Pre-need industry faces collapse?
LIZA REYES, ABS-CBN News | 01/22/2009 10:47 PM
A collapse – morbid yet possible — is what most pre-need companies are facing now.
The tough economic and financial environment have significantly dwindled its precious trust fund.
Pre-need firms deposit planholders’ premium payments in this trust fund, which trustee banks invest in various financial instruments like the stock market and bonds.
The earnings from these investments help the trust fund grow to a level that helps pre-need firms meet their maturing obligations to clients.
With a promised yield of 12 percent per annum more or less, the industry’s overall trust fund was still registering a net surplus back in 2006, according to the Securities and Exchange Commission (SEC) data.
But as the financial meltdown hit last year, yields suffered.
Now, the industry holds on to a mere 6 percent annual return – a yield unthinkable then, and sources said may even be tough to achieve.
Figures obtained from an industry source showed that, based on end-June 2008 figures, the industry’s trust fund deficit has ballooned to a whopping P46.83 billion.
This was a drastic turnaround from a surplus of P6.8 billion as of end-December 2007.
The source added that this deficit could even be bigger.
In an August 2008 letter of the industry to the SEC, it said that if urgent solutions are not implemented, the problems “could lead to the demise of the industry and many unfulfilled promises to planholders.”
The industry’s problem is really not something new.
Back in the 1990’s, old plans sold had high promises of return since interest yields of the trust fund was at 18 percent annually.
These double-digit rates were doable then since key rates and treasury bills were above 20 percent per year.
But when tuition fee growth rates skyrocketed after the government lifted the cap on tuition fees increases, it became more difficult for the local pre-need firms to meet maturing contracts.
This led several pre-need companies to stop honoring planholders’ claims. Later, most went to court for rehabilitation.
This eventually hit consumer confidence resulting in a significant drop in pre-need sales through the years.
Now the industry’s regulator is faced with a very tough task — how do you help an industry greatly paralyzed by these events?
In a September 2008 letter sent by the industry to the corporate regulator, it proposed various measures.
Its “simple” solution: continue raising capital and inject new funds to the trust fund. It was something that has been done in the past.
But since the erosion of the trust fund’s value became so huge, this simple solution was no longer feasible, the industry said.
Thus, the industry asked the commission to consider its proposed short and long-term solutions.
It asked for a regulatory leeway to address the trust fund variance. It said this would temper the erosion of the trust fund’s value.
This, it said, would give the industry some relief from the unrealized losses in the computation of the trust fund variance.
As for its unrealized losses, it will later generate positive returns as the market–it believes–corrects over time. It said these investments are going to be placed in select blue chip firms, with proven track records of profitability.
It admits, however, that if it wants to survive, these short term solution would not be enough.
Among its long-term solutions, it proposed the isolation of commercially impracticable “old basket of plans,” or those that promised to cover the entire obligation, even if the trust fund did not grow enough to meet it.
It proposed to manage these differently from the commercially-viable ones, while allowing pre-need firms to sell new plans formulated and priced on assumed all-weather hurdle rates.
It said this strategy would help the overall yield of the entire basket of plans to average down to a more realistic rate as old plans lessen, and new plans prevail.
The SEC, the agency assigned to oversee the pre-need companies, believes the industry is far from collapsing and its ability to recover from the current global financial crunch remains strong.
In an interview Thursday, commission secretary Gerard Lukban said just like any industry, the pre-need sector is expected to battle with the difficulties caused by the global financial problem.
“I believe the industry can still make it,” he said. “Let us not create a panic situation for the planholders.”
“We have been providing reforms such as coming out with guidelines on the management of trustfunds and accounting treatment. Our communication lines with them [pre-need firms] are always open. But we can’t be too lenient with them at the expense of the stakeholders,” explained Lukban.
What the SEC is doing now, he added, is a “balancing act” to find ways in order to support all stakeholders.
as of 01/23/2009 2:26 PM
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