1,200%! Now, the pre-need companies needs to find a way to compensate this increase in tuition fees which was not factored anyway in their initial investment programs.
Stock market offers the highest yield on any investment. It is also the riskiest. The average return of the stock market for 20 years is 14% compounded. If a pre-need company went to the stock market to cover the increase in tuition fees, it is not enough.
A fixed value educational plan on the other hand will sway other prospective clients into doing their own investment plan to cover their children's education in the future. However, majority of the working Filipinos have little technical knowledge on investments. Dipping in this new territory will be challenging for them.
I am doing my own educational plan for my daughter through stock market. Once she reaches college, she'll have enough to pay for her tuition fees and other expenses.
Thus, fixed value plan still offers significant value to prospective clients if pre-need companies will just explain how their monthly payments compounded into ten percent can result into significant value in the future and cover the majority of the tuition fees.
2. Independent Trustee
As mentioned above, there could be a possibility that a collusion between affiliate companies may happen if the pre-need company and trustee are related. In order to avoid this, the regulator must strictly implement the policy of having an independent trustee.
3. Sound Investment Policies
What is a sound investment policy in the first place? Risks must be assessed and considered in investment decision. The Asian financial crisis in 1997 reduced some of the pre-need companies' trust fund value considerably. I believe that you should not invest more than 25% of the fund in stock market because of the heightened risks associated on it. The portfolio must be a mix of various investments which should include real estate, stocks, government bonds, corporate loans, various projects.
4. Pre-need Insurance
Similar to a bank whose deposits are insured to certain extent, a portion of the premiums paid by planholders must be insured. This is to ensure that plan holders who typically belongs to the lower income bracket of our society are sure to get at least a portion of their hard earned money.
5. Strong Regulatory Implementation
According to the Senate Economic Planning Office, one of the major reasons of the pre-need industry's collapse is the lax monitoring of SEC and its failure to act decisively on a troubled pre-need company.
Sources:
http://www.senate.gov.ph/publications/PB%202009-02%20-%20%20What%20the%20pre-need%20industry%20needs.pdf
http://www.congress.gov.ph/download/cpbd/07-Pre-Need.pdf
http://www.oecd.org/finance/private-pensions/2763673.pdf
http://newsinfo.inquirer.net/488207/ppi-collapse-dashes-dreams-of-245000-policyholders
http://newsinfo.inquirer.net/488919/plan-holders-seek-to-defer-liquidation-of-preneed-firm
http://newsinfo.inquirer.net/489799/only-20-preneed-firms-remain-out-of-200-plus
http://business.inquirer.net/143337/list-of-distressed-preneed-firms
http://www.abs-cbnnews.com/business/01/20/09/pacific-plans-gets-new-lease-life
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