Preneed industry’s P150-B trust fund

With the huge P150-billion trust fund of the preneed industry, there is now more need than ever of letting a third-party investment house to take charge of investing the funds.

This would then solve the governance problem the Bangko Sentral (BSP) unearthed, and for which it issued strict guidelines, that would govern the banks and their trust fund department and the preneed firms’ investible funds. The BSP laid down guidelines that would ensure that there is a so-called China wall, so named to ensure that there is an arms-length transaction among related parties, such as the bank and its subsidiaries.

The need for a third-party company to manage the investments of the huge preneed trust funds would effectively free the Securities and Exchange Commission (SEC) from issuing investment guidelines that could hurt the industry. It must be noted that the commission is toying with the idea of putting a cap on the amount of investments that the preneed company can put on certain asset classes. This plan followed the liquidity squeeze that hit many preneed companies, leading to the suspension of the release of tuition support for thousands of plan holders.

Since the SEC had no choice but to review the investment procedures to ensure that the preneed industry overcomes its liquidity problems, it is, however, put in a Catch-22 situation. If it comes up with guidelines that would, say, crimp the investment of the trust funds in certain asset classes that would give the desired returns, then it would get the flak from the industry. But if it does not come up with the guidelines, the plan holders would raise a howl and say that the commission is not safeguarding the interests of the plan holders.

Thus, it would be better if the commission allows third-party investment houses which would just charge for their fees in exchange for the management of the trust funds. In this way, the preneed industry’s trust funds being managed can take advantage of favorable investment outlooks for certain asset classes.

The commission and the BSP, for that matter, need not worry too on the management of the trust fund investments. In fact, these third-party investment houses, mostly with their own research outfits and with a global reach, could move in and out of asset classes that would provide the best returns.

All that is needed is for the SEC to come up with an accreditation process for the third-party investment houses that would want to manage the trust funds. It is expected that many of the blue-chip investment houses would want to get hold of the P150-billion trust funds.

The SEC could accredit three or more investment houses and from there let the preneed companies to decide which to choose to invest their respective trust funds. This solves the problem that earlier bothered the BSP when it came up with the guidelines on the investment of the trust funds of the preneed industry.

Allowing third parties to invest the trust funds would do away with the questions on transparency and governance standards that have dogged the trust-fund investments. Besides this, the preneed firms need not worry that their investments would go awry as in the case of certain investments made by banks. This would also ensure that the trust-fund concept is not violated, especially among related parties in the transaction. We understand that the commission had unearthed certain investments made in behalf of the trust funds of preneed firms that violated governance and transparency standards.

The need for devolving the trust-fund investments to accredited third-party investment houses is much more pronounced now with the prevailing low-interest rate regime. With the Treasury bonds and the bills fetching low rates of 6.75 percent and 5 percent, respectively, the preneed industry is roiled from all sides. Its projected earnings stream would not jibe now with its previous assumptions if it relies solely on these safe investment outlets. This comes to the fore with the maturities of the higher-earning government securities that the pre-need industry held before.

One case in point, too, is the surge in the stock market. The preneed industry failed to fully take advantage of the advances in the stocks that could have meant recovering lost ground insofar as their trust funds is concerned. Imagine some blue-chip stocks doubling and even quadrupling in their share prices in two years as the Philippine Stock Exchange index marched to match its pre-Asian crisis index and beyond.

The possibility of the trust funds being invested in the stock market is a sure bet when accredited third-party investment houses take care of the trust funds. That could take care of the liquidity woes of the industry and nudge it to its precrisis level the way the stock market did so. 

E-mail: hugagni@yahoo.com

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With the huge P150-billion trust fund of the preneed industry, there is now more need than ever of letting a third-party investment house to take charge of investing the funds.