In a letter to Sen. Edgardo Angara, chairman of the Senate Committee on Banks, Financial Institutions and Currencies, Martinez said the Pre-need Uniform Chart of Accountants (PNUCA) that the SEC had formulated may not be an effective way of ensuring the true financial health of pre-need companies.
The PNUCA requires the setting up of an expense in the income statement of a pre-need company and a liability account called Actuarial Reserve Liability (ARL) in its balance sheet. The ARL represents the accrued net liabilities of the pre-need company to its planholders as determined and certified by an actuary accredited by the SEC.
Martinez said the PNUCA was basically patterned after the model designed for insurance companies.
"The PNUCA was the result of work done by SEC lawyers and accountants, which, if written reports are to be believed, was prompted by a shadowy group with other business persuasions," Martinez said.
Martinez said the setting up of the ARL in the pre-need company’s balance sheet is contrary to International Accounting Standards (IAS) 39 that requires the concurrence of three conditions for an expense and a liability to be reflected in the income statement and balance sheet of the pre-need company.
Among these conditions are: It has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.
Martinez said a reliable estimate cannot be made on pre-need future liabilities, especially for traditional plans, since investment yield, inflation and withdrawal rates are volatile and too subjective to be reliably estimated. Using a one-time fixed rate in computing the present value of obligations to be incurred over a span of 30 years is utterly unreasonable, he said.
"The only rationale on why the SEC has insisted on the use of the ARL is the mistaken notion that the pre-need products such as education and pension plans are like insurance. This is utterly wrong. Hence, pre-need companies are required to establish a reserve that will cover all claims immediately in the event of a catastrophe. But this can never happen with a pre-need product inasmuch as availments and utilization have a definite maturity in the future," Martinez said.
Martinez pointed out that the beneficiaries of traditional educational plans will never go to college at the same time and place while fixed value plans will not mature simultaneously. "In pre-need plans, benefit claim payments can be anticipated long before they occur," he said.
Martinez said IAS 39 is a sufficient gauge in determining the true financial position of pre-need companies.
Under IAS 39, financial liability actually increases over time as maturity of the pre-need product approaches. The increment is, in turn, based on the effective interest rate that exactly discounts the estimated future cashflows through the expected life of the financial instrument.
"If pre-need companies are to adhere to IAS 39, the need to put up actual assets as a reserve to cover projected liabilities over the next 30 years will no longer be necessary. Since the growth rate in the liability side is already definite, the challenge that faces pre-need companies is to ensure that the trust fund assets are enhanced at a rate that is greater than the internal rate of return of the liability," Martinez said.