May2009PB0902

PolicyBrief
SENATEECONOMICPLANNINGOFFICE

Whatthepreneedindustryneeds
Introduction

ThePhilippine preneedindustryis goingthrougha toughtime.Aside fromtheglobal financialcrisis,poor managementand investmentdecisions, andunsound governancepractices areseentohave causeditsproblems. Theindustrystands tosufferfurther unlessreformsare putinplaceandthe PreNeedCodeis enacted.

The SEPO Policy Brief, a publication of the Senate Economic Planning Office, provides analysis and discussion on important socioeconomic issues as inputs to the work of Senators and SenateOfficials.TheSEPOPolicyBriefis alsoavailableatwww.senate.gov.ph.

The preneed industry is caught in a lingering crisis of confidence. In 2004 and 2005, a number of preneed companies started to face liquidity problems and failed to service the maturing plans of their clients.TheinvolvedfirmswerethemarketsbiggestplayersCollege Assurance Plan Philippines (CAP), Inc., Professional Financial Plans, formerly The Professional Group, Platinum Plans Philippines, Inc. and Pacific Plans, Inc. Most these firms are now undergoing corporate rehabilitation. Recently, three Legacy preneed companies Legacy Consolidated Plans,Inc.,ScholarshipPlanPhil.,Inc.,andAllAsiaPlansCorporation unilaterally ceased operations even without prior approval from the Securities and Exchange Commission (SEC). The Legacy closure prompted the lawmakers to conduct congressional inquiries. It was foundoutthattheclosurehasaffected52,990planholders,whichhas resulted in an estimated loss of around PhP5 billion in investments, according to SEC. Since the Legacy Group of Companies closed shop, threemorehavecollapsed.OneoftheseisPrycePlans,Inc.,whichhas startedpayingoffplanholderswithmedicineandcookinggasbecause it no longer had funds to deliver the promised benefits. Lately, Prudentialife Plans, Inc.andPermanent Plans havefollowed suitafter the former did not meet the capital build up requirements and the latter said it no longer believes in the viability of the preneed industrygiventhetoughtimes. Ontopofthese,thePhilippineFederationofPreNeedPlanCompanies, Inc. (PFPPCI) has requested the government for a bailout, citing that troubles in the global economy have diminished the interest yields of theirtrustfunds.InitspositionpapersubmittedtotheSEC,thePFPPCI appealedformoreregulatoryleewaysothatitsmemberscanaddress thedeficiencybetweentheirtrustfundandtheirreserves. Thesedevelopmentshave,again,broughttoforetheneedtoexamine thestateofthepreneedindustry.Howdiditreachtheshakysituation it is presently in? Are the present rules not enough to monitor, superviseandregulatethemovementofthepreneedfirms?Canthe proposed PreNeed Code of 2008 save the ailing industry and guaranteetheprotectionoftheinvestingpublic?

Table1.InvestmentPortfolioofthe TrustFundforPreNeedCompanies AsofJune30,2008

Investment Instruments TotalTrust FundEquity Government Securities Equities RealEstate TimeDeposit Collective Investment Schemes Others Amount (inbillion PhP) P92.51 62.35 13.02 7.55 5.66 3.62 0.31 Percent toTotal 100.00 67.40 14.07 8.16 6.11 3.92 0.34

Source:SEC

Figure1.NumberofPreNeed Corporations,20002009
60 50 40 30 20 10 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Thepreneedindustry:anoverview Preneed plans, according to the Securities Regulations Code of 2000, are contractswhichprovidefor the performance offutureservices or paymentoffuturemonetaryconsiderationsatthetimeofactualneed. Theyarepayableeitherincashorinstallmentbyplanholdersatprices statedinthecontractwithorwithoutinterestorinsurancecoverage. There are three types of preneed plan offered by the preneed companies in the Philippines: (a) an educational plan, which seeks to coverthecollegeeducationofabeneficiary;(b)apensionplan,which offers a fixed value plan with guaranteed interest income upon maturityand;(c)alifeplan,whichcoversmemorialservicesatthetime of the beneficiarys death. These plans particularly appeal to Filipino individualsandfamiliesmainlybecausetheyhelpprepareandmobilize savings early on, and thus, make it easier for them to cope with the spiralingcostofliving.

