In the previous issue, Philippine Federation of Pre-need Plan Companies Inc. president Juan Miguel Vazquez shared his thoughts on why the country’s pre-need industry didn’t need a bailout.
Now, he goes deeper into how pre-need firms, struggling with low trust fund earnings, should approach the dilemma of paying plan holders with maturing contracts.
ChinaBiz: How should pre-need companies handle the effects of low trust fund earnings?
Vazquez: We have [a set of recommendations]. No one would really know that there’s low trust fund earnings today if not for us. I mean the meltdown happened last year [and] the realization happened around July, September, October, up to December. It’s still going on right? In August last year, we wrote the regulators and told them “Although everything looks fine, let’s anticipate some problems.” And what is the problem? Why are we worried? We’re worried because we made a promise. We made a promise based on an assumption that the trust fund will grow at a certain pace. Was it for good or bad? I don’t know but for the last 43 years it’s been doing fine.
But with this meltdown, we can’t tell what will happen [next]. So what’s our choice? We can keep quiet and continue paying the claims because we have the funds to pay for them. But if we pay the claims as we promised and the fund’s growing this way, the liability [will build up]. What will happen to the plan holder down the line? So while the trust fund is still intact, we told the Securities and Exchange Commission, “Let’s do a reassessment. Let’s assume a lower yield.” That means companies have to pour in capital to increase the fund. If you do that, the fund would pace with the obligation even though returns are low.
We said, “The companies can’t do it overnight because the drop from the current yield to what we anticipate is very drastic. It’s big. It will require a lot of capital. Let’s determine what that amount is, give us time, and the companies will come up with proposals on how to fill it up. If you approve it, then let’s implement it.” And these companies that do it, [they’re] top of the class. They can continue. Now, I think that’s very responsible and very useful. Because you immediately take away the cloud [of doubt]. So the plan holders have peace of mind. But not all companies can do that. But what is good about it is you identify the good ones; those that are able [to pour new capital] and those that are not, so [everything is] transparent.
Those who can’t can now go to their plan holders and tell them the truth. “I have the money, I have the assets [and] these are yours. If you take it today, basically, you’re not really losing anything.” Now, if I keep quiet and keep paying those that mature, the funds will be depleted. My choice is to give it to you now, if you’re willing [to take it] or not and have that potential problem. And that’s what we’re telling the plan holders. Maybe an orderly early settlement of claims is wise.
Some [of us] have been in this business for 40 years, some, for 20 years. Do you think we want to do this? We don’t. But we have to face you and tell you the truth and take care of all of you. It’s better than going to rehab. Because in rehab, you’ll [still] get it [back] but there will be another party; it will take awhile. To me it’s a plan. It’s better than not having any plan at all. And, remember this is an anticipative move.
So what will happen to the plan holders now? To those who bought plans from companies that went belly up?
Actually, the trust funds are there. A receiver was appointed, a business plan is being put up. The receiver will study the plan and recommend to the court. Is the business plan viable or not? If it’s viable, the court will approve it. If it’s not, the court will say, “Well, liquidate.” So the plan holders will get something, the only question is when.
I’ve written the five companies and asked them for an update. And the update is only for me to share. One already reported to me. The five companies are CAP, Pacific, PET, PPG, and Platinum. PET told me their rehab is nearly over. They mutualized their fund and plan holders were given the choice to stay or go; to take their money [or not]. Eighty percent of their plan holders opted to stay. Twenty percent have already gotten their money. So it’s already being run as a mutual fund and they should be out of rehab soon.
Would you advise those with existing plans to continue their payment?
If you’ve a partner and he’s very secretive, I think that’s more worrisome than someone who’s being honest and forthright. That’s one thing you have to factor in. Then two, get to know the company. But the companies in our federation, we are being forthright to plan holders. The funds are there [and] the benefits can be paid. It’s a question of where do we go from here. Those are hard decisions and the companies are doing soul searching. So I don’t give advice. I’m just saying “Look at what we’re doing and make your judgment.” But definitely I don’t think you really have a big problem.
Do you think we will see the end of this episode by year’s end?
Year’s end. I think the companies that opt to take the first option and are able to re-capitalize will be announced. People will know about it. I think that’s one way to regain credibility. And the companies that have made the harder decision will take a few months, even years, to settle it. But at least the process is ongoing and they can do it.
You seem pretty optimistic.
Optimistic in the sense that when this is done, I think the life plan industry will have very good growth because competition is not so keen. I also believe that the education and pension plans have a future but it’s very competitive because it’s a savings plan. And insurance is in savings, banks are in savings, everybody’s into savings.
Print ed: 04/09