Do trustees know SSS is sinking?

Enron and WorldCom were penalized last year for doctoring their books to bloat earnings. The CEO of Korea’s giant SK Group was indicted this year for similar offenses. Are trustees and managers of the Social Security System into it too?

It doesn’t seem so, not at first glance. To be sure, SSS annual reports acknowledge huge financial declines. For the first time in its 49 years the mutual fund recorded a P17.3-billion drop in assets, from P181.7 billion in 2000 to P164.4 billion in 2001. SSS officials admitted a further drop to P162 billion in 2002, an additional loss of P2.4 billion.

But Sen. Ramon Magsaysay Jr. is not satisfied with the confessions. In a privilege speech last week he raised the possibility that the declines could be bigger than reported. For, he discovered that a sizeable chunk of the assets are not marked to market.

"Marking to market" is an accounting method in which allowances for probable losses are attached to risky investments. Such allowances are deducted from cash on hand and kept on hold. True, the allowances can deplete operating funds. But it’s a safety net by which fund managers not only can forecast a market fall but also hedge against it.

Hedging is what the SSS is all about. When Magsaysay’s dad, then-President Ramon Sr., pushed for a Social Security Act in 1954, his dream was to protect and prepare wage earners and dependents from disability, sickness, maternity, old age and death. Under the SSS, employees deposit specified amounts per month, matched by their employers, so they can have cash to withdraw in case of emergency or for housing and retirement. SSS officers in turn must invest the members’ money in sound instruments with guaranteed earnings, such as government securities.

Magsaysay, the senator, noted that under the watch of SSS chairman and president Carlos Arellano from 1998-2000, the fund sold most of its safe government instruments. It then invested over P40 billion in crony firms on the behest of then-President Joseph Estrada. Of this, P15.1 billion was used to help Equitable Bank acquire PCIBank. The investment that held an alias Jose Velarde account is now worth only P5 billion.

Magsaysay decried that SSS books do not list the Equitable stock at its present market value of P5 billion. Instead, it is booked at the purchase price of P15.1 billion. So with the other crony equity investmentsthat total P40 billion.

That booking is called the equity method, as opposed to the cost method that calls for allowances for probable losses. Under the equity method, stocks are reported at purchase cost, and increased or decreased depending on the net earnings or losses for the year. Thus, investments of SSS in crony equities dangerously are not marked to market.

SSS officers will say that the equity method, just like the cost method, is an internationally accepted accounting principle. After all, the decline in market value of the Equitable stocks from P15.1 billion to P5 billion is only a paper loss at present. The SSS can wait till the stock market kicks up, and it could probably sell it at an actual gain. But that’s whistling in the dark.

There’s a stranger twist, however. The SSS inconsistently uses both the equity and cost methods. For instance, the P131.8 billion in "Other Investments" in its 2001 annual report have provisions for declines and probable losses.

Among these investments is P42 billion in housing loans, mostly to Pag-IBIG Fund and National Home Mortgage Finance Corp. SSS president Corazon dela Paz was quoted in newspapers last year as saying that SSS would recover only 20 to 30 percent of the amount. Probably even less, considering pending bills in the Senate and House of Representatives that would force the SSS to not collect on the loans. Another P32 billion of the P131.8 billion is in marketable securities - with an P11.5-billion allowance for decline in market value. In short, SSS is expecting a one-third drop in the securities value. Yet for the P40 billion that Magsaysay exposed as behest investments, SSS does not acknowledge the actual drop as seen in daily stock market transactions.

Perhaps the inconsistency in booking methods is not a deliberate ploy to hide losses. Upon hearing Magsaysay’s speech, dela Paz was overheard to have asked her staff if it’s true that the equities are not marked to market. Then again, as former chairman of a huge accounting-auditing firm, dela Paz is expected to know what’s going on in her turf. Several SSS managers are thus grumbling that instead of frequently travelling abroad, she should first get to the bottom of thigs and make a cuentas claras.

Magsaysay wants more than just marking the SSS investments to market. He wants the officers responsible for the behest investments punished. "This is unconscionable," the senator said about the reluctance of SSS trustees and management to investigate the behest investments. "Old-age savings of ordinary workers have been mismanaged and misappropriated, and yet so far there is nothing that would ensure that what transpired at the SSS in recent years will not happen again."

Of this charge, chairman Bernardino Abes says their hands are tied. Early in 2001, then-Justice Sec. Hernando Perez cut a deal for Arellano to testify against Estrada in exchange for immunity from the plunder suit. Arellano’s subsequent testimony was viewed by some quarters as insufficient, but Abes says the SSS must nonetheless abide by the government decision.

Yet, eight SSS managers aided by then-Chief Government Corporate Counsel Amado Valdez did file in late 2001 a graft case against Arellano, his fellow trustees, and several top executives. Another manager filed an administrative case for gross misconduct. The present trustees have not assisted them any in pursuing the cases with the Ombudsman.

In questioning SSS accounting styles, Magsaysay is finding common cause with the complainant managers. Like them, he wants to set aright the fund that his dad worked hard to establish. He asked in his speech, "When will we reform such gross injustice to the 24 million SSS members?" The managers asked the same thing in 2001.