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Are DC pensions right for the Philippines?

Fund managers are pushing for Rodrigo Duterte's new government to set up a defined contribution scheme, but others are not convinced about such a move.
Are DC pensions right for the Philippines?

Fund managers are pushing hard for pension reform in the Philippines as the country’s social security system struggles to provide adequate retirement benefits.

They want to see the introduction of a defined contribution (DC) pension scheme, where payouts depend on return on money invested, in addition to the government-run social security system for private workers, whose funding will run out by 2042.

But other industry participants are less convinced, arguing that shifting from defined benefit to DC scheme is not necessarily the right move at this point.

Addressing the shortfall

The Philippines is following in the footsteps of Thailand, which is in advanced discussions about introducing a DC scheme plan at the finance ministry level. Both countries provide mandatory DB schemes, where the sponsor must make up the difference in any shortfall in returns.

The problem is that the contribution rates to these schemes tend are low and their investments conservative. The result is a huge gap between the funds’ assets and their liabilities. The situation is exacerbated by the fact that people are living longer. In the case of the Philippines, the sponsor of the pension plan is the Social Security System (SSS).

The actuarial life of SSS is reported to be until 2042, which means the funds will run out in 26 years. Calls have been made to reform SSS, which includes increasing the contribution rate.

Meanwhile, Mike Ferrer, managing director at ATR Kim Eng Asset Management in the Philippines, thinks the election of a new government in the Philippines as the perfect time to push for substantial pension reform, as AsianInvestor has reported.

Ferrer has been rallying supporters, mostly fellow fund managers, to push for the implementation of a mandatory DC scheme as soon as possible.

He is confident pension reform fits with President Rodrigo Duterte’s vision for the economy. The recently installed president seeks to bolster the economy through tax breaks for companies and individuals. Savings from these tax breaks could be diverted into a mandatory DC plan, said Ferrer.

Scepticism about DC

While a move to a DC scheme would benefit the asset management industry – as it means a steady stream of new funds and more management fees – some say it could stunt the growth of developing countries and leave retirees short of cash in their old age.

Better to invest in the growing economy and plug pension gaps when they appear, argues one consultant.

“The logic around moving from a defined benefit to a defined contribution retirement structure at this stage of the inflation and growth cycle might not be the smartest thing to do,” said Peter Ryan-Kane, Asia-Pacific head of portfolio advisory at Willis Towers Watson. His firm provides consulting services to several state-administered pension schemes in the region.

What about the potential beneficiaries? One is certainly doubtful about the current system.

Carmencita Shih, business development manager at travel agency Pan Pacific Travel in the Philippines, said: “As you age, your needs for medicine, hospitalisation and other care services require more funds. The SSS pension will cover very little of those expenses. At the end of the day, a good savings account will help a lot.”

Yet nor does Shih believe that a DC plan would benefit all Filipinos. It might suit those who earn more, such as employees in multinational companies, she said. Less so employees with low salaries, “because additional contributions to a pension scheme will substantially reduce their take-home pay and living allowances”.

There is no easy answer – but at least there is recognition that changes have to be made one way or the other.

The second part of this report, focusing on pension reform in Thailand, will appear in the coming days.

¬ Haymarket Media Limited. All rights reserved.
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