Regulators and regulations: The case of the pre-need industry

They’re supposed to have the future needs of the 3.8 million plan holders covered- be it, education, life, or pension. Invest your money in pre-need plans and you would no longer worry about your or your family’s future.

But recently, pre-need companies were not able to deliver their obligations—again. College Assurance Plans (CAP) collapsed in 2005 because it was not able to keep up with the deregulated tuition fees. Tuition fees were increasing at 17 percent annually, while sales significantly declined in 2005 by 62 percent versus the previous year.

Early this year, the Federation of Pre-Need Companies asked Securities and Exchange Commission (SEC) for more elbow room for them to survive the effects of the global financial crisis. Days before Christmas last year, thirteen rural banks and three pre-need firms of Legacy Group (Legacy Consolidated Plans Inc., Scholarship Plan Phils., Inc., and All Asia Plans Corporation of Legacy Group) closed down.
 
When the pre-need industry collapses, who’s got it covered? Who makes sure that the dreams invested in every plan would not just go down the drain?

Foreseen failure

The Federation of Pre-Need Companies claim that it was asking for SEC’s help as early as August last year, when economic bubbles were just starting to burst. SEC admitted that the Legacy Group had made them aware of its financial woes three years ago. The economy was in a bad shape around that time, the peso-dollar exchange rate at an average was at Php55.09: US$1 in 2005 and at Php51.32:US$1 in 2006 .

Last year, a policy paper conducted by the Congressional Planning and Budget Department of Congress entitled Reforming the Pre-Need Industry: A Review points its finger at SEC’s poor regulations for worsening the effects of the deregulation of tuition fees in 1992 and the bad investment returns caused by the Asian Financial Crisis of 1997.

Too little too late?

According to the paper SEC “as a regulatory body…could have pre-empted some of the problems, such as the defects of the traditional or open-ended educational plans, the inappropriate accounting practices and the possible collusion between the trustee banks and the PNCs”.

It took four months before SEC answered The Federation’s SOS. The federation is asking to give them more flexibility on their investments because injection of more funds this time would just not work. Who after all is willing to shell-out when immediate survival is far more crucial than securing the future?

It seems that the government is willing to. At least some legislators are. Deputy Speaker Lorelei Fajardo confirmed that talks of a bail-out ala AIG is in “serious consideration”. Sen. Juan Miguel Zubiri approves of a bail-out long as they are bailing out the plan holders and not the companies.

Socioeconomic Planning Sec. Ralph Recto begs to differ. He asks where would the government get the money and why would tax payers who had no hand in the collapse, and who have things to worry on their own shoulder the expenses?

But why would the government pay special attention to this industry considering that there are other needs it has to address, like how our economy would absorb the 15,600 who have lost their jobs since December last year?

Aside from the fact that Pre-Need companies are the “guardians of the interest of the public”, Pre-Need Companies invested the most in the government, that’s why.

In 2006, 60.8 percent or about Php57.28 billion of the Trust Fund Investments went to government securities. Equities was a far second with only a quarter of that amount with about Php14.71 billion.

Miguel Vasquez, the federation’s president clarified that they are not asking for a bail-out (but it is welcome), they are asking for reform in regulation and more time to increase their capital.

An extension was granted but the reform is yet to be done. People Enabling Parents (PEP), the organization of CAP plan holders and Trade Union of the Philippines (TUCP) both are calling for the immediate passing of a Pre-Need Code.

Right regulators, right regulations

As the senate probes unfold, if only the SEC could have acted sooner, if they have learned from the CAP collapse at all, cases like that of the Legacy Group would have been prevented.

The probes on the Legacy Group anomaly led by Senate President Juan Ponce Enrile, Trade and Commerce Committee Chair Sen. Manuel Roxas II, and Committee on Banks, Financial Institutions and Currencies Chair Sen. Francis Escudero recommend that the industry be entrusted to the Insurance Commission (IC) because it is fit to do the job.

The only thing that’s prevented the transfer when it was proposed in 2005 was that Pre-Need plans, being transferable and negotiable, are securities and not insurance. But history that repeated itself tells us to favor IC for its performance over SEC for its jurisdiction.

SB 2077 or the Pre-Need Code of 2008 had passed its third reading in Senate on 04 December 2008. Among its major provisions is the transfer of regulatory powers from SEC to IC, just like what the senators are proposing.

The bill requires a Pre-Need Company to have a minimum paid-up capital of at least 100 million peso paid-up for capital for those offering three types of plan (education, life, and pension) to act as a solid base according to the bill’s principal author Sen. Edgardo Angara, just like what Sec. Ralph Recto pointed that IC has been doing with Insurance firms.

The also bill requires that there would be a Trust fund for every type of plan which would come from the plan holders regular contribution. With this, a failed investment would not tamper with the other Trust Funds. Though the Humpty Dumpty’s of the entire collapse offered education plans, the reputation of the entire industry was tarnished and caused a decline in sales of the rest of the plan holders. From 2000 up to 2007, Education Plans went down by 183,835 and Pension Plans went down by 194,100. Though Life Plans sales were up by 24,884, it is but a fraction of the combined pull of the two. Sales went down with the public’s trust.

The public trust can be restored if there would be reforms. With the right regulators and the right regulations have been identified, the only thing that’s missing is the enactment of the code.

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