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Regulation and Governance of

Philippine Public Pension Funds


By: Helena S. Valderrama, Ph.D. 1

Abstract

The continuing clamor for a legislated (or executive-mandated) across-the-board increase in the
monthly pensions of retired members of the Social Security System raises regulation and
governance issues in the management of the two biggest pension funds in the country. The
pension increase will not come from public funds, and thus solely involves a transfer from the
contributions of existing SSS members to the retired ones. Do current regulations and practices
provide appropriate mechanisms to ensure that the funds are used properly for the members’
social security protection? Is there proper and adequate communication to the members on the
funds’ condition, performance and utilization? To what extent are the funds’ leadership and
management teams accountable to the members? The study finds important gaps that need to
be addressed in the areas of regulation, fairness, transparency and accountability of both the GSIS
and the SSS in order for members to be confident that their interests are adequately protected in
the administration of the moneys they have contributed to these institutions in order to protect
them in their old age.

1
Correspondence: hsv@upd.edu.ph

1
Regulation and Governance of
Philippine Public Pension Funds2

1 INTRODUCTION AND STUDY OBJECTIVES

Social Insurance, along with Labor Market Interventions, Social Welfare, and Safety Nets, are
components of Social Protection, which has been elaborated on and defined for the Philippines
by the National Economic Development Agency (NEDA) as, “policies and programs that seek to
reduce poverty and vulnerability to risks and enhance the social status and rights of the
marginalized by promoting and protecting livelihood and employment, protecting against hazards
and sudden loss of income, and improving people’s capacity to manage risks.” (NEDA 2007)

The above-cited NEDA document likewise defines Social Insurance, the subject of this paper, as
“programs that seek to mitigate income risks by pooling resources and spreading risks across time
and classes. These are designed in such a way that beneficiaries pay a premium over a given period
of time to cover or protect them from loss of income and unemployment as a result of illness,
injury, disability, retrenchment, harvest failure, maternity, old age, etc..” (NEDA, 2007)

The Social Security System (SSS) and the Government Service Insurance System (GSIS), together,
are the institutions that provide social insurance to the great majority of working class Filipinos.
While both have programs to address the needs of members during times of illness, disability,
calamity, etc., the bulk of the resources of these institutions are meant to provide for members’
old age benefits. The key role played by these institutions in providing protection in one’s old age
came to the fore when legislation that aimed to provide across-the-board pension increase for
SSS retirees was vetoed by former President Benigno S. Aquino III in 2015. The main argument
for the law was to help private sector retirees cope with the high cost of living expenses. It was
revealed that most SSS retirees receive monthly pensions that are less than half the minimum

2
By H. Valderrama, Professor and BSP Professorial Chair Holder, Cesar E.A. Virata School of Business,
University of the Philippines Diliman. The author gratefully acknowledges the financial assistance of the
BSP through its professorial chair donation to the UP VSB and the research assistance of Toni Lei Uy.

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wage. However, SSS Management also pointed out that increasing expenditures without raising
contributions will jeopardize the SSS’ social security fund. Aquino justified the veto by noting that
the pension increase will result in net outflows in the range of P16 to P26 billion per year. These
deficits will reduce the life of the fund by 13 years (i.e., deplete the fund by 2029), in effect risking
the pensions of all future retirees in favor of the present ones3. Aquino said it will be both
“heartless and careless” of him to approve the increase given these conditions.

Yet, almost as soon as the next Congress opened, new bills proposing to increase SSS pensions
were filed by lawmakers. Renewed calls to increase monthly pensions of SSS retirees were made
to the new Administration, which had included this among its election promises. As of this
writing, it is reported that the House Committee on Government Enterprises and Privatization
had already passed the bills filed, having opted to adopt, without amendment, the Committee
Report on this matter filed in the previous Congress4.

This persistent effort by political entities to intervene in the use of the SSS’ social security fund is
the trigger for the current inquiry into the regulation and governance of the SSS and its
counterpart for government workers, the GSIS. In a recent forum on this issue, former Prime
Minister Cesar Virata questioned the jurisdiction of Congress to legislate the across-the-board
increase, observing that SSS’ funds are not public funds. Who has the authority to decide on how
funds of the SSS and the GSIS are used? Are there sufficient mechanisms in place to protect the
interests of the principal stakeholders of these funds; i.e., the member-contributors?