SincetheestablishmentofthefirstpreneedfirminthePhilippinesin 19661,preneedhasgrownintoamultibillionpesoindustryandhas contributed significantly to the growth of the financial sector. As of June 2008, the industrys trust funds2 amount to PhP92.5 billion, makingupabout7to8percentofthetotalbankingsystemstrustand other fiduciary accounts (TOFA). It also brings in much needed funds for the government, with more than twothirds (67.4 percent) of its trustfundinvestedingovernmentsecurities(Table1). Inthelast25years,atotalof92preneedfirmshaveregisteredwith theSECbutasofApril2009,only22areactivelyoperating(Figure1). IndustrysaleshavedwindledfromPhP36.8billion in2000toPhP15.3 billion in 2008, with the total number of plans sold reduced by more thanhalf,from582,003to253,378(Figure2). Saleofpensionplans,inparticular,plummetedby76.6percentwhile lifeormemorialplansappeartohavebecomemorepopular,withtheir sharetothetotalnumberofplanssoldincreasingfrom5.3percentto 69.2 percent during the said period. Sale of educational plans exhibitedthebiggestdrop,from208,438to10,152withanaggregate valueofPhP17billionin2000toPhP1.7billionin2008. Despitetheproblemshoundingtheindustry,latestdatafromtheSEC showed that the number of plans sold increased to 40 percent, from 33,989 in the first two months of 2008 to 48,239 in the first two months of the 2009. Life plans grew by 72 percent, from 23,611 to 40,589. But the sale of educational and pension plans fell by 50 percentand24percent,respectively.
The Pacific Plans, Inc. (formerly known as Pacific Memorial Plan, Inc.) is the countrys first preneed company. It introduced the offering of memorial plans while the College Assurance Plan pioneered in the traditional educational plan in 1980.
2 A trust fund is a fund set up from plan holders payments, which is separate and distinct from the paid-up capital established with a trustee under a trust agreement approved by the Commission, to guarantee the delivery of benefits. 1

56 54 45 45 41 33 28 31 26 22

Source:SEC

800,000 600,000 400,000 200,000

Figure2.NumberofPreNeed PlansSoldbyType, 20002008

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Educational

Life

Pension

Source:SEC

 Mindaluz Cabanta wanted to make sure that her child would not meet the same fate as hers. She was a sewer in a garment factory. She convinced by a fellow sewer was that the only way to ensure her childs future is by getting an educational plan. She bought a traditional educational paid on installmentplan, which she basis for a couple of years. It was stipulated her educational plan that the in pre-need company would cover her childs college tuition fee. She never missed a payment for fear that her childs educational plan would lapse. But before her plan could lapse, it was the pre-need company that collapsed first. This left Mindaluz wondering if she could still send her child to college. She has done her part; it is now up to the pre-need company to pay its dues. But as it turned out the road to settling ones educational plan is long and winding. Mindaluz could only hope that she would not only get hard-earned money back, but her peace of mind as well. The names of characters and the types of plan vary, but they all have the same sob story --- that of feeling duped by a pre-need company that suddenly declared dissolution. With the increasing number of pre need firms that closed shop, the plan holders are now caught in a dilemma. The plan holders who have finished paying are now wondering whether their pre-need companies can still settle fully their claims once their plans mature. There are also plan holders whose plans are yet to mature but are torn between paying to keeping their part of the agreement, and not paying at all for fear that they may not get a return of their investment. But there is a catch if they do not pay; the plans will lapse. Whether the former is better than the latter or vice versa is yet to be answered by either the SEC or pre-need firms.

