The pre-need mess: Who’s to blame?

By Neal Cruz (As I See It)
Philippine Daily Inquirer
First Posted 04:13:00 03/02/2009

WHAT’S happening to our pre-need industry? Formerly a sunrise industry, it is now setting under cloudy skies.

Strictly speaking, the problem is not the making of the pre-need companies. It was the making of the Department of Education (DepEd), when it lifted the 14-percent limit on tuition fee increases.

The pre-need industry operates on the principle of expectation. You pay now to the pre-need company, in installments, what you expect you will need in the future, be it education, memorial, or pension plans. The company invests your money and pays off what you need when you need it. It makes actuarial studies on how much it would need year after year to pay off the plan holders. The study starts from the presumption that tuition fees cannot increase beyond 14 percent.

So what happened when the limit was lifted and tuition fee increases hit the roof? Naturally, the firms didn’t have enough cash to pay the needs of planholders as guaranteed by their plans. Their actuarial studies went haywire. That is why only the traditional education plans (open-ended, meaning the company will pay whatever amount the schools charge) are affected. The memorial and pension plans are not affected at all.

When it began to sell traditional education plans in the mid-1980s, Pacific Plans Inc. (PPI) of the Yuchengco Group appeared to be the savior every parent was waiting for. Imagine, unlike other plans where the value of the benefit is fixed at the time of availment, traditional educational plans undertake to pay the tuition fee of the beneficiary at the time of availment, regardless of cost.

All these went out the window when the DepEd deregulated tuition fee increases, which then skyrocketed to 16 to 28 percent a year.

The Asian financial crisis and now the global financial crisis also took their toll on the investment projections of the pre-need companies.

In the case of PPI, it had chosen to invest in Napocor bonds which are fairly secure. But some of them are still locked up in dollar deposits that would not mature until next year.

The planholders naturally want PPI to fulfill its obligations now. A group called the Parents Enabling Parents (PEP) Coalition filed charges against PPI, claiming that planholders have been robbed of their hard-earned money and that the rehabilitation plan was just a sham proceeding to cover up PPI’s obligations.

The Yuchengcos finally threw in the towel and sold PPI—to Noel Cariño, the wonder boy of Asian Spirit. But what happened to PPI is also happening to other pre-need companies.

It is in this respect that the condition of the pre-need companies in distress may be differentiated. As already stated, PPI’s assets are invested in safe Napocor bonds and dollar deposits, and under the court-approved rehabilitation plan, holders of traditional education plans will get dollar-denominated entitlements in 2010.

College Assurance Plan, on the other hand, is differently situated as its trust assets were placed in a mix of investments including equities and real estate projects which have not done well. Legacy Consolidated Plans of Celso de los Angeles is something else. It is a scam, according to the Bangko Sentral ng Pilipinas (BSP), which has filed charges against De los Angeles and other officers of the Legacy Group. Legacy claims that its trust funds are intact, but the BSP says Legacy is operating what is like a pyramid scam—paying claimants with money collected from new planholders. When collections from new plans diminish, the whole operation collapses.

What the whole mess reveals, however, is that the Securities and Exchange Commission (SEC), which supervises pre-need companies, was woefully remiss in its duty. It did not monitor the pre-need companies closely, and therefore failed to institute measures to prevent their collapse. It is only now that the SEC has woken up, after the pre-need mess collapsed on our heads. The SEC’s job is preventive, not punitive or remedial as it is doing now, so that planholders and investors do not lose their investments.

The SEC recently came out with rules requiring pre-need companies to adopt capital build-up plans—but it was too late. Members of the Federation of Pre-Need Companies (FPNC) said they would comply but will require more time to do so. In the event that a company is unable to increase capital, the SEC will not renew its license to sell additional plans. If this happens, the company will sink into a deeper hole.

The only other recourse is for a company to rehabilitate and/or liquidate. In the event of liquidation, the question is whether or not the company has enough assets to cover its trust obligations.

Important, therefore, is where trust assets are invested. Considering how the global financial markets are right now, the most prudent place to invest funds would be government-issued bonds or securities as these enjoy sovereign guarantees.

Capital build-up is of course the preferred course of action by planholders. They would like the owners to plow in more capital to at least cover the deficiencies expected from the low return from their investments so that they may continue to service planholders.

But why would anyone want to put in good money after bad? Any additional investments would make sense only if there is hope for recovery.

During liquidation, planholders will have to share in what is available of the trust funds. The courts will have to distribute the same as equitably and fairly as possible. That is why some planholders would rather go with previously approved rehabilitation plans and look forward to getting their money, plus interest, rather than wait for something that may not come at all.

What is the lesson in all these? Government regulatory agencies, like the SEC, should do their jobs well.