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OECD/INPRS/KOREA Conference on PrivatePensions in Asia

October 24 –25, 2002, Seoul, Korea

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• Introduction

• Private Pension Schemes

• Pre-Need Pension Plans

• Reforms

• Future Directions

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• Four-tiered system– Social assistance scheme– Mandatory defined benefit scheme (GSIS,

SSS)– Mandatory Retirement Pay/GSIS/

Pag-ibig Fund– Voluntary tier (Pre-Need Pension Plans)

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• Mandatory Retirement Law (RA 7641)• Personal Pensions Plans:

– Pre-Need Pension Plans (RA 8799/ PNRules)

– Endowment Insurance (PD 612)

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• Historical Background of Pre-Need Industry– 1966

• The first pre-need company was establishedoffering memorial services

– 1977• Pre-need pension plans were introduced

– 1980• Education plans were offered to the public

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Pre-Need Sales: 1994 - 2001

0

10

20

30

40

50

1994 1995 1996 1997 1998 1999 2000 2001

year

amount in

billion p

esos

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Pre-Need Sales for Pension Plans: 1994 - 2001

0

5

10

15

20

25

1994 1995 1996 1997 1998 1999 2000 2001

year

amo

un

t in

bill

ion

pes

os

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• Pre-Need Pension Plans– Payment of contract price averages five years– Maturities of the pre-need pension plans are either upon

reaching a certain age of the planholder or over a periodof years after full payment

– Pension benefits may be paid out in lump sum orinstallments or both at the option of the planholder

– To ensure payment of benefits, pre-need companies arerequired to contribute to a Trust Fund which are fundedfrom their collections.

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0

5

10

15

20

25

30

35

40

45

1996 1997 1998 1999 2000 2001

No. of Pre-NeedPension PlanCompanies

412001

412000

421999

361998

321997

391996

No. of Pre-NeedPension PlanCompanies

Year

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13,297.02001

10,600.02000

8,715.31999

6,753.01998

4,763.71997

3,613.51996

Amount (inmillion Pesos)

Year

Total Trust Fund Equitiesfrom 1996 to 2001

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5.0 659,449.6Other Investments

5.7 752,395.8Receivables and other Assets

14.1 1,875,477.6Real Estate

13.7 1,817,558.7Total Equities

0.3 35,001.0Mutual Fund

0.4 58,219.8Common Trust Fund

4.3 565,163.8Loans

0.6 81,079.7Private Bonds

1.3 178,382.4Commercial Papers/Promissory Notes

1.4 184,916.0Time Deposit

50.1 6,659,841.0Government Securities

2.6 344,157.0Foreign Account

0.6 85,343.0Cash on hand/bank

100.013,296,985.0Total

% of TotalAmount (in thousand Pesos)Investment Instrument

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• Under the supervision and regulation of theSecurities and Exchange Commission

• Section 16 of the Securities Regulation Codeprovides that no person shall sell or offer forsale to the public any pre-need plan except inaccordance with rules and regulations whichthe Commission shall prescribe.

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• Pre-need company has to register its pre-needpension plans with the Commission

• Pre-need company selling its own plan shallobtain a license as dealer of pre-need plansfrom the Commission

• Provisions of the plan contract and all of itsbenefits and guarantees are considered in thepricing as contained in the actuarial feasibilitystudy.

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• Actuarial Valuation Report (AVR) is submittedto the SEC.

• The computed actuarial reserve as determinedby a SEC accredited actuary as of date ofvaluation is compared with the trust fund todetermine the adequacy of the funding level ofthe pension plan.

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• Pre-need company must deposit at least 51% ofthe total amount collected to the Trust Fund

• Trust funds must be established by the pre-need company with a trust entity.

• Trustees shall exercise due diligence for theprotection of the planholders guided by soundinvestment principles.

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• Trustee shall not use the Trust Fund to investin or extend any loan or credit accommodationto the Pre-Need Company

• Investments in both real estate and equitiesmust not exceed twenty-five percent (25%) ofthe total trust fund equity.

