Is pre-need business model washed up?

There was a time when we proudly pointed out that the pre-need industry was a novel Filipino invention. It addressed a market need, made education attainable to the masses and made money for the entrepreneurs who sold the plans.

The industry was lightly regulated by government, if it was regulated at all. Even now, after more than a dozen pre-need companies have gone under, our Congress has failed to pass a law that would govern the operations of the pre-need industry. From what I hear, even the law that is now pending reconciliation by both chambers of Congress is badly diluted. Any protection the pending legislation will give may prove illusory.

Because the industry was allowed to do as it pleased, greed eventually destroyed it. A failed industry leader was investing its funds in companies owned by the same family that owned the pre-need firm. When the related company suffered a downturn, it affected the pre-need firm’s ability to pay its plan holders. The rest of the story we all know and would rather not hear about again.

I consider myself lucky because the pre-need company I chose broke up towards the last two years of my youngest child’s college years. I still managed to get something out of my contributions even if I doubt if I can recover my funds after 10 years as provided for under the plan. If I know then what I know now about pre-need and about investing, I would have just invested the money I intended for my children’s education myself.

The way I see it, there is something basically wrong with the business model of the pre-need industry. Pre-need firms are investing only 45 to 51 percent of plan-holder contributions. For every P100,000 paid by plan-holders, only P45,000 to P51,000 is actually put to work in a trust fund. The balance is used to pay for the commissions of the selling agent and to cover the pre-need provider’s general corporate operations, including the compensation and bonuses.

Anyone who has experience investing must surely know how difficult it is to invest P45,000 safely and at the same time make it grow 15 to 18 percent per annum, which is the average (trust fund) target growth rate assumed by industry players.

Sen. Mar Roxas proposed a pre-need bill that sought to increase the minimum-deposit requirement at 60 percent. But by the time the bill was forwarded to the lower House it was back to the 51 percent now mandated by the SEC. The treatment of the installment paid by plan holders shows how our legislators are ready sacrifice the interest of ordinary folks who buy these plans.

Under current SEC rules, only a meager five percent of the first 20-percent installment goes to the trust fund. Of the second payment, a 10th goes to the fund. It’s only in the last three payments that 80 percent of each goes to the fund as money for plan holders’ benefits.

Because the pre-need industry depends on a continuous flow of new plan buyers rather than on investment earnings to pay the benefits of the early subscribers, it would seem that their business model was just a Ponzi scheme. As such, it is not true, as the industry now claims, that the current crisis is just part of a process that will strengthen the industry by weeding out the unfit.

Given what we know now and in the light of the current global financial crisis, parents will have to think of new ways of providing for their children’s future education. Our financial institutions will have to devise new products that will take the place of pre need plans. The trust departments of banks and insurance companies should take this challenge not only to provide a service to our people but to make good money out of it too.

But I don’t think parents can still think in terms of plans that would totally cover the cost of future education whatever that might be. They should start saving and investing as early as possible and be happy if their investments cover a good portion of their children’s education needs.

This is particularly true if they choose to invest for safety that would require them to put their money in funds that invest on fixed income papers like government securities and blue chip IOUs. Earnings will be modest for these safe investments. They can put their money in equity funds that promise higher earnings but that also entails some amount of risk.

I have lost confidence on pre-need firms. Even if the watered down pre-need code is finally passed by Congress, the problem will persist. I would advise young parents to look at the big insurance companies, Manulife, SunLife, Insular, PhilAm for alternatives to pre-need plans. The big insurance firms have the products that are useful for their needs and it seems they are properly regulated. But these big insurance companies will have to make their plans friendlier to families that are just starting up. The affordability factor was the big advantage of pre need firms.

In the meantime, there will be more wailing and gnashing of teeth as stand alone pre need firms find it more difficult to continue doing business. Their Ponzi scheme business model has already failed and given the current financial environment, it is difficult to see how they can go on.

SLEX

All you poor souls who use the SLEX regularly will have to suffer a bit longer. The Malaysians working on its modernization missed their March deadline to finish it and have told authorities that they will deliver by July. It is no longer as bad lately but it seems the Malaysians have money problems and that’s what’s delaying things.

I understand that the Malaysians were banking on a consortium led by Banco de Oro to finance them. Unfortunately, after a lot of time negotiating for the substantial loan package, BDO rejected it. Among other things, the BDO consortium was reportedly not comfortable with the legal aspects of the project.

While I can understand BDO’s fears, I don’t find the reason convincing. The project is now under a contract with the Toll Regulatory Board and that should be binding enough on the government even as PNCC was unable to get an extension of its franchise. The STOA the Malaysians have with TRB should be enough.

Anyway, the Malaysians had to go back to a Malaysian consortium led by Maybank for their financing. If you ask me, this is how it should have been in the first place. Foreign contractors should bring their own financing and not try to crowd out locals from local banks. The Indonesians who run CITRA’s Skyway also had similar financing problems at the start.

 Now I understand why the Malaysians are trying to get PNCC to turnover toll collection to them even before they have substantially completed the project. They want to show the banks that they are in control already and I suppose, the millions of pesos a day in toll collections is a good source of no cost money.

But they cannot do that legally. Even in the NLEX, the Lopez Group only took over toll collection when the project was completed. As for the demand of PNCC for the Malaysians to compensate for earlier work advanced by PNCC, that is also nothing unusual. I know that the Lopez Group also compensated PNCC for advance work they did to meet the APEC deadline of FVR even if that portion of the expressway was subsequently also torn up to make the entire highway compliant with the higher standards set by the Lopez Group.

The problem of the Malaysians is that high standards have been set by the Lopez Group at NLEX. I know they can meet or surpass that based on the quality I have seen in Malaysian expressways. They have to deliver because their national honor is also at stake. Right now, I am just happy I don’t have to use SLEX that much. I guess I can still decline invitations to dine or socialize in Alabang or points south until after July.

Black and white

PhilStar reader Artemio Tipon sent this one.

Attending a wedding for the first time, a little girl whispered to her mother, “Why is the bride dressed in white?’’

The mother replied, “Because white is the color of happiness, and today is the happiest day of her life.”

The child thought about this for a moment then said, “So why is the groom wearing black?”

Boo Chanco’s e-mail address is [email protected]