Pre-need crisis: Unkindest cut of all
’Tis the “most unkindest cut of all”: to throw to the mercy of the market precisely those parents who were responsible enough to save for the proverbial rainy day. The pre-need crisis has victimized the typical planholder — salaried employees and overseas Filipino workers — and for the government to pretend to be neutral by being legalistic shows that the soft state approach has made for pathetically soft-brained thinking.
The first set of victims consists of those whose pre-need plans have matured but are unable to collect full value on the money they had invested. They purchased the pre-need plan to protect their children’s future from the uncertainties of life, only to discover now that the pre-need company is itself the source of uncertainty.
The second set of victims are those whose plans have not yet matured, but who are forced to keep on paying the regular dues, fully knowing that they may never recover what they invest. They ask themselves: Why throw (our) good money after (someone else’s) bad? Yet if they stop their payments, they will be declared in default and risk penalties or forfeiture of all past payments altogether! They turned to the Securities and Exchange Commission, but I have heard the SEC’s reply on TV: Well, they signed the contract, it contains a default clause, and we must respect the contract. Yet I wonder: Would the SEC worthies invest their own money in the Titanic when the ship is tilting on the horizon, visibly about to capsize, while Celine Dion sings “Your payments will go on and on”?
The SEC, to its credit, had earlier acted as a proper regulator, warning as early as 2000 that the pre-need companies were using creative accounting and faulty financial reporting to cover up their precarious condition. Sadly when the College Assurance Plan scandal erupted in 2004, the SEC shifted its stance, from regulator to court — legal, yes, but timid and imprudent and unfair — and saw itself not as the tribune of the helpless public and the planholders, but rather as the neutral referee between the parents who entrusted their savings and the companies that bungled that trust.
No, the SEC or, for that matter, the entire executive and legislative branches of government, should openly be partisan to protect the innocent public. Fortunately, as the global economic meltdown hit our shores, these agencies have finally abandoned their passivity and begun some proactive measures. The SEC has issued new regulations to enable pre-need companies to diversify its investments options and while increasing their reserve requirement of liquid assets to meet their obligations. The Congress is deliberating on a Pre-need Industry Code to strengthen state regulation over the industry, protect planholders from the company’s insolvency, and deter predatory practices by the corporate officers.
These measures will help the planholders with companies who are still solvent but otherwise in risk of insolvency. They cannot help those parents who hold education plans with companies that are now bankrupt. Their only salvation lies either in market-based rescue or a government-funded bailout.
Note the purchase of the besieged Pacific Plans Inc. (PPI) by an intrepid entrepreneur and investment banker, Noel Oñate, with assurances that the takeover will have “no effect on the existing rehabilitation of PPI.” This is a market-based solution that doesn’t entail any government subsidy, relying instead on the risk-taking instincts of an investor and without prejudicing any vested claims by the planholders.
On the other hand, talk has began about a government — and taxpayer-funded—bailout. The barest minimum for any bailout program is that it shouldn’t put tax money in the hands of the same irresponsible corporate officers who squandered the planholders’ hard-earned savings; indeed we must hold them to account. It should also put a cap on executive pay, perks and golden parachutes. The distressed companies deserve as much sympathy as those Detroit bigwigs who went to the US Congress to ask them to rescue the automotive industry — and flew to Washington, D.C. in their private jets.
Moreover, there should be sufficient safeguards against questionable accounting practices, especially transfer pricing, that have enabled distressed conglomerates to move profits to their favored corporate shells (to keep the wealth within the family, so to speak) while shifting losses to their pre-need affiliates (to let the planholders take the flak).
The recent revelations [read story] about politicians’ intervention in the now bankrupt Legacy group of banks and pre-need companies should warn us about a more familiar risk. Ricardo Tan, former president of Philippine Deposit Insurance Corp., says PDIC, which insures our bank deposits, was early on alarmed at their exposure to the Legacy group and, upon inquiry, found “fictitious deposits, [rotating] collateral from one bank to the other, unsafe and unsound [banking practices] and improper documentation.”
Tan revealed that at the height of his investigation, now Speaker Prospero Nograles invited him to a dinner with the founder of the Legacy group, Celso de los Angeles Jr., now a town mayor in Albay province. Nograles allegedly asked him to go easy on De los Angeles who had ties to several administration allies, including Vice President Noli de Castro. Worse, Tan actually filed a complaint with now Ombudsman Agnes Devanadera. But, Tan laments, “Nothing happened. The case didn’t move.”
Yes, for the sake of the parents-planholders, we do need a bailout but only under strict safeguards. A bailout without safeguards is worse than no bailout at all.
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