Pre-need industry in distress

When the concept of pre-need plans was introduced to the market, it seemed like every man’s dream come true. Especially so when those who bought a plan, say an educational plan, saw that it worked beautifully. The concept was not difficult to sell because of the old Filipino practice of paluwagan which was pretty much akin to putting away savings in a piggy bank. It was an easy way of forcing one’s self to save to secure future needs.

Pre-need products basically consisted of educational plans (which were either open-ended or fixed-value), memorial plans and pension plans. Open-ended or the so-called traditional plans were more expensive than the fixed-value plans. Under this arrangement, the pre-need company would pay the tuition upon maturity of the plan, no matter the cost. There were even plans which carried a commitment to return the total amount invested by a plan holder.

The fixed-value plans, on the other hand, paid out a fixed amount consisting of the capital invested plus interest which was higher than those offered by banks for savings accounts.

The mechanism was simple. When a person buys a pre-need plan, he pays by installments, making it easy on the pocket. The moneys paid by plan holders are then put in a trust fund which the pre-need company, through a trustee bank, invests in various investment vehicles and securities. The pre-need companies would then earn returns or profits from such investments enabling them to pay out the plans as they mature, leaving enough profit for the companies. Before the year 1992—the year when tuition increases were deregulated—the increase in fees ranged only between 5 and 10 percent on a yearly basis. After the deregulation in 1992, schools increased tuition anywhere from 15 to 28 percent per annum, sometimes even more. While the average cost of a four-year college education in 1991 was P96,000, it ballooned to an average of P720,000 in 2004 (Diomedes Goboleo, Reforming the Pre-need Industry: A review). This threw off-track the capacity of pre-need companies to earn enough income to pay out the plans. Their business projections were, after all, based on assumptions that tuitions would remain at a yearly increment of only 5 to 10 percent. Because of this, the trust funds allocated for the open-ended traditional plans dwindled and became insufficient to meet the companies’ growing obligation to the maturing educational plans. The pre-need industry took a further beating from 1997 to 1998 when a financial crisis hit most economies, especially in Southeast Asia. And then came the global financial meltdown, threatening to keep most economies in recession for years to come. This time, the entire pre-need industry is on the verge of collapse.

But these are not the only reasons for the collapse of the industry. Many players, in fact, contributed to the industry’s downfall. Some tried to paint a rosy picture of their financial standing to be able to continue to sell. They manipulated their accounting records to show that they had more assets than liabilities. Some colluded with their trustee banks to invest portions of the trust funds in certain businesses that did not bring in returns. These companies then started to renege on their obligations to their plan holders. The distrust of people in the pre-need industry then set in. The sales of pre-need plans took a sharp fall, aggravating the entire pre-need companies’ inability to meet their obligations.

To say the least, this is an utterly sorry situation. There are many families who have had to take out loans to send their children to school because their educational plans failed them. Some have had to defer the enrollment of their children.

So what is maverick businessman Noel Oñate trying to prove by buying a distressed pre-need company such as Pacific Plans Inc. at this time when the industry is falling apart? I asked this question myself when Oñate engaged my service to put up Abundance Providers Investments Corp. to purchase all the shares of stock of Grepalife Holdings in Pacific Plans Inc. Mr. Oñate’s company thus now effectively owns and controls all the shares of stock in Pacific Plans. His company stepped into the shoes of Grepalife and assumed all the obligations that this company had in Pacific Plans.

My question was answered as I came to know Oñate more. He is driven and has business savvy. He virtually built his huge estate out of nothing except sheer hard work and skill as an investment banker, his sister-in-law, Carlotta Uy Montinola, another stockholder and director in the company, told me. Many of my friends who knew Oñate, and upon learning that I was lawyering for him, called me up to tell me that he was an excellent businessman with unbelievable capacity for creating successes out of unlikely opportunities. He founded Asian Spirit, that airline which pioneered flights in missionary routes such as Caticlan and Batanes, where other airlines then dared not go. From a fleet of two small planes, he transformed Asian Spirit into an international airline. After selling Asian Spirit last year, Oñate is back. This time, he is out to try his acumen in the pre-need industry. He tells me he does not promise the moon and the stars. But one thing is certain, he says. He is not going into the industry to fail. That is not an option for him.

He sees opportunity in adversity, he says. There is nothing to lose in giving him that chance. I guess I am staking my own name, too, speaking for him. — Atty. Rita Linda V. Jimeno, Manila Standard Today

E-mail: ritalindaj@gmail.com Web: www.jimenolaw.com.ph