Box 1. The case of Mindaluz and a thousand others

Whytheindustryisonthebrinkofcollapse Anumberoffactorshavecontributedtothedeteriorationofthepre needindustry. The Education Act of 1992, which allowed for the deregulation of tuitionandmiscellaneousfees,isoftencitedastheprimaryreasonthe preneedindustrystartedtobreakdown.Priortotheenactmentofthe saidlaw,tuitionfeeincreaseswerecappedat15percent.Thismadeit easierforactuariestopredictthepreneedfirmsfutureliabilitieseven if some of them were offering the generously openended or traditional educational plans. This type of plans requires preneed firmstopaythetuitionchargedbyschoolsregardlessoftheamount, as opposed to the fixedvalue educational plans whose benefits are welldefined. With the deregulation policy, tuition fees shot up tremendously. A study conducted by the PFPPCI revealed that 10 years after the Education Act of 1992 was implemented, the cost of a fouryear traditional educational plan increased 12 times from PhP20,000 to PhP240,000(CPBD,2008). Whetherthegovernmentconsideredthefateofthepreneedindustry whenitcraftedthesaidpolicyisuncertain.Whatisclearisthatseveral years after its implementation, the preneed companies who were marketingthetraditionaleducationalplanssawthemselveshardputin coveringtheirmaturingobligations.Someofthempaidjustaportion of the promised amount while the others were forced to close shop. Even those who were offering the fixedvalue plans werenot spared. While not as adversely affected, they also suffered from the general lossofconsumerconfidenceinthepreneedfirms. Poor management and unsound investment decisions made by some preneedcompaniesexacerbatedtheproblem.Inanattemptto covertheirshortfalls,someventuredintohighreturnbutequally highriskinvestments.ThiswasthecaseforCAP,whichplaceditstrust fund inequitiesandhighlyspeculativeventureslikethedevelopment ofCampJohnHay,FilEstateandtheMetroRailTransit(MRT).When theAsianfinancialcrisisbrokeoutandtheequityandrealestate markets buckled, CAPs trust funds further diminished. That these businesses turned out to be its affiliates did not help improve CAPs image to the public who were then already suspicious of possible collusionamongpreneedcompaniesandtheiraffiliatecorporations. Some preneed firms were also found to be engaging in creative accounting practices and sugarcoated their financial positions. When the SEC instituted the use of the actuarial reserve liability3 (ARL) schemeasthemethodofvaluationandcalledfortheuseofthePre NeedUniformChartofAccounts(PNUCA)in2002asastandard
3

Also called Pre-Need Reserve Liabilities, refers to the measure of liabilities of the pre-need company for its in-force plans as of valuation date.

Table2.PreNeedCompanies inthePhilippinesasofApril2009 1. AMAPlans 2. AyalaPlans 3. CaritasFinancialPlans 4. CityPlans 5. Cocoplans 6. DanvilPlans,(formerlyBerkeley InternationalPlans) 7. DestinyFinancialPlans 8. EternalPlans 9. FirstCountryPlans 10. FirstUnionPlans 11. GraylinePlans 12. HimlayangPilipinoPlans 13. LoyolaPlansConsolidated 14. 15. 16. 17 18. 19. 20. 21. 22. ManulifeFinancialPlans MercantileCareplans PazMemorialServices PhilamPlans ProvidentPlansInternational Corporation St.PeterLifePlan SunLifeFinancialPlans TransnationalPlans TrusteeshipPlans

