Member firms of the Philippine Federation of Pre-Need Plan Companies Inc. (PFPPC) have asked the Securities and Exchange Commission (SEC) to relax valuation standards on their trust funds to cushion the impact of the global financial crisis on their industry.

PFPPC President Juan Miguel Vazquez noted that in the last few months, “the trust funds of our plans registered huge unrealized erosions in value because of the economic slowdown. Our trust funds were reduced significantly because of mark-to-market accounting standards. This made us realize and accept that unless and until the onerous required yields on our old business are resolved and properly addressed, there could be no certain future for our industry,” he said.

A few years ago, several major players in the pre-need industry contolled by elite Filipino families, including College Assurance Plan of the Sobrepena group and Pacific Plans of the Yuchengco group, went belly up after assets of the companies proved not enough to cover the educational fees of its plan holders. (Read background stories here and here.)

These failed pre-need firms left millions of Filipinos holding on to pension, health and educational plans holding the bag, prompting the SEC to require industry players to implement higher targets for their trust funds.

The industry's current request, however, cites the global financial crisis as a reason to defer these trust fund targets.

Vazques said that the main problem of pre-need firms is the growing obligation on plans sold in the past, which only had viable prices during actuarial feasibility studies.

“These plans assumed interest yields of up to 16 percent per annum when key interest rates and T-Bill rates were 20 percent per annum. Tremendous volumes of business were underwritten in these past assumptions,” Vazquez said in a letter to SEC Chairman Fe Barin.

Generating the high returns promised by these old plans, Vazquez said, "is close to impossible."

As a short-term solution, Vazquez proposed to the SEC a relief from unrealized losses in the computation of trust fund variance. For instance, he said that the net trust fund variance should be recomputed to P100 million if a P200-million trust fund variance consists of P100 million in unrealized losses.

“As for the unrealized loss, we believe that this will generate positive returns as the market corrects over time. These investments are blue chip companies with solid growth prospects or fixed rate treasury notes (FXTNs) that trustees plan on holding until maturity,” he said.

Some of PFPPC's long-term solutions, on the other hand, include the ring-fencing of old plans which are commercially impracticable, submission of companies of their own pre-need financial program to address the ring-fenced plans, allowing companies to continue selling while addressing the ring-fenced plans, and reviewing the valuation standard for trust fund assets.

The SEC has agreed to help the pre-need industry in evaluating available options by striking a balance between the growth and survival of pre-need firms and the interest of its planholders.