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The BF Retirement Fund, Inc. Folly

(Article published in the Jun 22,2011 issue of Manila Standard Today) 

Whoever it was who caused Banco Filipino (BF) to transform in 2007 the Banco Filipino Retirement Plan’s funding vehicle from the trust that it was even prior to its first closure in 1985 into a corporation after its reopening in the mid 90’s did the bank’s stakeholders a very great disservice.  With neither rhyme nor reason, the mindless conversion ignored the generous package of privileges granted by law, privileges that were designed for the immediate good of the workers and eventual benefit to society as a whole. Moreover, the perpetrators of the BF Retirement Fund, Inc. folly added insult to injury by thereby not only inflicting on BF stakeholders the unnecessary pain of paying taxes but also exposed the fund, the caprices of BF management making likely its demise.

The incorporation of the BF Retirement Plan into BF Retirement Fund, Inc. per se (a) wasted the employer’s tax deduction privileges that are made available to trusts under Section 34(J), (b) threw away the income tax exemption that is conferred on trusts by Section 60(B), and (c), as a consequence, ate up the amount that either the retiring employees of BF could otherwise have enjoyed tax-free pursuant to the exclusion provided in Section 32(B)(6)(a) of the Tax Code or, at the very least, the bank could have used for legitimate purposes.  It was a blunder that, based on my undoubtedly limited experience, is most likely both without any prior precedent and without any subsequent replica.

In the first place, it rejected the offer of tax deductions. To encourage employers to set up a formal structure for the economic security of their employees upon retirement, Section 34(J) allows an employer “establishing or maintaining a pension trust to provide for the payment of reasonable pension to his employees” to deduct from his gross income his reasonable contributions to the pension trust under two modes.  On the one hand, those amounts that are contributed to the trust in order to cover pension liability accruing during the taxable year are deductible in full as ordinary and necessary business expenses; on the other, those amounts that are in excess of the amount needed to pay for current pension liability are allowed to be deducted from the employer’s gross income to the extent of one-tenth every year for the next ten years beginning the year in which the contributions were paid into the trust.


The practical effect of taking of such deductions is the assumption by the Government of 32% (in the case of corporate employers) of the deductible contributions to the pension trust.  It is as if the employer pays only two-thirds of the cost of the employees’ retirement because the remaining one-third is paid for by the Government.

Notice, though, that the law is very specific: for the Government to be willing to share in the burden of the employees’ retirement security, the payments by the employer must be to “such trust” and to no other. The law thus gives the benefit only to trusteed retirement plans and not to plans that are incorporated, as in the case of the BF Retirement Fund, Inc. 

Secondly, it refused the privilege of growing tax-free. By way of assistance to the retirement plan’s funding vehicle to maximize the earnings of the moneys contributed for the future payment of the employer’s retirement liability, the law makes such income tax exempt. Section 60(B) provides that “the tax imposed by this Title [i.e. Title II Tax on Income] shall not apply to employee’s trust which forms part of a pension, stock-bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees…”  It is as if the Government plows back into the trust fund what the government should have been able to collect on the income of the funding vehicle. 

Such generosity on the part of the Government is, as to be expected, subject to compliance with certain conditions, most of which are not material for the moment. What is clear and unconditional, for our purposes in this piece, is that the income tax exemption is granted to the funding vehicle only if it is an “employee’s trust”.  It is not similarly granted to an incorporated retirement plan, such as the BF Retirement Fund, Inc. 

Thirdly, the rejection of the tax perks is really renunciation of wealth that really belonged to the employees. The rejection of the Government’s offer to share in the burden of providing for the employee’s retirement security (by way of tax deductions for the employer contributions and tax exemption for the plan’s income) is like wasting one’s seeds and burning one’s harvest. As a result, either the amounts that otherwise would have been received or made payable to BF employees were reduced; or, if the level of the payments was maintained, then the store of resources that could otherwise have been devoted for the improvement of the bank or distributed as dividends to its stockholders was needlessly dissipated.

Someone, either the employee, or the bank, or its stockholder, had to dig into his pocket to replace what was lost when BF (even as it was screaming for a government bail out) turned away the Government’s helping hand.  And based on the observed life-style maintained by BF’s owners and managers, the piper’s fee did not come from the wallets.

To this three-fold injury inflicted on the bank itself and its stakeholders, the perpetuators of the BF Retirement Fund, Inc., by depositing the retirement funds under a corporate form, added the insult of the causing the employees to effectively shoulder the tax on the interest accruing to the deposit.  One hundred thirty eight million pesos (P138 million) were deposited with Banco Filipino itself. Since the funds, though really owned by the employees as a body, held in corporate form, they became technically the funds of an entity separate and distinct from the workers. The interest income of the retirement funds then become subject to, instead of being totally exempt from, the 20% final tax on bank interest.  And because funds were deposited in a sinking bank, those funds were effectively wantonly thrown out to the open sea.  That was the mother of all insults.

Such abuse BF’s employees could very well have done without.  It ought not be tolerated and, now that it is out in the open, the employees who were wronged should actively seek earthly redress as well as earnestly pray for divine vengeance.