The Perils of Pre-Needs: To regulate or not the pre-need industry
2002 Volume 9 No. 5
by Tina Dumlao
Pre-need or insurance companies, by the very nature of the product and service they sell, rely on the trust clients place on them. Thus, it was understandable when planholders raised serious concern when news broke out in August that some of the top pre-need companies have problems with their trust funds.
The Securities and Exchange Commission (SEC) has since declared all 46 pre-need companies solvent and has expressed expectations that the pre-need industry would continue to strengthen as more rules to protect the planholders are put in place. The issue, however, called to mind the importance of protecting the integrity of the trust fund to ensure that pre-need firms fulfill their commitments.
The trust fund is considered the heart and soul of the pre-need company as it is to this fund that the pre-need firm places the installment payments of planholders. Trust funds usually managed by the country’s top banks and financial institutions are then invested in certain financial instruments such as treasury bills and commercial paper placements. Conceptually, the returns on these investments should be more than enough to pay for the pre-need plans once they mature five, 10, 15, or 20 years after the plan was bought.
The SEC estimates that the pre-need industry has over P44 billion in trust funds as of June 2002, up by P7 billion since end-2001. The sharp rise in the industry’s trust fund placements was a result of tighter SEC rules requiring pre-need companies to fill their deficiencies within a shorter time frame. It also substantially raised the portion of collections that go into trust funds and set caps on how much a trustee bank can put in certain investments.
“The bottom line is, to protect the public, the industry must be financially stronger and must have sufficient funds to meet its maturing plans at any given day in any given year,” SEC chairperson Lilia Bautista said in a statement.
Miguel Vasquez, president of the Federation of Pre-Need Plan Companies said planholders should have no reason to fear from pre-need firms being unable to meet their commitments since the SEC closely watches how and where the trust fund is invested. He stressed that the consolidated rules on the pre-need companies clearly specify where the trustee banks should invest the pre-need firms’ trust funds.
According to the SEC’s prescribed investment portfolio mix, pre-need firms should invest at least 10% of their investible funds in government securities, a maximum of 15% in commercial papers issued by top-grade companies, a maximum of five percent for direct loans, a cap of 25% for equities, and 25% for real estate investments.
“The pre-need companies have no control over the trustee banks and where the money is invested because the money is not owned by the pre-need companies. We can only make suggestions on where the funds could be invested, but the banks have a free hand,” Vasquez added.
He admitted that there are some pre-need firms that have affiliations with trustee banks but he said there should not be any problem as long as the investment mix is followed. “There have been perceived excesses on how the funds are invested but the rules that have come out make it harder for the funds to be touched. There is emphasis on low-risk investments over speculative investments precisely to protect the planholders,” he said.
Trust fund firms are required to put in at least 51% of the planholders’ payments to the trust fund. Withdrawals from the trust fund are only allowed if used to pay for benefits or to meet maturing plans.
Statements of Assurance
Philam Plans, which has been around for the past 13 years and currently the second largest pre-need firm in the country, follows the investment mix stated by the SEC. Philam’s Jose Cuisia Jr. said in an interview that 93% of its trust fund is invested in fixed income or long-term government securities, which are considered low risk investments and can be easily cashed in to pay for obligations.
|Cuisia: Pre-need plans are like insurance policies|
Philam Plans has substantial liquidity on top of its P196 million in fixed assets. Only five percent is invested in equities, much lower than the level three years ago because of the downturn in the stock market. It also has only two percent exposure in real estate following the property sector slowdown.
Cuisia says there have been concerns about the industry so he agrees with moves expressed by some legislators to transfer the regulation of the industry from the SEC to the Insurance Commission. “A pre-need product is more of an insurance policy than a security. Therefore the sector needs to have a different regulation from securities,” he says.
Cuisia, however, agrees that the industry should not be over-regulated since it is experiencing tremendous growth. “Prospects continue to look good. The government must allow it to grow and contribute to economic development,” he says.
The issue on the health of the trust funds surfaced when reports broke out that the CAP group, the biggest pre-need company thus far, has been experiencing problems with its trust funds.
|Thompson: CAP never failed to meet obligations with planholders|
CAP’s Director, Marsh Thompson, however, stresses that CAP has been able to meet its so-called deficiency by submitting a P2.5-billion payment plan to the SEC. He also reiterates that it has never failed to meet its obligations with planholders.
CAP admits that the return on its trust funds was severely affected by the Asian financial crisis of 1997 and the subsequent decline in property values but that the funds are intact. “While the trust funds have technically not lost value on such investments, one may argue that the sharp decline in property values have somewhat limited the more robust growth originally expected out of such investment,” Thompson explains.
Pre-need firms such as CAP and Philam look for investment instruments that would give them the highest return to make sure that over time, the investments would generate enough funds to pay for future obligations under the contracts and still make a decent profit.
CAP, like other pre-need firms, has tapped two major trustee banks – Bank of Commerce and Allied Bank – to invest its trust funds. It has some P4 billion invested in fixed income, P3.5 billion in equities, and P3 billion in real estate.
“We surmise that the investment choices attempt to balance yields, perceived risks, and liquidity. This is not an easy task given the limited investment choices we are faced today. As a matter of policy, the trustee banks have allocated certain portions of the trust funds to long-term, high-yielding investments and some portions to liquid, short-term placements,” he says.
“The objective is to maintain trust funds at a healthy level and with excellent prospects for growth and liquidity. This is the guiding principle at all times,” he adds.
Erlinda Henson, chief financial officer of PET Plans, agrees that pre-need companies and the trustee banks must be attuned with the developments in the investment market, to take advantage of offerings that yield good returns. On the other hand, pre-need firms should also know when to cut their losses at times when the investment prospects dip such as what happened during the currency crisis.
“In PET Plans, for example, we took out most of our investments in the equities market because it was no longer giving us the return that we wanted. We went for more low-risk investments such as fixed income securities during those volatile times.” She explains that PET Plans regularly meets with its trustee banks to keep itself abreast of the developments in the investment world.
All pre-need executives agree that the crisis of confidence that shook the pre-need industry recently have emphasized the need to keep the trust fund healthy at all times. They, however, said that these concerns are just part of the growing pains that the pre-need industry is undergoing since it was only recently that the SEC has adopted consolidated rules.
Federation president Vasquez, however, cautioned against overregulating the industry, expressing fears that it could lead to the stifling of the growth of the robust industry.