SEC issues rules on mgm’t of pre-need firms’ trust funds

The Securities and Exchange Commission (SEC) has issued new guidelines on the establishment and management of the trust funds of pre-need companies to ensure adequate protection of planholders.

The SEC said the guidelines are intended to ensure the liquidity of the trust fund and guarantee the delivery of the benefits provided for under the contract.

Based on the new rules, no less than 10 percent of the net value of the trust fund assets per type of plan shall be set aside as a liquidity reserve to cover the benefits due to the planholder during the ensuing year unless the actuary determines otherwise.

In view of this, pre-need firms are required to submit to the trustee a list of fully paid plans maturing during the year on or before the 15th day of the first month of the fiscal company’s fiscal year.

Pre-need firms are also required to submit to the SEC a five-year cash flow projection on how to fund these benefit obligations from its liquid trust fund assets on an annual basis on or before the end of the first month of the fiscal year.

The liquidity reserve fund is composed of assets in the trust fund that are easily convertible to cash. Instruments that qualify as investments for the liquidity reserve fund include short-term government securities, peso savings or time deposits, unit investment trust fund, local mutual funds and listed equities.

A monthly report of the trust fund shall be submitted by the trustee to the trustor and the SEC within 20 days after the end of each month. This should include a balance sheet, income statement, return on investment computation schedule, schedule of earning assets, investment activity report, and trustee’s certificate on trust fund balance.

The trust fund must be established independently with the trust department of a trust company, bank or investment house doing business in the Philippines and authorized to perform trust and other fiduciary functions by the central bank, the SEC said.

No trust entity shall administer a trust fund established by a pre-need company which is a subsidiary or affiliate of such trust entity.

The trust agreement shall be submitted to the SEC for approval and contain the following provisions: the manner in which the trust fund is to be operated; investment powers of the trustee with respect to trust deposits; auditing and settlement of accounts of the trustee with respect to the fund; valuation standards and disclosure requirements of the trust fund, basis upon which the fund may be terminated, provisions for withdrawal of the fund; and provision that the trustee shall submit to the power of the SEC to examine and verify the trust fund.

The investment of the trust funds of a pre-need company in fixed-income securities shall not be less than 10 percent of the trust fund equity.

The maximum exposure to commercial papers shall not exceed 15 percent of the total trust fund equity while the exposure to each commercial paper issuer shall not exceed 10 percent of the allocated amount.

Investments in equities shall be limited to preferred or common stocks listed on the main board of the Philippine Stock Exchange. These investments shall include stocks issued by companies that are financially stable, actively traded and possess good prospects of growth in major business activity. The amount to be allocated for this purpose shall not exceed 25 percent of the total trust fund while the investment in any particular issue shall not exceed 10 percent of the allocated amount.

Investments in real estate, on the other hand, should not exceed 10 percent of the total trust fund. These investments shall be limited to income generating property located in strategic areas of cities.

The property shall be appraised every three years by a licensed real estate appraiser and accredited by the SEC to reflect the increase or decrease in the value of the property.

Pre-need firms may also invest in instruments issued by foreign institutions provided the transaction is done locally and that the value of investment shall not exceed 15 percent of the total trust fund equity.

Among these instruments include those issued by the government of any foreign country with a credit rating that is at least at par with the rating of the Republic of the Philippines’ bonds, and mutual funds with positive fund performance for the past three years.