Teves, Barin in hot seat in pre-need industry woes
February 2, 2009
FINANCE Secretary Margarito Teves and Securities and Exchange Commission chair Fe Barin will be in the hot seat today when the Senate committees on trade and industry and on banks and financial institutions begin investigation on impending collapse of pre-need industry.
Trade and Industry committee chair Sen. Manuel Roxas II said the investigation stemmed from an industry position paper claiming that the value of the pre-need industry’s trust fund has dropped by P40 billion, thus triggering fears of its imminent collapse.
Roxas said the Pre-need Code, which was passed on third reading in June last year, already sought additional regulations to protect the public from scammers in the pre-need industry.
“Additional legislation may be needed to protect consumers’ interest, and due to the wide-ranging and catastrophic impact of the global financial crisis in other markets abroad, it is our primary responsibility as the country’s leaders to ensure our investing public will not be in the losing end again this time,” he said.
Sen. Edgardo Angara, former chair of the committee on banks, has said the possible gradual collapse of pre-need industry could have been avoided if the legislature had instituted regulation mechanisms which are embodied in the Pre-need Code.
The pre-need industry has posted P157 billion in total assets. Over the last 25 years, more than 90 firms have engaged in the sale of pre-need plan securities.
He said the unexpected collapse of the first pre-need firm in the country, Pacific Plans Inc., following the fate of industry leader College Assurance Plan (CAP) shook the industry and caused serious grief and loss to countless parents.
Sen. Francis Escudero, chair of the committee on banks, had earlier filed a resolution to protect pre-need plan holders.
The resolution specifically wants to determine if the establishment of trust funds by banks and investment houses duly licensed by the monetary board of the Bangko Sentral ng Pilipinas, as part of the prescribed rules and regulations, are being implemented.
Catanduanes Rep. Joseph Santiago said the business model of pre-need providers appears questionable, and should be corrected to safeguard plan-holders,
“Pre-need firms are investing only 45 to 51 percent of plan-holder contributions. For every P100,000 paid by plan-holders, only P45,000 to P51,000 is actually put to work in a trust fund,” Santiago said.
He said the P49,000 to P55,000 balance (49 to 55 percent of P100,000) is used to pay for the commissions of the selling agent and his/her manager, and to cover the pre-need provider’s general corporate operations, including the compensation and bonuses.
“Just to make the P100,000 contribution whole again, the P45,000 in the trust fund would have to grow at an annual compounded rate of 15 percent for at least six years,” he said.
Santiago explained that P45,000 growing at a compounded yearly rate of 15 percent would reach a total of P104,087, roughly matching the plan-holder’s original contribution, only by the end of the sixth year.
“Everybody knows how difficult it is to invest P45,000 safely and at the same time make it grow 15 percent per annum, let alone 18 percent per annum, which we understand is the average (trust fund) target growth rate adopted by industry players,” he said.
He said the problem is not so much that pre-need providers are not putting the money to work securely and hard enough, but that too little is actually being stashed in the trust fund from the start.
“Obviously, if at the outset at least P90,000 (out of the P100,000 contribution) is put in the trust fund, and the money grows at an annual compounded rate of 15 percent, then the P90,000 would double to P181,022 after five years, or grow four times to P364,100 after 10 years,” Santiago said. – JP Lopez
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