The Philippines needs a more sustainable pensions system, argues one asset management business head in Manila, and he has set out his vision for how this will happen.
Pensions are not a priority of the administration of new president Rodrigo Duterte, given the relative youth of the country's population – the average age is 23.4 years. But Mike Ferrer, managing director at ATR Kim Eng Asset Management, said the current framework would run out of money for private-sector workers if nothing is done.
Ferrer’s first step will be to get the Fund Managers Association of the Philippines to consider – and, he hopes, formally back – a white paper outlining steps to a mandatory defined-contribution programme, similar to the Mandatory Provident Fund system in Hong Kong.
The next stage will be to get the Department of Finance to champion the reform and to find legislators willing to usher a law through Congress.
Ferrer is confident such a scheme would fit with Duterte’s vision for the economy. The controversial president, elected in May, seeks to bolster the economy through tax breaks for companies and individuals. He said savings from tax breaks should be diverted to a DC scheme.
Given that the model is Hong Kong's MPF, presumably foreign funds would be included in the system at some point.
Ferrer told AsianInvestor that any such scheme would coexist with the Social Security System (SSS), run by the government for private-sector employees.
SSS is the current government-administered mandatory pension fund for private-sector employees. The contribution stands at 11% of salary (7.37% paid by the employer and 3.63% by the employee) and is capped at P16,000 ($330) per month.
The SSS has 33 million members and assets of P500 billion ($10.3 billion). Compare this to the Government Service Insurance System, the defined benefit pension plan for civil servants, with two million members and P1 trillion in assets.
"Clearly the SSS fund is not big enough to cover the retirement needs of private-sector workers," noted Ferrer. "SSS members who recently retired only get about P5,000 a month, which is not enough."
Further, the corporate-based retirement system mandated by Philippine law is a defined benefit pay-as-you-go scheme. Employees, especially millennials, who do not tend to stay at one company their entire working life would find themselves without sufficient retirement funds because the structure requires a vesting period and lacks portability. Employees get the full benefit if they stay with a company for a certain period; if they stay for a shorter time, the payout is reduced accordingly, said Ferrer
Moreover, this only counts for workers who have been employed over the long term by a big company. Younger workers or those who changed employers may not get the full benefit.
There has been some progress made on expanding social security. Manila established the Personal Equity and Retirement Account (Pera) earlier this year. Meant to promote the local capital market as well as boost savings, it is voluntary and contributions come only out of the worker’s pocket.
Without an employer contribution, though, the sums are likely to be low or non-existent for most people. But Pera does provide a tax credit for members, and could be a useful starting point for something more ambitious.
"We can use the infrastructure built for Pera and use it as a platform to implement a mandatory DC scheme," Ferrer said.
A DC programme would also enable younger members to invest more prudently, if they are well advised. Most SSS assets, for example, are allocated to local government bonds, but in theory a DC scheme would allow young people to put more into equities or other higher-yielding assets.