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As Pacific Plans grapples with liquidity problems, holders of pre-need educational plans feel they're left holding the bag.
To Luzvimina Hipolito of Quezon City, the problem involving her and the
company that sold her an educational plan is basic: she who makes a
living running a carinderia never missed a single payment of her
premiums, even during the times “that I had nothing left to pay for
house rent.” If the company is in dire straits now, she asks, “Should I
let my children stop schooling?” The answer, to her, is as clear as a
summer day: “Raising the money should not be my problem; it should be
the Yuchengcos’.”
The Yuchengco family, one of the country’s most venerable names, is
embroiled in the latest scandal to hit the pre-need industry because it
owns the Pacific Plans Inc. (PPI) that is in default in its payments to
34,000 planholders.
Pre-need companies like PPI had offered traditional educational plans that guaranteed to cover 100 percent of the tuition of the planholders’ child. (These were apart from the fixed-value educational plans, which had limited value coverage.) In 1990, the government lifted the 10-percent ceiling on tuition increases. With deregulation, tuition charged by schools soared. Because of the unlimited guarantee offered by the traditional educational plan, a holder may have paid only P40,000 in total premiums but could reap more than P300,000 in benefits.
PPI, a 38-year-old company, stopped selling the traditional plans in 1992 but continued to service existing ones until last school year. Last April 13, the company won a Makati court ruling that allowed it to suspend payment to planholders.
On the surface, this appeared to be PPI’s effort to stop the company from hemorrhaging. But questions have been raised about its motive.
In December last year, the company thought that its trust fund—the pool of premium payments from planholders that had been invested—was healthy. It had reached P3.2 billion, more than enough to cover the P2.7 billion Actuarial Reserve Liability (ARL), or the amount that PPI should target to ensure enough funds to cover current and future tuition payments.
But to service all tuition requirements of the planholders for the coming school year in June, the company had to raise about P600 million. The trust fund had P341 million worth of cashable assets, and PPI president Ernesto Garcia said they had hoped to augment the balance with the sale of US$51.8 million in zero-coupon Napocor bonds where part of the trust was invested.
The bonds had been bought at a discount. Their US$51.8-million face value and seven percent coupon rate will be realized when they mature in 2010, although they are traded in the bond market. However, the Napocor bonds were affected by the credit downgrades of international credit rating agencies in the first quarter, Garcia said. The company had two options: to cash in the Napocor bonds so it could fully pay planholders this year—which would mean absorbing losses of up to P550 million—or suspending payment to planholders.
PPI chose the latter, explaining that to cash in the Napocor bonds would further endanger the trust fund and might prevent the company from servicing tuition requirements of 19,000 planholders who would enroll in the future.
In the rehabilitation plan, which PPI submitted to the court and could still be contested by planholders, the proposed solution was to hold on to the bonds until maturity in 2010. PPI would disburse the P341 million to cover a portion of the planholders’ first-semester tuition requirements, but for the second semester and succeeding school years, planholders were being asked to wait for five years.
In essence, the planholders would shoulder the company’s liquidity problem. They were left holding the bag. In the past, Garcia said, the profits generated from the more than 400,000 fixed-value contracts—the safer and more viable pre-need product because the tuition and other benefits are predetermined—were used to meet the planholders’ tuition needs. But since the fixed-value contracts had been spun off to another company, the PPI was left only with the traditional planholders’ investments.
Premeditated
About 3,000 parents who had bought the plan have formed the Parents Enabling Parents (PEP) Coalition to protest this arrangement. They’re not buying the official line that the spin-off and the court plea were part of a corporate strategy to protect all the 34,000 planholders’ interest in the long term.
Philip Piccio, PEP spokesperson, told NEWSBREAK, “The move to shield themselves [the Yuchengcos] through the court was premeditated. Therefore, there is malice and probably fraud.”
The coalition questions the August 2004 spin-off of the assets and trust funds of the 400,000 fixed-value planholders to a new company, Lifetime Plans Inc. The stake of PPI in Lifetime was subsequently sold to GPL Holdings, another Yuchengco company. “The [corporate restructuring] was to ensure that our share in Lifetime’s profits would be out of reach,” said Picco.
The spin-off is a business approach that isolates the good assets from the bad. The bad assets are either sold to another investor at big discounts, or nursed back to profitability. This strategy has been implemented in the case of the United Coconut Planters Bank (UCPB) and the Philippine National Bank (PNB). Both banks created separate departments to isolate their soured loans from the rest of the earning assets. PNB turned in modest profits because of this, while UCPB is recuperating.
