Pre-need firms to tap First Metro for liquidity fund

The Philippine Federation of Pre-need Plan Companies has tapped First Metro Investment Corp., – the investment banking arm of Metropolitan Bank and Trust Co – as financial advisor for its planned liquidity fund to address the financial problems of its members.

First Metro was tasked with raising funds from multilateral agencies for the proposed liquidity fund.

The creation of the liquidity fund is in response to the government’s call for the adoption of more safety nets for the protection of the investing public.

This effort is a unique private sector initiative working hand-in-hand with the Securities and Exchange Commission (SEC) to bolster the pre-need industry, whose objective is to serve the best interests of their planholders.

Apart from the liquidity fund, the group is considering issuing an insurance bond that can be tapped by its members to cover any trust fund deficiencies.

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 SEC 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Trust fund contributions, however, can only be withdrawn for benefits and to finance operating requirements.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. – Zinnia dela Peña