Here’s a public MoneySmarts confession. I have a fully paid educational plan with College Assurance Plans, and it’s the open-ended type. Yeah, silly me. Even before CAP officially admitted to its problems, I had heard of the dangers. Some reporter friends who were covering Congress at that time had obtained documents that already indicated that the country’s largest pre-need company was in trouble. And yet I still paid every centavo under the plan.
I still remember the day I went to CAP’s Makati office to get the certificate that I thought would get my child into the best schools in the country. As I was waiting for my number to be called, I sat next to a family that opted to get their benefits way ahead of schedule. The father, obviously an overseas Filipino worker, said he knew he would get only around 60 percent or thereabouts of the maturity amount. He didn’t exactly say it, but I think he also heard the rumors.
I guess he got a better deal.
CAP and other pre-need firms that went bankrupt burned a lot of Filipinos and damaged the reputation of the industry tremendously. Does this mean all pre-need products are worthless?
Personally, I worry about writing off something based on fear, just as I worry about getting into an investment based on greed. As one of those who got burned, my first instinct is to lump all pre-need companies in a miserable little ball and consider them unfit for Filipino consumers. But to be fair, Filipino savers need to take a closer look at the industry to make a better judgment on whether all pre-need products are indeed worthless.
Philamlife Pres. Jesus G. Hofilena, in a presentation made for the Asian Institute of Management’s JBF Center for Banking and Finance, said only a fifth out of over five million plan holders are in trouble. (Excuse me while I nurse my broken pride, being one of those victims :p)
We are in trouble because we opted for traditional education plans that promised to pay the tuition fee whatever level it would be at the time of maturity. (Wouldn’t you think this was a very good deal?)
At the same time, poor management actions of these companies weakened their financial position like investing too much in real estate. The government deregulated tuition fees causing school expenses to skyrocket, adding more kindling to the fire. Investment yields were going down and cracks in the regulatory framework started to show.
However, Hofilena believes that the industry is confronting serious issues facing it, like solving trust fund deficiencies and educating and professionalizing their sales force among others. He believes the tougher regulatory rules will force the industry to consolidate. You know, survival of the fittest blah blah blah.
Speaking now in hindsight, I realize that because of my investor profile, I should never again buy an educational or pension plan because returns are too low for me. But such products also have a place in the life of many Filipinos, who need to be forced to save for such a big expense as education for their children.
Don’t be fooled into thinking you are “investing in your future” with pre-need products. You are in effect paying these companies to collect your money from you, so that you can get the same amount by the time you need the money, plus a little bit more earned in interest. But hey, if that’s how it works best for some people…better low returns than no savings at all, eh?
In its article today, Citibank answered a reader’s question on preparing for the high cost of children’s education. When considering educational plans, make sure you:
Check the stability of the company. Also, compare the plan with other plans offered by other pre-need companies. See if the monthly premiums are reasonable. Generally, the more time you have until your children go to college, the cheaper the premiums will be. If you have lesser time until your children go to college, such as when they are already in middle school or high school, consider shoring up money for your own fund and doing your own investing.”
The best tip from the article is to set up a separate account for education expenses and to add to it monthly with total commitment. Never dip into this sinking fund; consider it sacred. Just the action of setting up a separate account does wonders for discipline and commitment.
May 31st, 2007 at 5:37 am
Some thoughts.
The nature of pre-need products as implied by its general benefit positioning are as investment vehicles that seek to address specific future needs such as education/pension. The math is simple and straightforward, invest one peso now and the product will return one peso in the future plus some modest returns-GUARANTEED!
The difficulties experienced by some pre-companies emanates from their inability to make good on these guarantees for a number of reasons, first and foremost would be on the issue of liquidity.
Pre-need companies much like any other financial intermediaries make their money through ‘investment spreads”- this is the difference of the promised returns and actual investment performance. When tuition fees was deregulated a few years back, it created a situation wherein the promised return outpaced actual investment performance, in an effort to catch up with these deficiencies, some pre-need companies opted to invest in higher yielding but not so marketable outlets such as property development etc. This created a “liquidity crunch” as some pre-need companies are unable to “sell” these vehicles to service the payment of benefits.
