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The Pay After Tomorrow

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Piggy Bank
Artwork by Gian Bernal for Fairnews

Parents who bought open-ended education plans from pre-need companies were left holding the bag after firms failed to honor maturing contracts. Is there a way out of the mess?

It’s like paying a company to force you to save. This is how the pre-need industry works.

A plan holder pays a pre-need company a particular amount, either in lump sum or by installment, and the company saves and invests it for him. After several years, the plan holder can get back whatever he put in along with the accumulated interest.

So where does your money go in the meantime?

Philippine Federation of Pre-need Plan Companies Inc. (PFPPCI) president Juan Miguel Vazquez says most of the industry’s trust fund in 2006 was invested in the government’s T-bills. Treasury bills are debt obligations or I.O.U. notes issued by the government to fund its activities. Investors buy these at discounted prices and claim the full amount when it reaches maturity. Aside from T-bills, the money is also invested in the local stock market, real estate, and mutual funds.

Rise of Pre-need
People often confuse pre-need with insurance since they have the same mode of payment. But there is a huge difference between the two. Insurance is a protection from future loss while pre-need is a form of savings for future services. To get an insurance benefit, therefore, something bad has to happen to you first. In the case of pre-need, nothing bad has to happen unless, of course, you signed up for a memorial plan.

It was people saving up for their deaths that gave birth to the pre-need industry. Often called a product of Filipino ingenuity, pre-need plans have been around since the mid-’60s. Starting off by offering memorial plans, pre-need companies grew to cover pension plans in 1977 and education plans in the ’80s.

The industry experienced a boom from the early ’90s to 2001. In 2001 alone, the pre-need industry sold 675,187 plans; total sales amounted to 38.67 billion pesos (US$837.49 million).

The downward spiral began in 2004. In 2008, total sales had plummetted to 15.17 billion pesos (US$328.54 million).

What happened? Well, lots of things. The problem started when some pre-need companies made promises they couldn’t keep.

Open-ended Controversy
Industry insiders say the real problem began when government lifted the cap on tuition fee increases in 1992. Traditional or open-ended plans are said to be the culprits that brought the pre-need industry to its knees.

Holders of open-ended plans were told their pre-need company would shoulder the cost of their child’s college education—no matter which school the child chose to enroll in, or whether or not the money invested in the company grew to match the child’s tuition by the time he hit college.

So how could pre-need companies shell out so much for so little? Well, the contract lapses if you miss a payment. And if you don’t resume payment within the stipulated time, the contract is nullified and all previous payments considered forfeited. (The company, by the way, won’t bother to remind you of your arrears.) One company reportedly made 300 million (US$6.50 million) from these orphaned payments.

But orphaned payments alone are not enough to cover all the promises made by some companies to their investors. Many pre-need firms that sold traditional education plans soon found themselves unable to meet maturing contracts because of shrinking profits and a steady rise in school fees. As returns declined, some firms began to fold up and cry for help.

Matter of Trust
The growing public panic—spawned by the admission of several pre-need companies that they could no longer honor their commitments to thousands of plan holders—seemed to have reached its peak after news came out that the Legacy Group of Companies had gone belly up.

Since companies pay the plan holders from trust fund earnings (mainly coming from stocks and bonds), they were, to a large extent, exposed to the vagaries of the market. Interest yields back in the ’90s went as high as 18% per year; but the 1997 Asian financial crisis and the current global economic meltdown changed all that. Current annual returns now hover at a measly 6%.

Although pre-need outfits often pin the blame on government tuition deregulation, others say fund mismanagement is more to blame.

Caesar Michelena, Miguel Vazauez, Alex Flores, Fe Barin
Ayan Flotildes/Fairnews

In the case of College Assurance Plan (CAP), former Senate Committee on Banks, Financial Institutions, and Currencies chairman Sen. Sergio Osmeña III said that from 1998 onwards, almost 100% of trust fund investments made by CAP (headed by its president and CEO Enrique Sobrepeña Jr) were in companies owned, controlled, or heavily invested in by the Sobrepeñas, the pre-need firm owners, themselves: Fil-Estate Land, Fil-Estate Management, Nasugbu Properties, Camp John Hay, MRT Light Rail, and others.

“All were criminal violations of the rule on trust fund management where the trustor shall not have an interest and shall not dictate the investments made by the management of the trust fund,” Senator Osmeña said in a 2005 privilege speech.

Says Atty. Vazquez, “Maybe five, six years ago, the rules on trust fund (management) were not so clear. While we say the major reason why there’s a problem now is the deregulation of tuition fees, we do not deny that there should have been improvements in the management of trust funds.”

