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Management of retirement funds needs close watching
(Article published in the March 5, 2001 issue of TODAY, Business Section)

A significant component of many an employee’s estate is the money that he expects to receive upon retirement. Accumulated over the years by compulsion of law or volition of the employer, retirement benefits represent a sort of safety net during one’s declining years and decreasing productivity.

The government, to insure that what is paid to the retiree is not unduly diminished, refrains from claiming a share of this pie. Section 32(B)(6) of the Tax Code excludes from gross income and exempts from taxation retirement benefits received by members of the Social Security System and the Government Service Insurance System as well as benefits received by officials and employees of companies which have additionally established qualified private employee benefit plans.

But this act of governmental abstinence is not always matched by self-restraint on the part of the retirement fund managers. Much have already been said against the use of SSS and GSIS money to favor the businesses of the former president. Very little, if not nothing, has said about the abuse of private retirement funds.

Private retirement funds have a split-level personality. On the one hand, they are extolled as money held in trust for the employees.

The Tax Code itself supports this creed by requiring that, for retirement plans to be qualified for preferential tax treatment both as to the payments to retirees as well as to the fund itself during its period of accumulation, at no time shall any part of the corpus or income of the fund be used for, or diverted to, any purpose other than for the exclusive benefit of members or participants under the plan.


On the other hand, however, retirement funds are in the real world not placed in the effective control of the employees themselves and are therefore susceptible of uses totally alien to their original purpose. This is where the fund manager’s flexibility (often a euphemism for lack of ethics) rears its ugly head.

Take for instance, the trust department of Urbancorp Investments, Inc. In an earlier item ("Urbancorp breaks, betrays trust", TODAY, 12 Feb. 2001), we narrated how, as manager of the Management Incentive Plan of Urban Bank, it violated at least ten (10) provisions of the manual on trust regulations in the course of borrowing from the funds of the public invested in URCOIN, a common trust fund it was managing, to enable a presidential crony of a prior administration not only to get back his investment of about Php 66 million but also to walk away scot free from his subscriber’s obligation of about Php 197 million.

This trust department is also the trustee of the employee benefit plan’s retirement fund of Urban Bank. From July to September, 1999 it made three loans, the first for Php 10 million due on 20 May 2001, the second for Php 11 million due also on 20 May 2001 and the third for Php 1 million due on 13 September 2001, all at interest rates below the lending rate of URCOIN.

Who is the lucky borrower? Urban Bank’s Management Incentive Plan, of course.

Need it be asked whether the interest accrued on those loans, which as of 25 April 2000, the day Urban Bank voluntarily declared its bank holiday, totaled over Php 1.8 million, was ever paid? In this transaction that is fraught with the deadly combination of conflict of interest and self-dealing, the muted victims are naturally the employees of Urban Bank who are the members of the bank’s retirement plan.

Misuse of the retirement fund, however, is not limited to daylight robbery. It could involve no stealing from the employees at all; just wresting control of a very big bank.

Sometime in 1999, then Finance Secretary Edgardo Espiritu, confessing to the former President the government’s lack of the wherewithal to purchase its over Php 4 Billion worth of pre-emptive shares from PNB’s rights offering, asked for approval to waive (for and in consideration of about Php 40 million to be paid to the government) its rights in favor of the PNB Retirement Fund, Inc. which was organized only on 09 June 1999 and registered with the SEC only on 12 August of the same year.

In his letter to the president, he disclosed that the purchase will be made by the fund through corporations which will be formed for that special purpose. Permission granted.

Four corporations were formed on 01 September 1999; one was registered with the SEC on 07 of the same month, the other three were registered two days later. All four had paid in capital of only about Php 75 million each.

This notwithstanding, each one of the four was able to borrow Php 1.25 billion each. The creditor of one was the provident fund of PNB; the other three borrowed from three companies which themselves were formed within the first ten (10) days of September 1999 at a paid-up capital of Php 250 million each.

Smoke. Mirrors. Music! Lo and behold! The government found itself second fiddle to a Mister Lucio Tan in the Board of Directors of PNB.

Fortunately, the retirement fund management industry, as a whole, does not seem as perverse as the two incidents above would suggest.

In the surveys done by Watson Wyatt Philippines, Inc., an international firm of consultants and actuaries providing its clients with totally independent advice on human resource management, it is clear that the average performing funds have been gradually decreasing their exposures to corporate loans from the 39% as of 31 March 1998 to the mere 17% as of 31 December 2000.

And while it was alarming to note that as of the end of September last year 95% of the worst performing fund (among those participating in the survey) was in corporate loans, the worst performing fund by end of 2000 had only 12% in corporate loans.

A note of caution, though, before rejoicing: is it possible that the loans that cause the worst performance were transferred to the banks, a la Urban?