Pre-need firms mull guarantee bond to cover trust fund deficits

In line with efforts to strengthen its liquidity position, the Philippine Federation of Pre-need Plan Companies Inc. is planning to issue a guarantee bond to be used by its members to cover trust fund deficiencies.

To complement the bonds, the federation will establish a liquity pool privately funded by its members and multilateral agencies to ensure the protection of pre-need planholders.

The bonds shall be issued to a special trust, supervised by a collegial body formed by the federation, which in turn is regulated by the Securities Exchange Commission and the Office of the Insurance Commission.

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.

If eligible for suretyship, the entire industry deficit of approximately P5 billion as of 2001 would cost P14.4 million in premiums.

The bond will be governed by three contracts — the principal contract which provides for the benefits plans; the surety bond which states the terms of the principal contract plus the amount of guarantee and pledged collateral; and the indemnity contract.

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Trust fund contributions, however, can only be withdrawn for benefits and to finance operating requirements.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 pre-need plan companies to meet their future obligations to planholders.

Pre-need 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 a decline of the stock market.

The 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 said there should be a regular review and public disclosure of pre-need plan firms’ trust fund assets and their liability fund to ensure that they can fulfill their promises to planholders.

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.

The trust fund annual valuation is done in order to determine the total trust fund’s present value — which should be sufficient to settle all the obligations of the entire fund in the event these simultaneously become payable today because of catastrophies or cash withdrawal runs.

Pre-need companies are firms issuing plans to provide payment or performance of future services or monetary considerations at the time of actual need. Pre-need plans include life, education and pension plans.