Holding the Bag
CAP folded up in 2003 and has been under rehabilitation since 2006. The Professional Group, Pacific Plans Inc., Platinum Plans, and PET Plans Inc. are also under receivership. But while these five companies sought corporate rehab (in the hopes of resuming business in the future, according to SEC chairperson Fe Barin), others simply closed shop and stopped operations.

As a result, consumer confidence dropped and exacerbated the pre-need sales slowdown in recent years. Insiders even claim the industry’s trust fund has dipped to an alarming 40 billion pesos (US$866.29 million).

But what happens to plan holders now? Those who have live agreements with companies still in operation have no choice but to continue their payments, market uncertainties notwithstanding. If they decide to default, all their previous contributions will have been for naught.

The SEC, for its part, claims to have done everything in its power to address the pre-need problem. It had been criticized as early as 2005 for the CAP fiasco (“The SEC has been criminally remiss in its regulation of CAP and Pacific Plans,” according to former Sen. Osmeña) and is under fire yet again from the Senate after Legacy closed down without properly notifying the commission. (“We are confronted with the problem because the SEC has failed in its actions,” Senate president Juan Ponce Enrile said in a recent hearing.)

Chairperson Barin counters, “We are also protecting the public’s interest.” In her testimony before the Senate Trade and Commerce committee, she explained the commission has close to 400 personnel to watch over some 60 pre-need companies. The SEC, Barin added, is even prepared to submit to the Senate documents that will determine whether or not the commission has been performing its duties.

“If what we are doing is not enough, we are leaving to [the Senate’s] judgment the need to have clearer provisions in the law,” the embattled SEC chairperson explains.

Pre-need Industry Sales Trend

Is Pre-need Still Viable?
Uncertainty holds true whether you put your money in the bank, buy an insurance plan (despite it’s name), or even invest in government bonds. But a wise investor—which today is synonymous with a conservative one—will always consider where there is less risk.

Pre-need plans still offer better returns than sticking your funds in the bank, even in time deposit. Deciding what plan to buy and which company to buy from determines the risk. As Pre-need Federation president Vazquez points out, the five companies under receivership had one thing in common: Their main offer was the open-ended education plan.

If we’ve learned anything from recent events, it’s that anything open-ended should set off alarm bells.

It cannot be denied that many parents and college graduates did indeed benefit from open-ended, pre-need education plans that matured before things started to fall apart in 2005. But any good this so called “product of Filipino ingenuity” achieved has been covered by the stench of the long-drawn-out pre-need fiasco.

If you’re looking into buying pre-need insurance, minimize risk by opting for fixed-value plans. This is the only way to make whatever you buy deregulation-proof—and not life-or-death dependent on whether government regulations are sufficiently implemented to safeguard your investment.

Whether tuition fees skyrocket by 500% in three years would matter little if you’re going to get a fixed return anyway. Of course, whether you could still afford to send your child to university is another matter. But a fixed return, no matter how small, beats going through years of waiting for a bankrupt pre-need firm to liquidate its assets and pay up.

Pre-need SalesAnother problem the industry must contend with nowadays is that open-ended education plans have given relatively low risk, pre-need products a bad name. Immediate past Philippine Marketing Association president Alex Flores acknowledges that a handful of “bad eggs” have somewhat affected the reputation of the two dozen pre-need companies that are doing well.

But Flores, who also heads the Paranaque Chamber of Commerce and Industry and is an AVP at Cocoplans, notes there are pretty good pension, health, memorial, and life plans that make viable investments. Even fixed-value education plans offered by companies that have a proven track record of excellent trust-fund management are good investments.

Sen. Edgardo Angara, a sponsor of the Pre-need Code of 2008, cites the trust fund as something that “would help guarantee the delivery of benefits to the plan holder and minimize the risk of insolvency.

Angara’s sponsored bill devotes a portion to regulating the trust fund to ensure that it remains untouched until the plan matures.

It is obvious that legislation was not able to keep up with the explosion of that segment of the industry devoted to pre-need education plans. Although industry insiders say the problem is more economic than can be addressed by laws.

Meantime, those left holding onto their plans (especially those who invested in the five companies under receivership) can do nothing but wait and hope that when the brouhaha dies down, they can get their hard-earned money back and still send their kids to college. “You will get something, that’s for sure. But when and how much, we don’t know. It’s for the courts to decide,” explains Vazquez.

There is no such thing as a sure thing where money is involved. Even SEC Chairperson Barin admits “Each answer is only good during the time we give it. We cannot guarantee that, over a long period of time, a company’s state will remain the same. We are all in business and there are things you cannot control.

Print ed: 03/09


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