The Capital Market Development Council chaired by Finance Secretary Carlos Dominguez III is considering reforms in the corporate pension system, including the recommendation by the Fund Managers Association of the Philippines to require the partial or full funding requirement of retirement plans for private sector workers.
Dominguez said over the weekend the council consulted the Department of Labor and Employment on FMAP’s recommendation.
He said the recommendation would help provide sufficient funds for the pension or retirement plans of private sector workers while boosting the demand for investments that could contribute to the growth of the Philippine capital market.
“This is to reduce fiscal risk in the system as country ages over the longer term and also as an ancillary measure to make pensions more portable. As a fully-funded and portable product, encouraging the adoption of PERA [Personal Equity and Retirement Account] accounts helps increase funding levels, but increased funding over the broader pension system [similar to the popularity of the 401K product in the US] is similarly desirable,’ Dominguez said.
“Promoting the more widespread adoption of PERA beyond their use as a tool to satisfy the Retirement Pay Law [RA7641] is also meant to augment average retirement incomes in the Philippines, which are currently insufficient to replace worker incomes,” he said.
Composed of representatives from the public and private sector, the CMDC is a coordinating body tasked to facilitate the development of the Philippine capital market.
Benedicta Du-Baladad, the co-chair from the private sector, spearheaded the project on the implementation of reforms in the corporate pension system.
Dominguez said in a letter to Labor Secretary Silvestre Bello III the CMDC decided to consult DOLE on this issue, given the department’s regulatory authority on the implementation of the Labor Code and Republic Act No. 7641 or the Philippine Retirement Pay Law, which mandates private companies employing more than 10 workers to either provide a retirement plan or retirement pay for their respective qualified employees.
Dominguez cited studies done by FMAP showing that RA 7641 does not require companies to fund retirement liabilities that are calculated based on the prescribed benefits.
Under this law, companies are mandated to pay pension benefits only upon retirement of their employees, usually based on the minimum requirements set by RA 7641.
The practice deprives employees of sufficiently funded retirement benefits in the absence of a well-funded pension plan that is invested in the capital markets to generate high returns.
Dominguez told Bello that the CMDC created a technical working group for the priority project that would coordinate with DOLE to discuss the recommendation of the FMAP, which was supported by the Asian Development Bank.
The TWG is headed by National Treasurer Rosalia de Leon.
“One of the conclusions in the studies is that this creates a social problem because people in their retirement may not have enough retirement savings. As to economic and capital market aspects, the absence of an effective pension fund system affects the demand side for investments that could contribute to the development of the Philippine capital market,” Dominguez said the letter.
Dominguez said the FMAP studies found that pension benefits for private sector employees were insufficient, and that the new generation of workers was at risk of receiving even smaller pensions later with the current system.
FMAP said the low accumulation of pension assets had limited the development of capital markets.
“A mandatory partial or full funding of pension obligation would address concerns on insufficient funding upon retirement of employees as the investment will generate returns to cover the required growth in the fund over time. Such pension investments will boost the demand side of the capital markets as well,” Dominguez said.