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Pre-need
Industry needs no Coddling The media exposure that the College Assurance Plan (CAP) recently has been receiving underscores the need for government to speed up the passage of a governing code that would guide the pre-need industry and protect the millions of plan holders who have invested in it. No doubt, the pre-need industry continues to be - despite its teething pains - a successful model retail financial product unique to the country. There have been abuses, and as such regulatory reforms have to be instituted and erring pre-need companies need not be coddled. Remove conflicts of interest A serious look at the reported conflict of interest situations by a number of pre-need companies should be the priority. Certain rules and standards must be put in place to reduce or eliminate any suspicion of conflict of interest and thereby prevent abuses on the use of the trust fund. Offhand, in the absence of a pre-need code though, the industry is starting to act on this - and other glaring - weaknesses. Last year, CAP reportedly sold its 15 percent stake in the Fil-Estate holding firm originally bought in 1998 for about P2 billion. The Securities and Exchange Commission (SEC) had prodded CAP to dissociate its funds from the holding firm because it is not listed, and therefore would have been more difficult to monitor. CAP also sold its 13.5 percent stake in the Bank of Commerce, which is a trustee bank, in exchange for about a billion pesos worth of Systems Technology Institute (STI) gift checks. While the sale covered by STI's Gift of Knowledge certificates does not boost CAP's liquidity, it helps ease the pressure of the humongous actuarial reserve liability (ARL) dilemma. In the pre-need industry, the ARL is the estimated total amount of payment that a pre-need company will have to pay in future for plans - either tuition or burial - that it solicited. The extent of this future liability is influenced by factors like interest rates, inflation rates, tuition fee increases, mortuary rate hikes, among others. By the way, aside from CAP, the Yuchengco's own pre-need company, Pacific Plans, reportedly also makes use of RCBC - a Yuchengco controlled bank - as its trustee. Boost trust fund position The industry also needs to raise the required minimum trust fund contributions to 25 percent of the first 20 percent of payments collected and 75 percent of remaining payments. Its immediate implementation will address the industry-wide problem of increasing trust fund deficits. For CAP though, which is already hobbled by a cash flow problem, a white knight that would infuse $100 million to address its liquidity problem seems to be the best solution. At the moment, CAP's reliance on its existing investments may not be sufficient to alleviate its cash flow problems. Out of CAP's P8.5 billion in trust fund assets, more than a third is invested in MRT bonds that were issued to raise funds and pay off the railway firm's angry creditors. The Metro Rail Transit Corp., by the way, is controlled by a consortium led by CAP's owners, Fil-Estate Corp. Some 31 percent of the trust fund or almost P2.7 billion is in real estate investments that include Canyon Woods, Tagaytay Forest Estates, the Nasugbu Harbor Town and some Naic, Cavite properties. While some bright signs have recently been glimpsed in the property market, the above recoverable value may be debatable. There is also the P2.26 billion - representing more than 26 percent of the trust fund - in shares of stocks of listed companies as well as non-listed affiliates. Disposal of these shares in a still unstable stock market environment may not help tide over the distressed pre-need company's cash flow problem yet, but this may come in handy in future. Improve quality of governance There is an urgent need to intensify monitoring of pre-need firms' performance, profitability, actuarial reserve and trust fund compliance. To enhance the quality and level of governance, the pre-need industry may have to introduce a fit-and-proper test for managers, directors and shareholders, similar to what is being undertaken in the banking industry. Distraught CAP plan holders are complaining that the SEC is keeping the public in the dark instead of painting an accurate picture of the problem and coming up with a sustainable solution. I don't think that telling the real score on the industry problem could worsen the anguish of an already aggravated industry and its clients. The problem that had dragged for years is getting worse, and I think that pre-need customers would feel more assured if the regulator, the SEC, would give any non-compliant pre-need company the whacking that it deserves rather than be seen as a mother coddling a spoiled brat. More so, if the brat is the biggest of the lot. Taxes, corruption and BIR on TV "Isyung Kalakalan at iba pa" on IBC News (4:30 pm and 10:30 pm, Monday to Friday) ends today the discussion of issues related to taxes, corruption and the Bureau of Internal Revenue. The 10-point program of GMA definitely requires substantial funding that the government at present does not possess. Additional revenues must be realized either out of better collection of current taxes due or the imposition of new or higher taxes. What areas of the existing tax administration system require overhauling to improve collection efficiency? What new taxes can be imposed without necessarily affecting the overburdened consuming public? Watch it. "Breaking Barriers" with Senate President Frank Drilon "Breaking Barriers" on IBC (11 p.m. every Wednesday) will feature Senate President Frank Drilon on Wednesday, 21st July 2004. Join us break barriers to gain a better understanding of the issues that confront the Senate as we discuss with Senator Drilon the financial crisis and the crisis of confidence that the nation is facing today. Are new taxes imminent? What more can the legislative body do to eradicate or reduce corruption, the root cause of the crisis of confidence engulfing the business sector? Watch it. Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reygamboa@linkedge.biz. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.
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