In a previous presidency, two pension funds administered by the government were used to augment private capital employed to raid a private universal bank. What resulted was an aberration in the history of mergers and acquisitions. A smaller bank, previously a retail savings and loan operation gobbled up one of the five largest universal banks in the country.
Under Gloria Arroyo, employing similar gambits, the government attempted to raid a conglomerate whose media affiliations posed problems for Arroyo’s incumbency. Never mind that the targeted institution was a public utility critical to the economy and where political infestation might be toxic. Never mind still that in both instances of capital intervention, share values did not simply distort, they changed the risk profiles of the pensions involved.
At the business school where I handle the finance and credit management programs there is an ironic truism bandied about as an absurdity and as an introduction to credit. When asked as to who is at the losing end of a hundred peso debt between a creditor and a debtor the usual answer is that the borrower has the larger burden. However, when asked as to who loses when the amount is in the hundreds of millions, ironically, the lender has the larger liability. Such bias underlies debtor relief and protection under Chapter Eleven and most bankruptcy laws.
The severity of the truism has been demonstrated repeatedly where huge creditors fall from non-collectible debt. Perhaps the best example in recent times is the failure of Fannie Mae and Freddie Mac and other liquidity providers and guarantee agencies in the face of recent U.S. sub-prime mortgage defaults.
In the Philippines debt deficiency judgments are often biased against lenders. Creditor giants can be toppled, their coffers fleeced and pillaged.
Of the funds vulnerable to poaching, pensions are probably the most victimized. Innate characteristics render it susceptible. Using a watershed example from the middle of the last century spanning over fifty years and arraying details against inherent pension vulnerabilities we will illustrate a classic modus confronting pension funds.
Albeit an ancient case where both memory and documentation fade with the passing of time, it quickly turns relevant given the modus operandi employed and the reality that corrective processes and statutory reliefs not only plod excruciatingly slow but can be waylaid. In this example, one pension stands to lose beyond Php 1 billion – an amount the victimized pensioners cannot risk to folly and fraud.
By its very nature, pension funds are mandated to allot a portion of its portfolio to financing the debts of members. Unfortunately this captive debtor market presents relatively higher risks.
Aggravating the charge, pensions are obligated to offer concessionary terms often mismatched with a debtors risk profile. Had the choices been wider and the market more competitive, risk premiums would have compensated. In a pension’s portfolio, they don’t. This vulnerability is remedied only by belated foreclosures.
In our benchmark case, in the 1950’s, one pension had lent over Php 3 million against mortgaged parcels of land that were to be developed into a residential subdivision. These were eventually foreclosed when the debtor failed to repay. The pension then liquidated the mortgages and its owners had changed several times over in the course of time.
Another vulnerability of pensions is that its funds are like gold-gilded beacons that attract all sorts. Moreover, because they are pensions and await pay-outs based on the actuarials of members, they are intrinsically long-term and relatively dormant.
That’s an additional risk faced by pensions. The time element and the dormancy render these financial sanctuaries and repositories vulnerable to controversial claims. More when these are saddled with documentation and records often archived in equally dormant morgues and crypts.
Desecrating sanctuaries is not uncommon. It simply takes an army of smart-ass lawyers to comprise a raiding party. In our case, decades after the liquidation of securities to pay for the debt, an individual claiming to be a widow of the original debtor’s son appears with a Php 1 billion claim. The widow claimed that part of the assets that secured the loan were never mortgaged to the pension but was included in the liquidation after mortgages were foreclosed. She demanded restitution.
The sudden appearance of widows is classic and pension history and lore is populated with these, compelling us to view resurrected claimants as another form of vulnerability.
The pension replied that the claimed lots were indeed never part of the mortgage, having been excluded in the mother title, and sold to third parties, not by the pension fund but by the original debtor outside of the loan transaction. In fact 60% of the claimed lots were sold by the borrower prior to the loan and thus could not have formed part of the mortgage. Records and documents show ownership in the names of third-party purchasers and not under the pension’s assets. A pension cannot pay what it never owned.
It is unfortunate that pension funds bear inherent defenselessness. It’s bad enough that state pensions are used for political ends. Academic vulnerabilities however turn even more tragic when the pension involved might be our Government Service and Insurance System, and that the funds exposed to the controversial claims of widows and their attorneys are those of the already victimized public school teachers, elderly and disabled pensioners and lowly-paid government employees.
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Dean,
Employee pension funds sometimes buy into their own company. Are these funds then being used by the owners/management of the company to increase their control or are these being used by outside investors who want to take over effective control of a company or are these just wise investments or all of the above?
