The Education Act of 1992 is often referred to as the main reason of the collapse of the pre-need industry. The Act deregulated the education industry and the 15% capped tuition fee increase was removed. As a result, educational institutions increased their tuition fees tremendously.
Ten years after the Education Act of 1992 was enacted, the cost of a four year educational plan increased by 1200 percent. The yield on investments by the pre-need companies cannot cope up with the tuition fee increases. Consequently, pre-need companies incurred deficiency in their trust fund.
5. Independent Trustee
Some of the pre-need companies' trustee were affiliates. Pacific Plans' trustee is RCBC, both are under the Yuchengco Group of Companies. CAP's trustee is Bank of Commerce, both have Sobrepeña affiliation. Ayala Plans trustee is BPI, both under Ayala Corporation, Philam Plans trsustee is Philam Savings. Cocolife trustee is UCPB; and First Union's trustee is Union Bank. There is a possibility that a collusion between these two related companies may occur.
Excerpts from Congressional Planning and Budget Department House of Representatives:
Collusion between pre-need companies and their affiliates could result in possible diversion of the trust fund into business ventures other than the intended investment specified by the SEC.
In 2005, Senator Serge Osmena, during committee hearings, mentioned about CAP and PPI impropriety in handling their trust fund. Specifically, he pointed to the questionable investment of CAP in its affiliates company such as the Fil-Estate Management, Inc (FEMA) and PPI appointment of Rizal commercial Banking Corporation (RCBC) as its trustee bank. Likewise, Atty. Maricel Lopez, counsel for CAP planholders accused CAP’s executives of diverting P25 billion of its trust funds to its affiliated corporations (Camp John Hay Development Corporation, Metro Railway Transit and Fil-Estate Company).
As a result, CAP had incurred P1 billion loss in bad investment in FEMA alone, a holding company of the Sobrepeña family, which also controls CAP. Moreover, CAP engaged the trust fund in a 14 wrong mix of investments from related parties at questionable prices. On the other hand, PPI and its trustee bank, RCBC, both owned by the Yuchengco Group of Companies (YGC), have interlocking officers. While PPI is in financial distress, the YGC has earned a whopping 1055% ROI on its P165 million investment in just 8 years.
Solution
1. Stop Open Ended Plan
When tuition fee skyrocketed after The Education Act of 2002 was passed, yields on investments cannot cope up with the increase in tuition fees. Forecasting the pre-need's maturing obligations in the future became difficult. An open ended plan requires the pre-need company to pay the tuition fee charged by schools regardless of cost.
Before the Education Act of 2002, the maximum tuition fee increase is 15%, can you imagine the increase when the education sector is deregulated? The increase of tuition fees for ten years since 2002 was 1,200%! Now, the pre-need companies needs to find a way to compensate this increase in tuition fees which was not factored anyway in their initial investment programs.
Stock market offers the highest yield on any investment. It is also the riskiest. The average return of the stock market for 20 years is 14% compounded. If a pre-need company went to the stock market to cover the increase in tuition fees, it is not enough.
A fixed value educational plan on the other hand will sway other prospective clients into doing their own investment plan to cover their children's education in the future. However, majority of the working Filipinos have little technical knowledge on investments. Dipping in this new territory will be challenging for them.
I am doing my own educational plan for my daughter through stock market. Once she reaches college, she'll have enough to pay for her tuition fees and other expenses.
Thus, fixed value plan still offers significant value to prospective clients if pre-need companies will just explain how their monthly payments compounded into ten percent can result into significant value in the future and cover the majority of the tuition fees.
2. Independent Trustee
As mentioned above, there could be a possibility that a collusion between affiliate companies may happen if the pre-need company and trustee are related. In order to avoid this, the regulator must strictly implement the policy of having an independent trustee.
3. Sound Investment Policies
What is a sound investment policy in the first place? Risks must be assessed and considered in investment decision. The Asian financial crisis in 1997 reduced some of the pre-need companies' trust fund value considerably. I believe that you should not invest more than 25% of the fund in stock market because of the heightened risks associated on it. The portfolio must be a mix of various investments which should include real estate, stocks, government bonds, corporate loans, various projects.
4. Pre-need Insurance
Similar to a bank whose deposits are insured to certain extent, a portion of the premiums paid by planholders must be insured. This is to ensure that plan holders who typically belongs to the lower income bracket of our society are sure to get at least a portion of their hard earned money.
