As a showcase of the Securities and Exchange Commission’s resolve to regulate the troubled pre-need industry well, SEC chair Fe Barin told the senate hearing Monday that it had prohibited Prudentialife Plans Inc. from selling new pre-need plans since April 16.
Barin told the Senate Committee on Trade, which is conducting the hearings on the controversial retail financial industry, that Prudentialife failed to present an acceptable proposal to address its capital and trust fund deficiencies.
In September 2008, SEC records showed that Prudentialife has P14.16 billion in “trust funds,” or the current market value of its investments. This amount, however, was more than P5 billion short of the SEC-required P19.5 billion “reserve funds,” or the amount that pre-need companies should be aiming for after they have invested their clients’ money over a period of time.
On February 2, Prudentialife submitted a Multi-year Capital and Trust Fund Build-up plan, which the SEC rejected. The regulator stood its ground even after the company appealed.
In an en banc decision last April 17, the SEC commissioners revoked the company’s 2009 dealers’ license, or its permit to sell new plans.
The company, however, said they would continue to service and honor their obligations to current clients.
Barin said they rejected Prudentialife’s proposal because it did not meet SEC’s requirement.
The acceptable assets to plug the gap between the company’s trust fund and the reserve fund should be, among others, (a) income-generating real estate, and (b) unlisted shares that are not in any way related to the pre-need company.
In a statement, Prudentialife said, "The assets we offered are real estate properties that have good values but are not yet income-generating. Aside from this, we offered unlisted shares of profitable companies but are affiliates of our pre-need company.”
It confirmed that, “The SEC did not accept these assets for contribution to our trust fund and capital."
Previous lessons from the fall of industry giants, like College Assurance Plan (CAP) and Pacific Plans, in 2005 have led SEC to require that pre-need companies park their clients’ amortization payments only in safe investments.
CAP’s thunderous fall was mainly due to the decisions of the owners, the Sobrepenas, to invest the pre-need plan holders’ money in potentially high-yielding but very risky ventures. These included posh residential condominiums, high-end golf courses, the concession to operate Camp John Hay in Baguio, and the rights to operate the MRT rail company. When the beneficiaries of CAP’s educational plan holders were all set to enrol in school, the company could not come up with the cash to pay the tuition fees since the funds were still trapped in the non-earning ventures.
In the case of the Yuchengco-led Pacific Plans, a good part of the trust funds were invested in bonds issued by the investment arm of Rizal Commercial Banking Corp, which is part of the Yuchengco Group of Companies.
Prudentialife also has investments in real estate, including First Asia Realty Corporation, a part owner of SM Megamall. Its unit, Globe Asiatique, Inc. is a developer of various office, residential, and memorial properties.
The SEC and Prudentialife, however, did not specify which assets were included in the plan.
Prudentialife blamed the global economic crisis and the impact of the controversy surrounding the Legacy Group as culprits behind the pre-need sector's dilemma.
"The global economic crisis has affected a number of industries worldwide including the Philippine pre-need industry. The trust funds of the industry have not been earning their projected returns,” Prudentialife said in the statement.
According to its website, the company used to realize returns that averaged 16.8 percent in 2006 for the assets it parked in its trust fund. As of June 2008, the yields have plummeted to just 4.87 percent.
“Compounding the problem of the industry is the ongoing investigation of the Legacy fraud case. This has dragged down the confidence in our industry whose image has already been tarnished when major pre-need firms went down years ago," Prudentialife added.
The Legacy Group has three pre-need companies, which all closed in January. The syndicated estafa cases filed by bank regulator Bangko Sentral ng Pilipinas and state insurer Philippine Deposit Insurance Corporation have traced how the money of its 12 rural bank depositors and the pre-need clients ended up in companies controlled by businessman-turned-politician, Celso de los Angeles, Legacy’s founder.
The pre-need industry was already in the doldrums before Legacy hugged the headlines.
The Philippine Federation of Pre-Need Plan Companies admitted in January that, as of June 30, 2008, the gap between how much its 24 members have and should have set aside to cover future obligations to clients reached a staggering P46.83 billion.
They said this deficit continued to grow in the second half of 2008 as the US-led financial crisis shrank the market values of their investments.
The Federation, which had lobbied hard against stricter regulations and accounting standards in the past, said their members had three options: (a) raise new capital based on the SEC's multi-year funding scheme, (b) take an "orderly exit" from the industry and paying plan benefits as warranted, or (c) seek corporate rehabilitation.
Prudentialife was one of the two who chose the first option. The other was Cocoplans, Inc. SEC approved the plan forwarded by Cocoplans.
Some of the other 22 existing pre-need companies with trust fund and capital deficiencies have yet to reveal their choice. The deadline for the first option was extended to and eventually expired last April 15.
In the past, the SEC, upon the prodding of the Federation, gave pre-need companies considerable leeway in making up for their trust fund deficiencies.
Under the scrutiny of the media and legislators, the SEC cannot afford to be as lenient as before.
Barin and the other SEC officials disclosed their decision on Prudentialife's proposal before an audience of lawmakers and pre-need plan holders who have previously castigated the commission for being too soft on Legacy.
It did not help that Legacy owner Celso de los Angeles was a no-show at the senate hearing. The senators had ample time to grill SEC in the hope that the regulator turns out to be as guilty as the fraudsters in Legacy.
In earlier hearings, former SEC commissioner Jesus Martinez was alleged to have facilitated the approval of Legacy Consolidated’s dealers’ license at the time Martinez received “gifts”— a property and a vehicle—from Legacy.
Barin herself was dragged into the picture after it was reported that her husband obtained a sports utility vehicle from a Legacy executive. Senators called for her resignation, but she denied any wrongdoing.
This time, the SEC did not come empty-handed at the senate hearing. For naming Prudentialife and citing their recent decision, SEC seemed bent to show off that it is doing its job and has no sacred cows.
Prudentialife might as well be the sacrifice on the altar. It is one of the industry pioneers and has been around for 31 years. Its founder, Ambassador Francisco A. Alba, was the Philippine envoy to the Vatican from 2001 to 2003. What more, Alba was active in the Federation and has been vocal in issues hounding the industry.
As far as the pre-need industry is concerned, SEC tends to highlight the good rather than humiliate the bad. In February, it made public a list of pre-need companies that have voluntarily increased the portion of clients' funds they are setting aside for future obligations. Prudentialife was not in that list.
SEC’s current boldness is almost unprecedented. In the past, SEC commissioners tried an iron hand as they started to introduce reforms, but later backed off when they were prevailed upon by industry players.
One commissioner told abs-cbnnews.com/Newsbreak before that they feared that being too rigorous with the reforms might financially choke the pre-need companies, leading to their closures. The commissioners were concerned that more plan holders would end up holding the bag if and when the pre-need companies close shop.
SEC’s decision to tell the world of Prudentialife’s plight is a test of that long-held worry. -- with reports from Zen Hernandez, ABS-CBN News