In PPI’s case, the “good assets” were spun off to Lifetime Plans while the “bad assets” were left with PPI. Garcia said they had equitably apportioned the assets, liabilities, and trust funds between PPI and Lifetime. “We asked ourselves if we wanted to wait until [another pre-need] would go belly up,” Garcia said. “We could just ride the tide and not to put too much focus on ourselves. But our decision was to immediately protect the interests of the greater good. And we thought it was the most prudent thing to do.”
But even the Securities and Exchange Commission (SEC), the pre-need industry’s regulator, was caught off-guard when PPI sought relief from the court. Fe Barin, the SEC chairperson for the past eight months, said, “They pulled one over us.” Filing for suspension of payment is a strategy that companies use to overtake their creditors, suppliers, and other stakeholders who might go after the companies’ assets once they smell financial trouble.
In hindsight, the SEC could have seen this situation coming, especially after it approved the spin-off in August 2004. But Barin explained that the circumstances then were different. The SEC allowed the Lifetime spin-off because the apparent game plan at that time was for the company to find an investor and not go to court.
Since 2002, PPI, the College Assurance Plan (CAP) and 10 other pre-need companies that offered traditional educational plans have been on the SEC watch list. Reforms followed more than 10 years of lax regulation of the pre-need industry, thus the belated order to stop the sale of traditional plans only in 2002.
A source said PPI was one of those with faulty computations of their ARL, or the present value of all current and future tuition availments. The ARL is based on inflation, interest rates, and expected tuition fee increases, among others. A measure of how healthy a pre-need company is whether its trust fund is equal to or exceeds the ARL. The company’s ARL in 2002 was only P8.9 billion. The correct figure, the source said, should be about P15 billion. In other words, PPI’s trust fund was short by almost P7 billion then because it only had P8.6 billion. The Yuchengcos reportedly sought a two-to-three-year leeway to address the deficiency. The SEC agreed because CAP and the other pre-need companies were also allowed to amortize their deficiencies.
Of all the pre-need companies on SEC’s watch list, CAP was the big bang; it had 780,000 planholders. Its trust fund deficiency was climbing every year and reached P17 billion in 2004. The public gauged the SEC’s capability as regulator by the way it handled CAP. Did SEC fail to anticipate PPI’s moves because it was lax with CAP and others? Or did PPI take advantage of the situation, hoping it would be treated with the same kid gloves as CAP?
Garcia said that PPI had made earnest efforts since 2003 to contain its exposure to traditional plans. Proposals to schools were made wherein PPI would advance the entire four- or five-year college tuition of planholders. The proposal included a cap of 10 percent on yearly tuition increases. None of the schools agreed. PPI said they tried to buy back the plans, but most of its planholders declined. The company also decided against negotiating directly with each planholder because it was time-consuming.
Obviously learning from CAP’s experience, PPI isolated the profits earned by its 400,000 fixed-value planholders to protect these profits from being used to subsidize the withdrawals of traditional planholders. CAP, meanwhile, continues to deplete its trust funds to meet current tuition requirements.
Sentiments are mixed. Parents say CAP’s strategy continues to give hope, while PPI doused it. Others say CAP is leaving them in the dark, while PPI is more forthcoming about what planholders should expect.
Damage Control
Last April, PPI planholders received individual letters detailing the amounts due them based on the proposed rehabilitation plan. They were told they could sell back their plans if they decide not to wait for the Napocor bonds to mature in July 2010. Or they could let their money remain in the trust fund, earning seven percent from the year they finished paying the premiums until the bond matures.
The planholders were not pleased. Piccio stressed that they bought PPI educational plans on the assurance that PPI was backed by the financial muscle of the Yuchengco Group of Companies. The group includes major players like Rizal Commercial Banking Corp., Malayan Group of Insurance and Great Pacific Life Assurance Corp., and House of Investments. Other sister companies include Bankard, Mapua Institute of Technology, Honda Cars Manila, Manila Memorial Park, and Nippon Life Philippines.
PEP is also getting inspiration from CAP, which recently filed a class suit. For their part, PEP members are preparing documentary evidence of fraud and pooling their financial resources for the cases they plan to file soon.
Garcia admitted they underestimated the intensity of the backlash from planholders, especially against the person of the patriarch, former Ambassador Alfonso Yuchengco. The initial plan was to dissociate the family and the conglomerate’s other companies from PPI, but, in the end, the Yuchengcos found themselves committing bulk of the P2 billion funds to meet the withdrawals before 2010—a decision that could have saved them all the brouhaha in the first place.
An insurance executive summed up the entire affair with this comment: “Financial services are fiduciary businesses. We should always remember that we are handling other people’s money.”—With reports from Dwight Agulan
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