Preneed companies take hit from crisis

PLANHOLDERS should brace for hard times ahead, as preneed companies admitted hefty losses due to the global financial crisis.

The Philippine Federation of Pre-need Plan Companies Inc. (PFPPCI) said the industry is realizing huge losses due to the mark-to-market rule of the Securities and Exchange Commission (SEC).

The mark-to-market rule is an accounting method wherein companies book gains or losses based on current market prices of the financial instruments they invested in. Preneed companies are required to set up trust funds to finance future obligations that would arise once the plans they sold to the public mature.

In a letter to the SEC, the PFPPCI said trust funds of member firms’ plans registered huge “unrealized” erosion in value in recent months because of the economic slowdown.

“This made us realize and accept that unless and until the onerous required yields on our old business are resolved and properly addressed, there could be no certain future for our industry,” PFPPCI said.

The problem stemmed from plans that were approved in the past based on assumptions that were prudent at that time, but had since been eroded by the global financial crisis.

“Our problem is the growing obligations on plans sold in the past, which were priced per actuarial feasibility studies that were then viable,” the group said.

“These plans assumed interest yields of up to 16 percent per annum when key interest rates and Treasury bill rates were 20 percent per annum,” it said.

The letter was signed by officials of Permanent Plans Inc., Pru­dentialife Plans Inc., Pacific Plans Inc., Sun Life Financial, Trusteeship Plans Inc., Loyola Plans Consolidated Inc., Himlayang Pilipino Plans Inc., Eternal Plans Inc., Paz Memorial Services Inc., Ideal Pension Plans Corp., Cocoplans Inc. and Ayala Plans Inc.

In a separate position paper, the group said putting up capital and injecting new funds into the trust funds is no longer reasonable given the present economic environment.

“The erosion of value is so huge and raising capital is no longer a doable and fair solution to embrace. Because of the negative returns of some trust funds, the variances not only run in the millions but in the billions,” PFPPCI said.

If SEC will be firm about the required capital boost, PFPPCI said chances are the majority of its members will refuse to do so, and opt to stop selling and just attempt to service the plans.

“It will only aggravate the problem, as it will also be the death knell of the industry. We sincerely believe that the closure of the industry will not result to the protection of planholders,” the federation said.

The SEC had said it is looking into the need to tweak the mark-to-market rule of booking the “fair price” of bonds and equities bought by investment houses, mutual funds and pre-need firms’ trust funds amid the global financial crisis. –Chino S. Leyco, Reporter, Manila Times