5. Strong Regulatory Implementation
According to the Senate Economic Planning Office, one of the major reasons of the pre-need industry's collapse is the lax monitoring of SEC and its failure to act decisively on a troubled pre-need company.
WEAKNESS:
Manpower
Diversification and expansion.
Money
Investment of its funds to unrelated business.
Method
Capitalized on its track record and continued to offer pre-need educational plans and other insurance products.
Environment
With the passage of the Educational Act of 1992 deregulating tuition fees, the company faces skyrocketing college costs.
I. INTRODUCTION
It was not very far in the past, when the pre-need industry's development was soaring. One organization after alternate sprouts like mushroom to exploit the fame of the pre-need arrangements in the Philippines. Today, it is no more the case as even pioneers of the business became penniless.
College Assurance Plan spearheaded the instructive arrangement in 1980. It was a name to be figured with in the matter of giving tertiary or school instruction, a loved resource which Filipino folks would dependably stress among their youngsters. The organization spearheaded a pre-need arrangement that ensures backing to folks when their kids venture upon the entries of schools and colleges for a school instruction.
Amid the decade of 1980s and the distance to the 1990s, there was no issue with what the organization offered and guaranteed its arrangement holders, and indeed, College Assurance Plan was industry pioneer in its part profiting by its reputation and being the spearheading organization. College Assurance Plan, Inc. set solid footing in the business which helped business for pre-need arrangements prompting the passage of different firms now contending with CAP.
As a background, CAP was incorporated on February 14, 1980 with Atty. Enrique A. Sobrepeña, Jr., James Marsh Thompson, Rafael E. Evangelista, Dr. Ernesto M. Espaldon and Amb. Romulo M. Espaldon as the incorporators to engage as the first pre-need educational plan company in the Philippines. From an initial paid-up capital of P570,000.00 and an authorized capital stock of P10.0 million in 1980, it now has an authorized capital stock of P300.0 million with a subscribed portion of P157.0 million and a paid-up capital of P127.0 million. Since its incorporation, the company had registered P40.0 billion worth of plans with currently over 125,000 availing plans and 290,000 fully paid but not yet availing. There are 164,000 actively paying plan holders. By June 2003, CAP had assisted 54,856 graduates and is continuing to assist 97,771 scholars. CAP has already paid P8.8 billion in tuition fees as of May 2003 and by late 2004, CAP has paid over P11.3 billion with 84,490 scholars graduated. A. Statement of the Problem
B. Definition of Terms
Pre-need Industry
Pre-need Plan - according to the Securities Regulations Code of 2000, are contracts which provide for the performance of future services or payment of future monetary considerations at the time of actual need.
Educational Plan - seeks to cover the college education of a beneficiary
C. Importance of the Problem
D. Scope and Limitation E. Significance of the Study F. Summary of Conclusion and Recommendation
II. THE PRE-NEED INDUSTRY A. List of Major Players and Competitors B. Critical Success Factors C. The Industry’s Regulators
Security and Exchange Commission
Philippine Federation of Pre‐Need Plan Companies
Insurance Commission
Under the Senate version of the Pre‐Need Code of 2008, pre‐need companies will stay under the jurisdiction of the SEC. At one point in time, the Insurance Commission (IC) has been considered for the role of regulator of the pre‐need industry but in the end the SEC has been deemed more appropriate for the role. Some of the reasons cited for choosing SEC as regulator are: a) SEC is already familiar with the way the pre‐need industry works; and b) SEC already has the resources to manage the industry as under the SRC, SEC can keep a portion of its revenues. Moreover, IC does not have the resources and the proposed Code cannot provide the additional resources to IC. Besides, IC has to reorganize its structure and compensation. Despite the issues on organizational structure and compensation, the House version of the Pre‐Need Code bill is inclined to favor IC as regulator of the pre‐need industry. Recent developments, which have cast doubts on the capability of the SEC to regulate the industry, led to proposals to transfer the regulatory powers of the SEC over pre‐need to the IC as the latter seems to be more equipped in ensuring that the interests of plan holders are protected. The IC as regulator of the insurance industry is known to be stringent in its rules and conservative in assessing investment options.
