aging risks: are filipinos sufficiently protected? · aging risks: are filipinos sufficiently...

Aging Risks: Are Filipinos

sufficiently protected?

REGULATION AND GOVERNANCE OF

PHILIPPINE PENSION FUNDS

Study Objective

To determine if there are sufficient

mechanisms in the regulation and

governance of the Philippine pension

funds to protect the interests of the

principal stakeholders of the funds –

the member contributors

Social Insurance

“programs that seek to mitigate income risks by

pooling resources and spreading risks across time and

classes. These are designed in such a way that

beneficiaries pay a premium over a given period of

time to cover or protect them from loss of income

and unemployment as a result of illness, injury,

disability, retrenchment, harvest failure, maternity, old

age, etc..”

NEDA, 2007

Replacement Rate: GSIS and SSS

Source: Pang-Rey, M. (2016)

Key Differences in Pension Design:

GSIS and SSS

GSIS SSS

Replacement rate Up to 90% of average

monthly salary in last 3

years of retirement

Up to 40% of “monthly

salary credit”- currently

max MSC is P16,000

Contribution rate 21% of monthly salary Up to 14% of monthly

salary

Retirement benefits Based on credited years

of service and average

salary in last 3 years of

employment

Based on credited years

of service and “monthly

salary credit”

PH

Pu

blic

Pe

nsi

on

Fu

nd

sSSS GSIS

Social Security Benefits Per RA 1161

1. Retirement

2. Death

3. Disability

4. Maternity

5. Sickness

6. Funeral

Per RA 8291

1. Separation

2. Retirement

3. Disability

4. Funeral benefit

5. Survivorship

6. Life Insurance

Type of Retirement Benefits

Plan

Defined benefits Defined benefits

Number of Members 33.56 million (registered employee,

self-employed and voluntary members as of

Nov 2015)

1.5 million (active members as of 31

Dec 2015)

Number of Pensioners 1.8 million (as of November 2015) 0.4 million (as of 31 December 2015)

Selected Financial Information (as of or for the year ended 31 December 2015)

Total Assets P444.4 billion P960 billion

Value of Social Insurance Fund P402.6 billion P865 billion

Total Contributions (SIF) P130.8 billion P83 billion

Total Benefits Paid (SIF) P111.5 billion P85 billion

Total Operating Expenses P8.85 billion P5.8 billion

Participation in the SSS

Source: Pang-Rey, M. (2016)

CAGR 3% 6% 7%

Active

Contri-

butors as % of Total

Employees

34%

34%

37%

37%

38%

Size of the PH Pre-Need Industry

Of which:

97% are

“life” plans

3% are

pension

plans

PH

Pu

blic

Pe

nsi

on

Fu

nd

s

Relevant Laws

Enabling Laws

RA 10149 GOCC Governance Act of 2011

to enable the State to “actively exercise its ownership

rights in GOCCs and to promote growth by ensuring

that operations are consistent with national

development policies and programs” (RA 10149, Sec. 2)

Classified SSS and GSIS as GOCCs, in particular,

Government Financial Institutions

Created the Governance Commission for GOCCs

(GCG), which was given authority to act as the agent

of the State in exercising ownership rights in GOCCs

Sp

ec

ific

“O

wn

ers

hip

” r

igh

ts

wh

ich

GC

G c

an

Exe

rcis

e

Investment of Social Insurance Funds

Principal criteria: safety/security, yield, liquidity

Policy re investment of fund in loans to real estate sector

For the SSS "xxx (e) in bonds, securities, promissory notes or other evidence of indebtedness

of agencies of the National Government or financial intermediaries to finance

housing loans of members; and in long‐term direct individual or group housing loans giving priority to the low‐income groups, up to a maximum of ninety percent (90%) of the appraised value of the properties to be mortgaged by the borrowers; xxx Provided, That not more than thirty five percent (35%) of the Investment Reserve Fund at any time shall be invested for housing purposes; xxx” (RA 8282 Sec. 26)