for reporting the preneed firms finances, it was found out that somecompaniesdonothaveenoughassetstopayofftheirfuture obligations.ThePNUCAgaveamoreaccuratepictureofthefinancial conditionofthefirmsasitshiftedtheaccountingmethodfromaccrual to marktomarket where profits and losses are recorded based on currentmarketprices ofthe instruments inwhichthepreneed firms investedin. InthecaseoftheLegacyGroup,policyholderswereluredtoselltheir planstoanaffiliatecompanycalledLegacyCardwiththepromisethat the contract amount will be doubled given a certain period of time, depending on thebusiness planchosen bythe planholder. The said activityissimilartoapyramidschemesinceitwaspayingclaimantswith money collected from new plan holders. When collections from new plans started to fall, the whole operation consequently caved in. Witnesses in the Senate hearings also alleged that Legacys trust fund wasdivertedforthepersonaluseofitspresident,CelsodelosAngeles. However,accordingtothePFPPCI,thecaseoftheLegacyGroup,should betreatedasan isolatedoneandshouldnotbe likenedtotherestof thepreneedcompanieswhoarenowexperiencingfinancialdifficulties, notbecauseofunsoundandfraudulentbusinesspractices,butbecause oftheeconomicslowdown. A large part of the industrys trust fund, as managed by the firms trustee banks, is invested in government securities and the stock market. Because of the global financial crisis, prices of these stocks plummeted.Asaresult,therewashugeerosioninthetrustfundvalue ofthepreneedfirms.InapositionpapersubmittedbythePFPPCtothe SEC,itisreportedthatfromanassumedannualinterestyieldofashigh as16percent,trustfundearningshavegonedownto6percent.Asof June30,2008,thetotaltrustfundofthepreneedindustryamountsto P92.5billion,ahugedeclineofPhP14.7billionfromitsDecember2007 levelofPhP107.2billion.FromasurplusofPhP9.7billionin2007,trust funddeficiencyreachedPhP46.8billion(Table3). The PFPPCI has requested regulatory leeway, which will enable pre need companies to build up their capital and address their trust fund deficiencies. In particular, PFPPCI requested that they be allowed to defer the payment of plan holders benefits by five years and be relieved from the marktomarket computation of the trust fund variance. The Federation has also asked that they be allowed to fund their deficiency with noncash assets such as real estate and unlisted sharesofcompaniesthathavepositivetrackrecord. The SEC approved the request but shortened the time span to three years,from2009to2012.Planholdersandlawmakers,however,were lukewarm to thismove and contended that SECdecisionshave always leanedinfavorofthepreneedcompaniesandnotfortheprotectionof theinvestingpublic.Moreover,SECwasassailedforbeingremissinits dutiestocloselymonitorthepreneedcompaniesandactdecisivelyon their problems. Its weakness as a regulator is considered to be an importantfactorwhythepreneedindustryisnowindistress.

Source: SEC

Table3.TrustFundandActuarial ReserveLiabilities,2000June2008 (inbillionpesos) Year Trust Fund Equity 33.17 36.51 55.67 60.67 60.25 57.67 67.86 81.68 92.5 Actuarial Reserve Liabilities 36.89 43.10 59.85 81.01 59.58 54.36 57.91 72.03 45.7 Trust Fund Variance 3.27 6.60a/ 4.18a/ 20.33 0.67 3.31 9.94 9.66 46.8
b/ a/ a/

2000 2001 2002 2003 2004 2005 2006 2007 asof June 2008

Source:SEC *(a/)Previousyear'sdeficiencieswere alreadyfundedbythepreneedcompanies *(b/)Starting2007,theActuarialReserve Liabilities/PreNeedReserveiscomputed basedontheamendedPNUCA

Table4.PremiumContribution totheTrustFund(in%) PaymentReceived Life Other Plan Plans Collection of the 1st 5 5 20%ofcontractprice Collection of the 2nd 20%ofcontractprice Collection of the 3rd 20%ofcontractprice Collection of the 4th 20%ofcontractprice Collection of the 5th 20%ofcontractprice Source: SEC 10 70 70 70 10 80 80 80