• In both cases, investment in a single asset mustnot exceed ten percent (10%) of the allowablemaximum limit.

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• Pre-need companies are required to submitreports on trust fund financial condition.

Type of Report1.) Audited financial statement2.) Actuarial Valuation Report3.) Consolidated Trust Fund Statements4.) Sales Report5.) Collection Report

FrequencyAnnualAnnualQuarterlyMonthlyMonthly

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• The role of the external auditor is to render anopinion if the financial statement is prepared inaccordance with generally accepted accountingprinciples and standards.

• The Commission has mandated the strictadherence to the Pre-Need Uniform Chart ofAccounts (PNUCA) to allow comparability andbetter appreciation of the over-all financialstanding of the industry.

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• The audited annual financial statements mustbe submitted within one hundred five (105)days after the end of its fiscal year.

• The Actuarial Reserve Liabilities presented inthe audited financial statements should be theamount shown in the Actuarial ValuationReport duly certified by an accredited actuary.

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• An Information Brochure must be filed andshall not be used if the information containedtherein is outdated or does not accuratelyreflect the terms of the Plan or the financialability of the Pre-Need Company through theuse of Trust Fund Assets.

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• Contributions to pre-need pension plans are notdeductible from taxable income.

• Investment yields of the trust fund are subject to taxrates from a high of 20% on interest from any currencybank deposit, commercial papers, governmentsecurities and other fixed income instruments to a lowof 5% final tax of not over P100,000 or 10% final tax ofamount in excess of P100,000 for capital gains from thesale of shares of stock not traded in the stock exchange.

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• The sale of pre-need pension plans is subject tothe 10% value-added tax which is usuallypassed on the planholders.

• Pension benefits like social security benefitsand retirement gratuities are exempt fromincome tax.

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Regulatory Initiatives

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• The Commission promulgated the New Ruleson Registration and Sale of Pre-Need Plansunder Section 16 of the SRC on August 2001.

• The said rules took effect last September 21,2001 but in the transitory section of the Rules,it provided for varied transition periods for fullimplementation of the same.

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• Required an increase in the minimum paid-upcapital for pre-need companies as a buffer for thetrust fund performance fluctuation and to weedout fly by night operations

• Required strict compliance with Pre-Need UniformChart of Accounts for a more accurate accountingand reporting of financial condition of pre-needcompanies

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• Required the issuer or general agent engaging thesalesman’s services to certify under oath that thesalesman has been duly trained pursuant to a trainingprogram approved by the Commission and hassuccessfully passed an examination given by the issueror general agent and approved by the Commission orthe Federation.

• Required pre-need companies to put up a complaintsdesk to handle complaints and answer concerns ofplanholders

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• Required pre-need companies to limit payment ofcommissions to 10% of the contract price of the plans

• Increased accountabilities have been imposed on theaccountants and actuaries

• Issued three Memo Circulars which are expected toprovide sufficient guidelines to actuaries in coming upwith reasonable and attainable actuarial assumptionsand to ensure the integrity of the valuation of reserves

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• All pre-need companies have been enjoined tosubmit their manual of good corporategovernance.

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• Pre-Need Plans Code of 2002– The passage of a legislative measure would further

strengthen the industry in terms of decisivelyaddressing solvency and fairness to planholdersissues with a tighter grip that only legislation maylay down

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• Personal Equity and Retirement Account(PERA) Act of 2002– It calls for the establishment of voluntary individual

retirement accounts that would receive favorabletax treatment in order to encourage more privatesaving for retirement.

– It will induce capital-market innovation throughcompetition among financial institutions trying toattract savers to open PERAs.

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• Government must pass legislation to offerpreferential tax arrangements to the industryand its clients and to promote the developmentof the capital market by encouraging savingsand trading of financial instruments.

• The regulator should work on more prudentialregulatory measures that will ensureplanholder protection

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• The pre-need industry must closely monitor thecompliance of its constituents with goodcorporate governance principles.

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