Investment of Insurance Funds

Policy re investment of fund in loans to real estate sector

For the GSIS

“ xxx (c) in direct housing loans to members and group housing projects

secured by first mortgage, giving priority to the low income groups and in short and medium term loans to members such as salary, policy,

educational, emergency stock purchase plan and other similar loans: Provided,

That no less than forty percent (40%) of the investible fund of the GSIS Social

Insurance Fund shall be invested for these purposes;

(d) in bonds, securities, promissory notes or other evidence of indebtedness of

educational or medical institutions to finance the construction, improvement and

maintenance of schools and hospitals; xxx” (RA 8291 Sec. 36)

The National Home Mortgage Finance Corporation (NHMFC) administered

the United Home Lending Program (UHLP) created by the Aquino

administration in 1988. The SSS, together with the GSIS and the Home

Development Mutual Fund, provided funds for home mortgages of its

members through UHLP. Loans released to NHMFC on various dates from

1988 through 1995 amounted to P30.075 billion.

On December 17, 2003, the SS Commission … approved the restructuring of

the P40.5 billion obligation of NHMFC to SSS. One of the conditions of the

restructuring agreement is the sale by NHMFC of its highly delinquent

portfolio. On May 18, 2004, said portfolio was successfully bidded (sic) out

and the SSS net share in the proceeds is P3.464 billion. This amount is

reflected in the accounts as a receivable from NHMFC.

- 2004 Financial Statements of the SSS (Note 11)

Restructuring of National Home Mortgage and Finance Corporation

(NHMFC) account

The GSIS Board of Trustees in its Resolution No. 89 dated March 31,

2011, approved the 100 per cent provision for impairment loss in 2010

for the NHMFC account, both for the outstanding balance of the

principal obligation and interest due to non-payment of the account for

the past seven years. Details are as follows:

Principal 6,214,907,610

Interest 1,669,353,075

Balance per books as at December 31, 2010 7,884,260,685

- GSIS 2011 Financial Statements (Note 6.3)

SSS Financial Statements

NHMFC Financial Statements

On the Proposed P2000 Across-the-

Board Increase

Estimated Returns on Monthly

Contributions

SSS GSIS

Beginning salary - P10,000/mo

If member retires at 65 and dies at 70 1.67% 3.42%

If member retires at 60 and dies at 70 4.04% 5.40%

Beginning salary - P28,000/mo

If member retires at 65 and dies at 70 1.40% 3.06%

If member retires at 60 and dies at 70 3.66% 5.26%

Quality of Financial Reporting

Non-disclosure of actuarial present value of promised benefits

Year of

Actuarial

Valuation

1999 2003 20072011

(Original)

2011

(Updated)

Unfunded

LiabilityNot reported Not reported P748.99 B P1.19 T P1.22 T

Year Fund

Will Last2015 2031 2039 2043 2042

As explained in Note 23, Unfunded Liability is “the difference between the present value of future

benefits and operating expenses vis-à-vis current assets and the present value of future contributions.”

Unfunded liability is not the “present value of promised retirement benefits” required to be disclosed

by PAS 26 para. 17.

Quality of Financial Reporting

Non-recognition of insurance liabilities

According to Note 2, the fund was established

“to provide a package of benefits for public

and private sector employees and their

dependents in the event of work-connected

contingencies such as sickness, injury,

disability or death.” (SSS 2014, p. 57)

Quality of Financial Reporting

Recognition of Members’ Contributions as

Revenue on a Cash, rather than Accrual, basis

Administrative and Operating Costs

Both the SSS and the GSIS are allowed by their

respective charters to incur up to 12 percent of revenues

for their operating expenses

Revenues are defined to include contributions of plan

participants to the pension funds

Administrative and Operating Costs

“Pension systems represent a

commitment between governments

and their populations. Thus, confidence

and trust are imperative for long-term

sustainability.” (Reilly, 2015)

Important Reforms

Significantly increase the participation of SSS and

GSIS members in the governing boards of the

institutions. Isolate the funds from political influence.

Revise the investment guidelines of the social security

funds to consider its principal mandate

Ensure that operating costs of the funds are capped

considering appropriate cost drivers

Improve the quality of financial reporting of the funds

Spearhead an intensive educational campaign on

retirement planning for Filipinos