ThepowersoftheSEC Section16ofRA8799ortheSecuritiesRegulationCodevestedtheSEC withregulatorypowersoverthepreneedcompanies.Itauthorizedthe SEC to prescribe rules and regulations governing the registration and saleofpreneedplans.Someoftheseimportantrulesarethefollowing: AminimumpaidupcapitalofPhP100millionasabufferfortrust fundperformancefluctuation; A minimum trust fund equity requirement of not less than 45 percentoftheamountcollectedforlifeplansand51percentfor pension and education plans. For installment payments, the minimum limitsof the depositcontribution to thetrustfund shall beinaccordancetoaschedule(Table4).ShouldtheSECdiscovera deficiency in the trust fund, it shall give notice to the preneed company, and require it to make additional deposits within 30 days.TheSECmayalsodemandforahigherdepositasdetermined bytheactuary; Aninvestmentportfoliomixfortrustfunds.Toensurethatrisksto the trust fund are managed, the fund shall observe a certain investmentmix(Table5); Liquidityreserve4requirementofnotlessthan10percentofthe net value of the trust fund assets per type of plan. Loans, treasury notes or bills, Central Bank Certificates of Indebtedness, repurchaseagreements,savingsortimedepositswithgovernment owned banks or commercial banks, and investments in fixed income instruments shall qualify as investments for the Liquidity ReserveFund; Atrusteewhowillexerciseduediligencefortheprotectionofplan holders,andwhowillhavetheexclusivemanagementandcontrol over the funds, including the required liquidity reserve fund. The trustee must be established independently with the trust department of a trust company, bank or investment house doing businessinthePhilippines; Strict compliance with the PreNeed Uniform Chart of Accounts (PNUCA)foramoreaccurateaccountingandreportingoffinancial conditionofpreneedcompanies; A limit to the payment of commissions up to 10 percent of the contractpriceoftheplans;and Reportorial requirements such as the monthly, quarterly and annualpublicationoffinancialconditionandtrustfundstatements, amongothers. Should the SEC find that a preneed company has violated any of the saidPreNeedRules,hasengagedinfraudulenttransactionsordoesnot conductitsbusinessinaccordancewiththelaw,orisinsolvent,theSEC hasthepowertocancelthepreneedcompanysregistrationandpermit tosellnewplans.
Refers to a portion of the trust fund set aside by the trustee to cover the benefits due to plan holders for the ensuing year.
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Table5.InvestmentPortfolioMix AllowedbySEC Condition Investment instrument Shallnotbeless than10%ofthe trustfundamount. Shallnotexceed 15%ofthetotal trustfundfor longterm commercial papers,exposure toeach commercialpaper issuershallnot exceed10%ofthe allocatedamount. Shallnotexceed 5%ofthetotal trustfund,the amounttobe grantedtoeach corporate borrowershallnot exceed10%ofthe amountallocated. Equities(e.g., mutual Shallnotexceed funds, fixed income 25%ofthetotal instrumentsandblue trustfund, chipsecurities) investmentinany particularissue shallnotexceed 10%ofthe allocatedamount. Realestate Shall not exceed 25% of the total trustfundamount Source: SEC Fixedincome a.Shortterm&long terminstruments (e.g.,govtsecurities) b.Savings/time deposits&common trustfundinstrument c.Commercialpapers dulyregisteredwith theCommission d.Directloansto corporations

Table6.MultiYearTrustFundBuildUpPlan Box2.TheCapitalBuildUpPlan Year Amounttofund The Securities and Exchange Commission (SEC) has agreed to ease rules governing the preneed 1 1/5oftrustfunddeficiency 2008 industry,andhas givenpreneedcompaniesachancetoaddresstheirtrustfunddeficiencies.Thefollowing 2 2009 1/4oftrustfunddeficiency aretherequirementsandconditionsfortheapplicationofmultiyearcapitalandtrustfundbuildupsetbythe SEC: 20103 1/3oftrustfunddeficiency 4 1/2oftrustfunddeficiency A2011 from the company acknowledging its trust fund deficiency or capital impairment based on the letter actuarialvaluationreport(AVR)andauditedfinancialstatements(AFS)for2008andagreeingthatshould 5 2012 Entiretrustfunddeficiency economicconditionimprove,thecompanymayrequireashortenedperiodofcapitalbuildup; AVRandAFSending2008; Table6.Multiyearcapitalbuildupplan Afiveyearprojectedfinancialstatementtogetherwithassumptionstaken; Year Mandatory decrease in the A15yearfinancialprogramaddressingtheoldbasketofplansthatarecommerciallyimpracticable,taking capitalimpairmentamount intoconsiderationtherespectivematurityvaluesoftheplans; 20081 1/3ofcapitalimpairment A board resolution authorizing the filing of the application with supporting documents and taking full 2 responsibilityovertherepresentationsandcommitmentsindicatedinsuch; 2009 1/2ofcapitalimpairment Once approved, thecapital impairment fund deficiencies and capital impairment should be immediately 20103 entire respective trust amount addressedwithin60days.Thedeficiencybetweenthetrustfundandpreneedreserveswithin2009and2013 mustalsobefundedbasedonanagreedschedule(Table6).Thepreneedcompanythatneedscapitalbuildup mustaddresstheimpairmentbetween2009and2012butwillbesubjecttoadjustmentsbasedontheannual auditedfinancialstatement(Table7). Table6.MultiYearTrustFund Aspartofthecapitalbuildupplan,theSECisallowingmore BuildUpPlan investmentsinrealestate,unlistedsharesofstockaswellasplan Year Amounttofund holder loans but with conditions. Preneed firms must also 2008 1/5oftrustfunddeficiency complywiththefollowingconditions: 2009 1/4oftrustfunddeficiency 2010 1/3oftrustfunddeficiency The preneed companies must follow a strict schedule in filing AVR and AFS within 105 days after the close of 2011 1/2oftrustfunddeficiency calendar/fiscal year. The application and availment of the 2012 Entiretrustfunddeficiency multiyearcapitalandtrustfundbuildupmustbedisclosed bythepreneedcompaniesintheirrespectiveAFS. Thereclassificationoffinancialassetsofpreneedcompanies Table7.MultiYearCapitalBuildUpPlan Year Mandatory decrease in the shall be made in accordance to Philippine Accounting capitalimpairmentamount Standards39. 2008 1/3ofcapitalimpairment The preneed companies cannot declare any form of dividends, stock options or warrants, or any form of profit 2009 1/2ofcapitalimpairment sharing, performance bonus and other compensation 2010 schemestoitsofficers.Incaseofincreaseinallowancesand entire capital impairment amount benefits,itshouldnotbemorethanfivepercent.

