Enhancing savings for capital formation

By next week, Congress would have passed two tremendous mobilizers of savings: the Personal Equity and Retirement Account or PERA, and the Pre-need Code. This is a huge step for the financial system, as these two measures will significantly increase funds for capital growth.

Right now, our country suffers a low savings rate and weak capital market. Our financial system is not supportive to business and entrepreneurship, and that is why job creation is slow. Money does not circulate smoothly because we do not have enough vehicles that encourage savings and allow access to financing. While I have nothing against banks, it is unhealthy that financing for business mainly comes from banks.

Together, PERA and the Pre-need Code will encourage long term saving and inject fresh financing into the capital market.

The PERA bill is at the bicameral level and will be enacted, if not by next week, then certainly within the year.

PERA will supplement the existing government-sponsored pension scheme by setting up a privately funded retirement fund. It allows private individuals to set aside P50,000 a year, withdrawable when the contributor reaches the age of 55, and tax-exempt. It will reduce our heavy reliance on the already overwhelmed publicly-funded retirement scheme.

PERA targets Overseas Filipino Workers and small business owners, as they are not covered by the government's current pension programs. This is also true for the domestic labor force, of which only 78% are members of government-initiated pension funds.

Like PERA, savings mobilized through pre-need helps build a stronger capital market. In fact, the multi-billion pre-need industry is the biggest accumulator of savings.

This week, the Pre-need Code was passed on second reading, and it won’t take long before it is made into law. Its biggest significance is creating a ruling legal framework for the industry, which suffered an “anything goes” regime in the absence of a governing law.

With the passage of the bill, we are able to protect the planholders and at the same time keep the pre-need industry viable. It offers an institutional solution to the problem of the pre-need industry.

Among other strong safeguards and precautions, its best feature is the Trust Fund model, where a portion of the payment collected by the preneed company will be deposited in a trust fund. This would help guarantee the delivery of benefits to the planholder in the future, and minimize the risk of insolvency as the trust fund will remain untouched until the plan matures.

For transparency, we now require full disclosure, among others, of the company's investment of its trust fund. Pre-need companies must have a minimum paid-up capital of P100 million to provide a solid capital base and lessen the risk of instability in the future. It penalizes directors and officers for conflict of interest transactions. Also, salesmen must undergo a licensing exam before he can sell a pre-need plan. With many safeguards in place, the chance of pre-need companies to become insolvent is small. The industry will now become stronger and planholders can sleep safely.