D. Relevant Statutes and Laws
The powers of the SEC
Section 16 of RA 8799 or the Securities Regulation Code vested the SEC with regulatory powers over the pre‐need companies. It authorized the
SEC to prescribe rules and regulations governing the registration and sale of pre‐need plans. Some of these important rules are the following: * A minimum paid‐up capital of PhP100 million as a buffer for trust fund performance fluctuation; * A minimum trust fund equity requirement of not less than 45 percent of the amount collected for life plans and 51 percent for pension and education plans. For installment payments, the minimum limits of the deposit contribution to the trust fund shall be in accordance to a schedule (Table 4). Should the SEC discover a deficiency in the trust fund, it shall give notice to the pre‐need company, and require it to make additional deposits within 30 days. The SEC may also demand for a higher deposit as determined by the actuary; * An investment portfolio mix for trust funds. To ensure that risks to the trust fund are managed, the fund shall observe a certain investment mix (Table 5); * Liquidity reserve4 requirement of not less than 10 percent of the net value of the trust fund assets per type of plan. Loans, treasury notes or bills, Central Bank Certificates of Indebtedness, repurchase agreements, savings or time deposits with government‐ owned banks or commercial banks, and investments in fixed income instruments shall qualify as investments for the Liquidity
Reserve Fund; * A trustee who will exercise due diligence for the protection of plan holders, and who will have the exclusive management and control over the funds, including the required liquidity reserve fund. The trustee must be established independently with the trust department of a trust company, bank or investment house doing business in the Philippines; * Strict compliance with the Pre‐Need Uniform Chart of Accounts
(PNUCA) for a more accurate accounting and reporting of financial condition of pre‐need companies; * A limit to the payment of commissions up to 10 percent of the contract price of the plans; and * Reportorial requirements such as the monthly, quarterly and annual publication of financial condition and trust fund statements, among others.
Should the SEC find that a pre‐need company has violated any of the said Pre‐Need Rules, has engaged in fraudulent transactions or does not conduct its business in accordance with the law, or is insolvent, the SEC has the power to cancel the pre‐need company’s registration and permit to sell new plans.
The Pre‐Need Code of 2008
A Pre‐Need Code for the Philippines’ pre‐need industry has been proposed as early as 1987. Since then, the measure has been re‐filed and deliberated. To date, the Senate version of the Pre‐Need Code
(Senate Bill No. 2077) authored by Senators Mar Roxas, Edgardo
Angara and Loren Legarda has already been passed on Third Reading but until now its counterpart legislation in the House of
Representatives is still pending.
Senate Bill No. 2077 or the proposed Pre‐Need Code of 2008 seeks to establish a regulatory framework to protect the plan holders and promote a healthy pre‐need industry. SB 2077 is essentially a consolidation of the existing rules and regulations of the SEC. A number of new rules, however, are introduced: * An affiliate trust entity should no longer be allowed to serve as trustee of a pre‐need company. * Liquidity reserve requirement will be increased from 10 percent to
15 percent. * Investment of directors and officers should not be in excess of
PhP5 million in any business venture where the pre‐need company’s trust fund has investment or financial interest. * Required actuarial reports shall be duly certified by an independent SEC‐accredited actuary. Under the present pre‐need rules, it is only optional on the part of the SEC to refer the actuarial reports for verifications to an independent actuary. * The maximum term for direct loans to corporations will increase to four years, instead of two as in the existing pre‐need rules. * The amount of trust fund invested in equities will be increased from 25 percent to 30 percent. * The maximum term of loans to corporations, one of the investment options of trust fund, will be four years, instead of two years as in the existing Pre‐Need Rules.
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* The amount to be invested in equities shall not exceed 30 percent, instead of 25 percent as in the present Pre‐Need Rules. * There will be a range of administrative and criminal sanctions which are severe enough to discourage abuses and malpractices. * Under the Code, if the SEC finds that a pre‐need company is in a state of continuing liability or unwillingness to comply with the
Code, a conservator will be appointed at any time before, or after the suspension or revocation of its license. The conservator, who may be another pre‐need company or any competent person or corporation, will take charge of the assets, liabilities and management of company. * Insolvency proceedings of pre‐need companies shall be lodged with the Commission. No pre‐need company shall be allowed t o file directly to courts for rehabilitation or liquidation. Likewise, no restraining order or injunction shall be issued by the court unless the SEC acted in bad faith. * The pre‐need companies can declare dividends provided that: (a)
100 percent of the capital stock is intact; (b) there is a sufficient amount to pay all net losses reported or in case of settlement, to pay all the liabilities for expenses and taxes; and (c) the trust fund shall remain unimpaired.