Source:SEC

However,itappearsthattheSECitselffailedtofollowitsownrules.In theSenatehearings,itwasrevealedthatLegacywasstillabletosecure permittosellnewplansfromtheCommission,ignoringSECsadvisory torecapitalizeasearlyas2006.ThiswasalsothecaseforCAPwhowas still able to get a permit to sell in 2001 even after the SEC found a PhP2.6billion trust fund deficiency the year before. Moreover, even withtheregularfinancialreportssubmittedtotheCommission,theSEC is apparently still unable to keep track of companies that are already havingfinancialdifficulties. SEC officials explained that lack of technical and financial capabilities, andnotnegligence,havebeenhinderingthemfromcarryingouttheir mandateeffectively.Atpresent,theSEConlyhasabout400personnel andhasnoresidentactuariestodothecountercheckingofthefigures and financial projections preneed companies submittothem. Itwas furtherarguedthatthenonpassageofaPreNeedCodehasrestrained theregulatorypowersoftheSEC. ThePreNeedCodeof2008 A PreNeed Code for the Philippines preneed industry has been proposed as early as 1987. Since then, the measure has been refiled and deliberated. To date, the Senate version of the PreNeed Code (Senate Bill No. 2077) authored by Senators Mar Roxas, Edgardo Angara and Loren Legarda has already been passed on Third Reading but until now its counterpart legislation in the House of Representativesisstillpending. SenateBillNo.2077ortheproposedPreNeedCodeof2008seeksto establish a regulatory framework to protect the plan holders and promote a healthy preneed industry. SB 2077 is essentially a consolidationoftheexistingrulesandregulationsoftheSEC.Anumber ofnewrules,however,areintroduced: An affiliate trust entity should no longer be allowed to serve as trusteeofapreneedcompany. Liquidityreserverequirementwillbeincreasedfrom10percentto 15percent. Investment of directors and officers should not be in excess of PhP5 million in any business venture where the preneed companystrustfundhasinvestmentorfinancialinterest. Required actuarial reports shall be duly certified by an independentSECaccreditedactuary.Underthepresentpreneed rules, it is only optional on the part of the SEC to refer the actuarialreportsforverificationstoanindependentactuary. The maximum term for direct loans to corporations will increase tofouryears,insteadoftwoasintheexistingpreneedrules. The amount of trust fund invested in equities will be increased from25percentto30percent. The maximum term of loans to corporations, one of the investmentoptionsoftrustfund,willbefouryears,insteadoftwo yearsasintheexistingPreNeedRules.