Dear MB,
All of the above for the private pension funds. The pensions that I was writing about are the SSS and the GSIS. Those do not reinvest in themselves but are used by the powers that be for ends that do not fall under the “normal” investment modes. For instance, in acquiring PCIBank by a smaller bandk, BDO, the latter’s funds were augmented by both SSS and GSIS.
Dean
In the advanced economies of the West entitlement taxes (social security) are not invested in private marekts. That is a dangerous and more often corrupt use by states to promote crony capitalism.
Dean anytime you want to hear of the serious probelms between the state run institutions and the pribvate banks aI could refer you to someon who has a case study of the unholy alliance between private banks the SSS and the corrupt executive. Inlcuded in this are guys who are now high offcials in the Courts in this country.
Pension funds in the Philippines are a mockery. My mother was a
30 years in service as a public school teacher. She receives
500 pesos monthly pension from GSIS.
Dear Mariano,
And I can bet that she does not only NOT receive it on time, but if she tried to borrow against it, she would be denied, or be given the run-around.
And yet officers of the GSIS can and are granted theirs in record time.
Dean
Perhaps the best example in recent times is the failure of Fannie Mae and Freddie Mac and other liquidity providers and guarantee agencies in the face of recent U.S. sub-prime mortgage defaults.
But Dean, the two GSEs mentioned have all but been forgotten in the still ongoing crisis in the US. We have not been hearing anything from both in terms of the burdens they should be carrying and the onerous responsibilities for the crisis that they should be owning up to. The current administration may continue to make life harder for the banks and financial brokerages in terms of more fees and regulations, but the two GSEs appear to have all been forgotten, more like “exonerated” of their colossal failures.
There will really be hell yo pay when these thieves step down…
Well, Dean,
You caught me at a bad moment, as I rather figure the main ethic in the Philippines is to get away with anything you can. It permeates from the Palace to the farthest reaches of the farthest village, where they are packing the dynamite for the fishing.
Until you deal with the root cause, you are writing into the wind. The church has failed at it. Until there is a vibrant Civil Liberties Union, this is just another shrug for the well-worn shoulders.
Joe
There is everything faulty on the GSIS law.
Apparently, under its principle of premium-based pension scheme, one simply gets back what he pays to GSIS by way of remitted premiums, assuming these were remitted by the agency where one works.
Hardly a healthy notion of what a state pension fund should be as done in other countries.
A subject very close to my heart. Really gets my goat. Thanks for writing about, Dean.
Dear Dean,
I am a Retirement Consulting Actuary here in the US. We also handle Governmental Plans.
Digging around, let’s put the SSS’s Benefit Payouts and Employee/Employer contributions into perspective.
lets say an employee’s average salary per month is P12,000. The total (employee and employer) contribution to SSS is P1,248 per month. Lets say Net of Admin and Investment Fee, only P1,100 out of the P1,248 goes to the Fund. Lets say the Actuarial Investment Rate is 7%. In 20 years, the total contribution will accrue to around P550,000. Study shows that a 65 year old retiree will survive for another 15 years. I am being conservative with 15 years. Therefore, the payout for retirees should be at least P4,950 per month.
I this example, the retiree will get a max of
1. P300 + (0.20 x 12,000) + (0.02 x 10 x 12,000) = P3,900
2. (0.40 x 12,000) = P4,800
3. P2,000 for 20 years of credited service
Therefore, your max monthly retirement benefit is P4,800. I don’t know if the retirement benefit is tax exempt.
That is a P150 gain per month for the SSS or P380,000 for the duration of the Employees life.
Therefore they can take more risk. Benefit Payouts are long term but it does not stay dormant. Actuaries and Investment Professionals are there to mitigate both systematic and investment risks.
As I look in to the SSS’s Portfolio a staggering 43% is invested in the Government Sectors and 38% goes into risky investments such as loans. That is very alarming. I don’t know who is the Actuary for SSS but he needs to talk to the investment guys so they can figure out a balanced portfolio and not loaded with RISKS!!! While the Annual Reports boast 4 consecutive years of surplus, it is masked because of the positive investment gain from the sale of properties and stakes from Equitable PCI Bank and SMB. That is an impressive 12% Net Return for the 2008 year where Pension Plans with Diversified Portfolios were losing between 20% to 35%. I don’t know what their Current Liabilities are. However, I can tell you this. The Fund is deteriorating fast. SSS’s ratio of assets to benefit payments is only 4 and that is very frightening even for a Fund with perpetual contributions.
All these information are from http://www.sss.gov.ph
- Roleen: the Frustrated Pinoy Actuary