Pre-need products (a unique Philippine invention) would continue to proliferate for as long as the typical Filipino savers opt to transfer the responsibility of investment decisions to another party and as Salve has pointed out-“some savers have to be forced to set aside money”.
This brings to mind an anecdote I usually share in my talks-the anecdote of the two cans. Let us say you have two investment choices represented by two cans, one promising 0% return while the other promising 20%. The can that has 0% return can only be opened on the 10th year while the can that pays 20% can be assessed anytime. Supposing we put one peso each day to each can starting today till the 10th year. At the end, which can do you think would have more money? The can that has zero returns or the can that pays 20%?
Are all pre-need products worthless? Maybe yes? Maybe not? They may be worthless now in the context of not being “paid” on the “promised time” because of liquidity constraints, but there can still be of value sometime in the future. Maybe the key is to entrust the responsibility of your investment decision to an institution that is known for promises kept?
Thanks
May 30th, 2007 at 9:29 pm
salve je suis desole pour l’entendre (i’m sorry to hear that), i guess you and everyone else are entitled to ur share of angst w/ CAP and doubt w/ preneeds. Ur “blah blah blah” ’s a bit sarcastic
not necessarily true that ALL pre-need products are WORTHLESS! maybe SOME, those open-endeds, and maybe WORTH A FRACTION of what was promised. man, i know this doesn’t help
May 30th, 2007 at 6:15 pm
hey salve, don’t feel too bad. my parents are also victims of this CAP fiasco. they bought a plan for my youngest bro so they won’t suffer in their old age. Too bad, i do pity my father.
the CAP fiasco is one of the reasons why i got interested in the whole financial scene anyway. i kept following the news on that. one good thing that came out of it, anyway.
i wouldn’t necessarily categorize all pre-need plans as worthless since many people were able to use the plans they got (not just the ones from CAP). just a combination of circumstances that made some companies go belly-up.
and as far as i can remember (when CAP was part of the financial headlines), the company is illiquid. They invested in real estate and could not unload their assets fast enough to cover their rising need in cash (thanks to TFI). Just look at their buildings they have in almost every capital city. Also bad investment decisions and well the owners are still rich, just the company that went poor.
anyway, my 2 cents…
May 30th, 2007 at 5:28 pm
uhmmm…here’s my insight on this
Preneed companies have different product designs…as mentioned, it’s open-ended and fixed-benefit. By open ended, this means that the company will pay the actual amount. Fixed benefit will…well, pay you a fixed benefit.
Those who got burned were the ones selling open-ended. Why? Because, no company (whether bank, mutual fund, pre-need, insurance, stock brokers, etc.) can predict inflation. The design of their products was flawed. (How would you know what rate you should get to be able to repay your obligation and still earn if you don’t know how much your obligation?) No one can guarantee inflation (especially tuition fee inflation). If they can…then it’s too good to be true.
The more prudently managed companies or those with foresight only came out with fixed-benefit plans.
although pre-need products in general are more for the ultra-conservative people who values forced savings more than those who are after returns.
May 30th, 2007 at 3:50 pm
CAP is insolvent by P 17B as of last count: P 25B in tuition fee liabilities vs P 8B in overvalued properties in trust fund. Not surprising for their claims to bloat: One CAP plan costing P 15,000 last 1983 will now deliver P 50,000 a semester at Ateneo (P 400,000 for the entire term - 26 times your investment). CAP should have admitted insolvency just after tuition fees deregulated. Instead they pyramided - you know, today’s CAP clients paying for old clients. RE: president GMA - a Macapagal sits in the CAP Board of Directors, you know! And all other pre-need firms with sky-is-the-limit educational plans are immediately suspect. Caveat emptor for pre-need.