Theamounttobeinvestedinequitiesshallnotexceed30percent, insteadof25percentasinthepresentPreNeedRules. There will be a range of administrative and criminal sanctions whicharesevereenoughtodiscourageabusesandmalpractices. UndertheCode,iftheSECfindsthatapreneedcompanyisina state of continuing liability or unwillingness to comply with the Code,aconservatorwillbeappointedatanytimebefore,orafter thesuspensionorrevocationofitslicense.Theconservator,who may be another preneed company or any competent person or corporation, will take charge of the assets, liabilities and managementofcompany. Insolvency proceedings of preneed companies shall be lodged withtheCommission.Nopreneedcompanyshallbeallowedto filedirectlytocourtsforrehabilitationorliquidation.Likewise,no restrainingorderorinjunctionshallbe issuedbythecourtunless theSECactedinbadfaith. Thepreneedcompaniescandeclaredividendsprovidedthat:(a) 100 percent of the capital stock is intact; (b) there is a sufficient amounttopayallnetlossesreportedorincaseofsettlement,to payalltheliabilitiesforexpensesandtaxes;and(c)thetrustfund shallremainunimpaired. ContentiousIssuesandConcerns Inthefinalanalysis,anumberofcontentiousissuesandconcernsshould beconsideredintheshapingofthefinalformofthepreneedcode,to wit: IsitICorSEC?UndertheSenateversionofthePreNeedCodeof2008, preneedcompanieswillstayunderthejurisdictionoftheSEC.Atone pointintime,theInsuranceCommission(IC)hasbeenconsideredforthe role of regulator of the preneed industry but in the end the SEC has beendeemedmoreappropriatefortherole.Someofthereasonscited forchoosingSECasregulatorare:a)SECisalreadyfamiliarwiththeway the preneed industry works; and b) SEC already has the resources to manage the industry as under the SRC, SEC can keep a portion of its revenues.Moreover,ICdoesnothavetheresourcesandtheproposed Code cannot provide the additional resources to IC. Besides, IC has to reorganizeitsstructureandcompensation. Despite the issues on organizational structure and compensation, the House version of the PreNeed Code bill is inclined to favor IC as regulator of the preneed industry. Recent developments, which have castdoubtsonthecapabilityoftheSECtoregulatetheindustry,ledto proposalstotransfertheregulatorypowersoftheSECoverpreneedto the IC as the latter seems to be more equipped in ensuring that the interests of plan holders are protected. The IC as regulator of the insuranceindustryisknowntobestringentinitsrulesandconservative inassessinginvestmentoptions. 8

Premiumcontributiontotrustfund.SB2077hasalsokepttheminimum trust fund equity requirement at 45 percent and 51 percent of the amount collected for life plans, and for pension and education plans, respectively.Inlightofthehugeerosioninthetrustfundvalueofpre needfirms,itishightimetoreviewthesaidcontributions.Todate,the SEC is already studying the possibility of increasing the trust fund contribution,whichshouldhavebeendonealongtimeago.Thecurrent scheduleisbasedonthepreneedrulessetin2001.Eightyearshave passed since then and the same breakdown and share is being followedandwillbeadoptedbythePreNeedCodeof2008. Itislikelythatovertimethe45percentto51percentallotmenttotrust fund from the premiums is no longer sufficient given the inflation, investmentenvironmentandexternaldevelopments.However,evenif theminimumdepositrequirementintothetrustfundisincreased, itstillwouldnotguaranteethefinancialsustainabilityoftheindustry asitlargelydependsonacontinuousflowofnewplanbuyersrather thanoninvestmentearningstobeabletopaythebenefitsoftheearly planholders.Giventhisviciouscycleofrollingoverthemoneyofplan holdersandtheuncertaininvestmentearningsduetotheriskyfinancial environment,amuchbiggerquestionneedtobeanswered:Isthepre needindustrystillviable? Independent trustee. SB 2077s provision disallowing an affiliate trust entitytoserveastrusteeofapreneedcompanyisawelcomechangeas it will erase doubts of possible collusion between the trustee and the preneed company. The imposition of criminal and administrative sanctionswillalsodiscourageviolatorsofthePreneedCode.Whilethe present preneed rules dictate that the trust fund must be established independently, some preneed firms managed to contract affiliate trustees(aspreneedfirmandtrustcompanybelongtothesameholding company). Among them is the Pacific Plans whose trustee is RCBC. Pacific Plans and RCBC both belong to the Yuchengco Group of Companies.ThesamecouldbesaidaboutBankofCommercewhohas acted as trustee for CAP. Both companies have Sobrepea affiliation. Others are Ayala Plans whose trustee is BPI; Philam Plans, Philam Savings;Cocolife,UCPB;andFirstUnion,UnionBank. Preneed insurance facility. An option worthy of consideration is a preneed insurance coverage facility that will assure preneed plan holdersthattheycanstillgetaguaranteedamount,ifnotthematurity valueoftheirplansincaseapreneedcompanyfilesdissolution.The burdenoffundingtheliquidityfacilitycanbesharedbythegovernment andthepreneedcompanies.Thisliquidityfacilitycanalsoevolveintoa lender of last resort to a preneed company suffering from a financial distress.Itsimpactongovernmentfinancesandthemoralhazardit mayposeshould,however,betakenintoconsideration. 9

