SEC wants to approve trust fund withdrawals of pre-need firms

The Securities and Exchange Commission has proposed that any withdrawals from the trust funds and pre-need companies should have its consent to make sure that these funds are being used as intended.

A trust fund is a critical component mechanism designed to guarantee the capacity of pre-need plan companies to meet their future obligations to planholders.

The SEC said the proposal is part of measures intended to ensure proper trust fund management and to make trust funds readily available to planholders.

In order to ensure that only withdrawals authorized by the SEC rules will be allowed by trustee banks, the Commission proposed that after the trustee bank has processed the claims, the same shall be sent to the SEC for clearance.

The trustee should not release the claims unless SEC approval is given, an SEC official said.

However, the SEC official said that should the corporate watchdog fail to act within two days from receipt of request, the trustee bank shall deem that the request has been approved by the Commission.

The trustee can allow withdrawal for benefit claims, trustees’ fees and other minor repairs for the maintenance of the trust fund, the SEC official said, adding these proposals are still subject to the approval of the Bangko Sentral ng Pilipinas.

The central bank is currently investigating trust funds of pre-need companies being held by bank trustees to determine whether these firms had been making prudent investment decisions.

As of the end of 2001, the pre-need industry had an aggregate trust fund of P33 billion, of which 30.9 percent was used to buy government securities. Records also showed that 24 percent financed new business ventures and expansion while 20.3 percent was placed in property development.

According to the SEC, there is a need for strict government monitoring to ensure the protection of planholders. SEC said there should be a regular review and public disclosure of pre-need plan firms’ trust fund assets and their liability fund to make sure that they can fulfill their promises to planholders.

The SEC has urged the BSP to penalize trustee banks of pre-need companies which fail to monitor the level of investments infused by pre-need firms into their trust funds.

SEC chairman Lilia R. Bautista said earlier trustee banks should correctly monitor the investment decisions of pre-need firms and make sure they comply with the investment portfolio mix set by the SEC. The investment portfolio mix is intended to provide for liquidity and capital growth of pre-need plan companies.

Under the prescribed portfolio mix, real estate and equity investments are limited to 25 percent of the trust fund equity while direct loans are confined to five percent. On the other hand, investments in commercial papers are restricted to 15 percent. For government securities, pre-need companies are bound to invest a minimum of 10 percent.

Pre-need companies are required to deposit in a trust fund a minimum of 51 percent of their collection or a higher amount as may be determined by the actuary. Trust fund deficiencies may be attributed to low investment yields and the decline of the stock market.

Companies with real estate investment in the trust fund prior to 2000 and exceeding the 25 percent maximum limit have been directed to comply with the prescribed limit until the end of the year. Banks seem to have difficulties in complying because of the depressed real estate market and contractual obligations before the rules were adopted.

The firm’s trust fund is not handled by the firm but by a bank that makes the funds grow. If the investments are low, pre-need firms are required to put in more of their collection to the trust fund.

This trust fund liquidity requirement must be at least 10 percent of the total trust fund of the company.

The SEC requires pre-need plan firms to submit a trust fund valuation report not later than April 30 each year. The valuation is first done by the pre-need plan company actuary. Should there be any trust fund asset shortfall, the SEC will require the pre-need plan company to present its program of trust fund buildup.