Pre-need association sounds financial SOS

THE pre-need industry will show a steep deficit for 2008, with liabilities surpassing trust funds, after investment earnings took a beating from the global financial meltdown.

The deficit, which stood at P46.8 billion in June, was a reversal of the P6.8-billion surplus posted in 2007, and was likely to be even bigger for the entire year, said Jose Alberto Alba, vice president of the Federation of Philippine Pre-Need Plan Companies Inc.

The widening deficit calls into question the ability of some pre-need companies to meet their obligations to plan holders.

Pre-need firms with enough funds could weather the crisis, but others with more limited resources could fold up, Alba said.

He said the industry’s trust funds, managed by banks, were not generating the 12-percent assumed return on investment because all industries were suffering from the global slowdown.

Government bonds aside, trust funds are mostly invested in corporate bonds, the stock market and real estate, all of which have been hit hard by the financial crisis.

An industry source said some pre-need companies were cutting their losses.

“Because of the deficit, many companies are thinking of various options, most of them unwinding the plans and paying all plan holders whether claiming this year or years later. The idea is no plan holder should be left out in getting a piece of the limited pie,” the source said.

Plan holders of one troubled pre-need company, Pacific Plans Inc., said they would go to court to stop the sale of the company to Abundance Providers Investments Corp., a company controlled by Noel Oñate, the former chairman of Asian Spirit.

The president of the coalition of Pacific Plans customers said they were surprised by news of the P250-million sale, saying the court hearing the company’s rehabilitation plan was not informed.

The Yuchengco Group-owned Pacific Plans went into rehabilitation in 2005.

“We find it suspicious. They [the Yuchengcos] just want to escape from their obligations to plan holders,” said Philip Piccio, president of the Parents Enabling Parents Coalition.

Despite the crisis, the pre-need industry showed some signs of recovery toward the close of 2008, when sales for the first 10 months rose 7 percent to 204,227 policies.

But sales actually fell 20.8 percent in peso terms to P12.7 billion from P16 billion, while initial collections decreased by 26.49 percent.

Data from the Securities and Exchange Commission show that total pre-need sales were boosted by strong performance of life plans, which posted a 60-percent increase in sales to 138,364 plans.

Sales of educational plans dropped 56 percent to 9,290 plans, while pension plans fell 32 percent to 56,573 policies.

To save the industry, the Philippine Federation of Pre-Need Plan Companies Inc. last week asked the Securities and Exchange Commission to implement short and long-term solutions to relieve “huge unrealized erosions” in the trust funds of their plans.

Among the short-term solutions that the group proposed: relief from mark-to-market losses, a five-year provision in funding trust fund variance, allowing a pre-need company to fund the variance with non-cash assets, such as real estate and unlisted shares of companies that have positive track record, and a five-year leeway in funding shareholder’s equity in case losses will erode capital base.

The group claims that the unrealized loss in the future “will generate positive returns” as the market corrected over time.

Even if pre-need companies are given a relief from mark-to-market losses, a number of them will still register trust fund variances.

The group says its members should be given five years to cover the trust fund variance. They should also be allowed to finance the variance with non-cash assets such as real estate and the unlisted shares of companies with a positive track record.

The long-term proposals were to ring-fence the old basket of plans that are commercially impractical, to allow individual companies to submit their own pre-need financial programs to address the ring-fenced plans, to allow a company to continue selling while addressing ring-fenced plans, and to review the valuation standard for the trust fund assets.

The group says it must be allowed to determine the block of plans that were priced based on returns that are no longer attainable, and to manage these plans differently from the commercially viable plans.

After the plans to be ring-fenced are identified, individual companies are to submit their own pre-need financial programs to address those plans.

The group also asked the SEC to allow them to continue selling while addressing ring-fenced plans, claiming that margins earned from selling new plans could help address the problem of their older plans.

To further convince the SEC, the group claims that in Taiwan, companies are allowed to continue to operate even if they do not cover variances immediately. They claim that those variances are covered over time by future earnings from more profitable plans.

Of the 14 members of the group, only the representative from Philamlife Plans Inc. did not sign the position paper submitted to the commission.

Those who signed were representatives from Permanent Plans, Pacific Plans, Trusteeship Plans, Himlayang Pilipino Plans, Paz Memorial Services, Cocoplans, Prudentialife Plans, Sun Life Financial, Loyola Plans Consolidated, Eternal Plans, Ideal Pension Plans, and Ayala Plans.–Jenniffer B. Austria, Manila Standard Today