The House version of the PreNeed Code has this similar scheme as it seekstoestablishabenefitfund,whichwillguaranteepaymentsincase a preneed firm collapses. Under the bill, the preneed company shall deposit in the benefit fund a portion of the installment payment it collectedunder apreneedplancontract.The useofthefundsshallbe for the sole benefit of plan holders and shall be approved by the regulatorybodybasedontheprovisionsoftheproposedmeasure.
Sources: ComplianceCalendar.(2008).SecuritiesandExchangeCommission.Dateaccessed:February2,2009 http://www.sec.gov.ph/preneed/2008%20compliance%20calendar.pdf. Bautista,Lilia,R.(2004)PreNeedandGovernmentPartnersinNationBuilding.(2004).Speechdeliveredatthe ThirdAnnualPreNeedConsciousnessWeekheldattheShangriLaHotel,MakationFebruary5,2004. SecuritiesandExchangeCommission.Dateaccessed:February9,2009 http://203.167.80.132/lrb/pdf/Speech%20of%20LRB%2005Feb04.pdf. Gobeleo,Diomedes.(2008).ReformingthePreNeedIndustry:AReview.CongressionalPlanningandBudget Department.DateAccessed:February23,2009 http://www.geocities.com/cpbo_hor/cpbdpublications.html#PolicyBrief GuidelinesontheManagementoftheTrustFundofPreNeedCorporations.(2007).DateAccessed:February18, 2009http://www.sec.gov.ph/circulars/cy,2007/secmemo04,s2007.pdf. MultiyearCapitalandTrustFundBuild(February25,2009).SecuritiesandExchangeCommission.Dateaccessed: March2,2009http://www.sec.gov.ph/circulars/cy,2009/secmemo01,s2009.pdf.pdf. NewRulesontheRegistrationandSaleofPreNeedPlansunderSection16oftheSecuritiesRegulationCode.(2001) Dateaccessed:February10,2009http://www.sec.gov.ph. PreNeedCorporationswith2009Dealer'sLicense.(2009).SecuritiesandExchangeCommission.Dateaccessed: February4,2009http://www.sec.gov.ph/preneed/PreNeed%20Directory%20(2009)%20 %20dealers%20jan2009.pdf. SecuritiesandExchangeCommission.(variousyears).Variousdatarequestandphoneinterviews. SenateofthePhilippines.(variousyears).TranscriptsoftheCommitteeHearingsonthePreNeedIndustry. SummaryofproceedingsonPreNeedCodeof2005.(2005).CommitteeonBanks,FinancialInstitutionsand CurrenciesjointwithCommitteeonTrade&Commerce. SummaryofproceedingsonPreNeedCodeof2008.(2007).CommitteeonBanks,FinancialInstitutionsand CurrenciesjointwithCommitteeonTrade&Commerce.

This Policy Brief was prepared by Irene Sanchez under the supervision of her Directors, and the overall guidance of their
DirectorGeneral.TheviewsandopinionsexpressedarethoseofSEPOanddonotnecessarilyreflectthoseoftheSenate,ofits leadership,orofitsindividualmembers.Forcommentsandsuggestions,pleaseemailusatsepo@senate.gov.ph.

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