The Capital Market Development Council (CMDC) is looking into implementing reforms in the corporate pension system, notably the recommendation to require the partial or full funding of retirement plans for workers in the private sector, the Department of Finance (DOF) said in a statement yesterday.
Carlos Dominguez, DOF secretary, who also chairs the CMDC, said CMDC has consulted the Department of Labor and Employment (DOLE) regarding the recommendation made by the Fund Managers Association of the Philippines (FMAP).
He said this recommendation will help in providing sufficient funds for the pension or retirement plans of private sector workers while boosting the demand side for investments that could contribute to the growth of the Philippine capital market.
“CMDC is studying higher levels of funding for pension and retirement pay system compared to the present situation,” Dominguez said.
“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,” he added.
Composed of representatives from the public and private sector, CMDC is a coordinating body tasked to facilitate the development of the Philippine capital market.
In a letter to Silvestre Bello, labor secretary, Dominguez said
CMDC has decided to consult the DOLE on this issue, given the department’s regulatory authority on the implementation of the Labor Code and Republic Act (RA) 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 said in the letter studies done by FMAP found that RA 7641 does not require companies to fund their 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.
This 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 CMDC has created a technical working group for this priority project that will coordinate with DOLE to discuss the recommendation of FMAP, which was supported by the Asian Development Bank.
“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,” Dominguez said in his letter.
“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,” he added.
The finance chief said the FMAP studies found that pension benefits for private sector employees are usually insufficient, and that the new generation of workers is at risk of receiving even smaller pensions later with the current system.
FMAP also said in its studies the low accumulation of pension assets limits the development of capital markets.
As time passes, the issues hounding corporate pensions will become more difficult to solve, according to the studies.
“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, citing the recommendation of FMAP.
Meanwhile, Dominguez was asked in a Viber group with reporters yesterday if he is eyeing the Personal Equity and Retirement Account (PERA) Law to implement this plan, to which he said: “As a fully-funded and portable product, encouraging the adoption of PERA 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.”
“Promoting the more widespread adoption of PERA beyond their use as a tool to satisfy the Retirement Pay Law (RA 7641) is also meant to augment average retirement incomes in the Philippines, which are currently insufficient to replace worker incomes,” he added.