Actuarial Reserve Liability
Pre‐Need Uniform Chart of Accounts - The PNUCA gave a more accurate picture of the financial condition of the firms as it shifted the accounting method from accrual to mark‐to‐market where profits and losses are recorded based on current market prices of the instruments in which the pre‐need firms invested in.
III. CORPORATE ANALYSIS A. The Company History and Timeline of Significant Event
1980 - The CAP Family of Companies began the birth of its mother company - College Assurance Plan.
1982 - Former Justice Secretary and Solicitor General Silvestre Bello III has been elected as the new independent director for the College Assurance Plan, Phil. Inc (CAP), comprehensive Annuity Plans and Pension Corp. (CAPPension) and CAP Life Insurance Corp. (CAPLife). The announcement was made by Ambassador and former Solicitor General Raul I. Goco.
1988 - College Assurance Plan ( CAP ) was established as a non-stock, non-secretarian educational foundation. * CAP College engages in education, research and related activities utilizing the non-traditional or non-formal as well as formal delivery system of instruction and grants degrees for programs recognized by the Commission on Higher Education (CHED). * Distance Education it was patterned after the "open university" concept of education which is already well-established and widely accepted in more advanced countries of Europe, Australia,Canada, the United States and Asia. * CAP College has developed new innovations to continuously improve its instructional delivery system. It has integrated new technological advancements that may be able to enhance the current system.
1989 - CAP College School for the Deaf was established giving hope to deaf high school graduates who are looking forward to college education that will prepare them to become productive members of Philippines society.
1990 - CAP Health joined to the Health Maintenance Organization, Inc. Industry in the Philippines to give insurance welfare of every Filipino to secure them.
1992 - CAP College and Pension is increased of their trust fund for over 1.9 billions as of this year * Cap College continued sale of open-ended plan despite the deregulation of tuition Education Act of 1992 which saw the deregulation of tuition fees.
1994 - CAP and other pre-need companies enjoyed enormous sucess, with sales growing 127 percent
October 18,1993 - Financial crisis that caused trust fund investment to have lower interest yields, inappropriate accounting practices, collusion among pre-need companies and their affiliates.
1997 - RELI was established primarily as the arm of the CAP Family of Companies for extending financial assistance to qualified clients of CAP under the lending investors program. Its article of Incorporation and By-Laws was approved by the Securities and Exchange Commission.
2004 - CAP’s dealer’s license was suspended in 2004.
B. The Profile of Management and Principals C. CAMELS Assessment D. CAR Assessment
IV. ANALYSIS OF THE PROBLEM A. Description of the Problem/Crisis
A number of factors have contributed to the deterioration of the pre‐ need industry. The Education Act of 1992, which allowed for the deregulation of tuition and miscellaneous fees, is often cited as the primary reason the pre‐need industry started to break down. Prior to the enactment of the said law, tuition fee increases were capped at 15 percent. This made it easier for actuaries to predict the pre‐need firms’ future liabilities even if some of them were offering the generously open‐ended or traditional educational plans. This type of plans requires pre‐need firms to pay the tuition charged by schools regardless of the amount, as opposed to the fixed‐value educational plans whose benefits are well‐defined.
With the deregulation policy, tuition fees shot up tremendously. A study conducted by the PFPPCI revealed that 10 years after the Education Act of 1992 was implemented, the cost of a four‐year traditional educational plan increased 12 times from PhP20,000 to PhP240,000 (CPBD, 2008). Whether the government considered the fate of the pre‐need industry when it crafted the said policy is uncertain. What is clear is that several years after its implementation, the pre‐need companies who were marketing the traditional educational plans saw themselves hard put in covering their maturing obligations. Some of them paid just a portion of the promised amount while the others were forced to close shop. Even those who were offering the fixed value plans were not spared. While not as adversely affected, they also suffered from the general loss of consumer confidence in the pre‐need firms.
Poor management and unsound investment decisions made by some pre‐need companies exacerbated the problem. In an attempt to cover their shortfalls, some ventured into high‐return but equally high‐risk investments. This was the case for CAP, which placed its trust fund in equities and highly speculative ventures like the development of Camp John Hay, Fil‐Estate and the Metro Rail Transit (MRT). When the Asian financial crisis broke out and the equity and real estate markets buckled, CAP’s trust funds further diminished. That these businesses turned out to be its affiliates did not help improve CAP’s image to the public who were then already suspicious of possible collusion among pre‐need companies and their affiliate corporations.
B. Timeline of the Problem C. The Impact of the Problem on: 1. Corporate Viability 2. Market and Clientele 3. Overall Industry
