SEC approves guarantee facility for pre-need companies

The Securities and Exchange Commission (SEC) has approved the Philippine Federation of Pre-need Plan Companies Inc.’s proposal to issue an insurance bond that can be tapped by its members to cover any trust fund deficiencies.

Emil Aquino, head of the SEC’s Non-Traditional Securities and Instruments Department, said the proposed guarantee facility can be considered as an acceptable funding arrangement that could allow pre-need companies to continue with their business for a limited period while they look for fresh fund infusion and/or seek improvements in the performance of the trust fund.

"The putting up of the bond tends to add third party credibility to the financial state of the affected firms," Aquino said.

Aquino said the no-collateral requirement where the trust fund has sufficient liquid assets to meet obligations maturing within the period the suretyship is in force, provides the pre-need firm the required leeway to make up for its shortfall without eroding the trust fund level.

He, however, noted that the proposed fees for the said arrangement appears to be comparatively high considering the short-term coverage that the facility offers.

Aquino said the Federation sould consider a mechanism that may serve its longer term requirements like the Securities Investor Protection Fund (SIPF). Like securities member-firms of SIPF, pre-need companies may pay monthly assessments equivalent to a cetain percentage of the volume of business or sales transactions.

The fund, he said, will take responsibility for paying benefits to current and future planholders when a pre-need company folds up or with under-funded trust fund or requiring momentary financial assistance in the form of loans.

"A grant from a multilateral organization may be looked upon for purposes of securing adequate seed money for a strong kickstart for the fund," Aquino said.

To complement the bonds to be issued, the Federation will establish a liquity pool privately funded by its members and multilateral agencies to further ensure the protection of planholders.

Aquino has also expressed concern on the proposal to tap liquid trust fund assets of pre-need companies for purposes of setting up the pool. "The trust funds of pre-need companies are in fact the primary planholder protection funds that ensure payment of benefit obligations of the individual firms," he said.

Companies that can avail of the bonds are those which can demonstrate ampleness of liquid resources and those with sound financial condition and profitable operating results.

To enhance eligibility for suretyship and reduce bonding cost, the Federation said other pre-need companies or principal affiliates may guarantee performance of the principal’s obligation to sureties. Pre-need firms of like size may enter into alliances whereby co-guarantee arrangements for suretyships would be available.

The Federation has been actively seeking ways to improve the industry’s liquidity and to provide an alternative cost-efficient means of complying with the SEC’s requirements for the maintenance of trust fund balances.

Trust fund deficits are required by the SEC to be remedied through additional trust fund contributions.

Trust fund contributions, however, can only be withdrawn for benefits and to finance operating requirements. If a deficit reverses, contributions made for it can only be applied to future mandatory contributions, unnecessarily tying up the company for cost of borrowed funds.

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

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

The trust fund is not handled by the firm but by a bank that makes the funds grow. If the investments are low, preneed 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.