2 REVIEW OF LITERATURE

Aging and the issues that come with it have been the concern of many governments and major
international institutions worldwide for decades now. The World Bank (WB), in 1994, published
Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth, and called it the “first
comprehensive, global examination of th(e) complex and pressing set of issues” surrounding old
age security arrangements (World Bank 1994). The World Bank report highlighted the fact that

3 http://www.rappler.com/business/211-governance/118998-aquino-vetoes-sss-pension-bill (accessed 3
Jul 16)
4
http://cnnphilippines.com/news/2016/09/08/house-committee-passes-sss-pension-hike-bill.html
(accessed 26 Sep 16)

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providing for the security of an aging population can come at the expense of spending for growth.
More importantly, the report identified the possible objectives (i.e., redistribution, saving,
insurance) 5 , desired outcomes (i.e., poverty reduction, forced and voluntary savings), and
financing modalities (e.g., taxes, earnings-based contributions) of a pension system. The
recommendation of the 1994 WB Report was for governments to develop three systems to
provide for the financial needs of its elderly: a publicly-managed system with mandatory
participation; a privately managed mandatory savings system; and voluntary savings.

Table 1 – Three Pillars for Financial Security for the Elderly (WB 1994)

Pillar Objective Form Financing Outcome


First pillar – Means-tested,
mandatory Redistribution minimum pension Poverty
Tax-financed
publicly and insurance guarantee or flat reduction
managed pillar rate
Second pillar – Mandatory
mandatory Saving and personal savings Regulated and
Forced saving
privately insurance plan/occupational fully-funded
managed pillar plan
Voluntary
Third pillar – Saving and personal savings Voluntary
Fully-funded
voluntary pillar insurance plan/personal saving
plan

In 2005, the World Bank, in a report entitled Old Age Income Support in the 21st Century, revised
the above framework to add two more pillars. The WB re-emphasized that a pension system’s
multiple objectives require a multi-pillar approach. The international organization also noted that
reforms and appropriate pension system design are country-specific, as a country’s initial
conditions, as well as its economic, institutional, financial, and political environment, vary. Table
2 below summarizes the characteristics of the WB’s (expanded) multi-pillar approach:

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The WB report defined each as follows: “Saving involves income smoothing over a person’s
lifetime xxx Redistribution involves shifting lifetime income from one person to another xxx
Insurance involves protection against the probability that recession or bad investments will wipe
out savings, that inflation will erode their real value, that people will outlive their own savings, or
that public programs will fail. (WB 1994, p10)

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Table 2 – Multi-pillar Pension Taxonomy (WB 2005)

Target groups Main criteria


Objective Pillar Life- Inform
Formal Funding/
time al Characteristics Participation
sector collateral
poor sector
"Basic" or
"social pension"
Elderly
at least social Universal or Budget/general
poverty 0 X X x
assistance, residual revenues
protection
universal or
means-tested
Elderly Public pension
poverty plan, publicly
Contributions,
protection managed,
perhaps with
and 1 X defined benefit Mandated
financial
consumpti or notional
reserves
on defined
smoothing contribution
Consumpti
Occupational or
on
personal
smoothing
pension plan,
and elderly
fully funded
poverty 2 X Mandated Financial assets
defined benefit
protection
or fully funded
through
defined
minimum
contribution
pension
Occupational or
personal
pension plan,
Consumpti
partially or fully
on 3 x X X Voluntary Financial assets
funded defined
smoothing
benefit or
funded defined
contribution
Access to
informal (e.g.,
family support),
Elderly other formal
poverty social programs
protection (e.g., health) Financial and
and 4 X X X and other Voluntary non-financial
consumpti individual assets
on financial and
smoothing nonfinancial
assets (e.g.,
homeowner-
ship)
Note: The size of x or X, normal or bold, characterizes the importance of each pillar for each target group.

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The WB’s framework also identified the primary and secondary criteria to be used in evaluating
pension fund design alternatives. The primary criteria are: adequacy (also known as coverage),
affordability, sustainability, equitability, predictability, and robustness. The framework also
proposed that alternative pension fund designs should be assessed in relation to their
contribution to output and growth. These secondary evaluation criteria refer to minimization of
labor market distortions, contribution to savings mobilization, and contribution to financial
market design (WB 2005).6

Other multi-lateral institutions have devoted significant resources to the study of pension systems
as well. The Organisation for Economic Cooperation and Development (OECD) published a series
of papers in 2008 specifically on governance of pension funds and pension systems. The OECD-
sponsored studies observed that many of the governance weaknesses of pension funds relate to
the composition, qualifications, mandate, and conflicts of interest within the funds’ governing
boards. Specific recommendations made by the paper include a more balanced representation
of the stakeholders in the governing board, a higher level of board competence and expertise,
and improved regulation in the form of codes of conduct to address conflicts of interest and a
strengthened supervising authority (Stewart and Yermo, 2008).

As regards public pension funds, Yermo (2008) noted that these should, at a minimum, be subject
to the same governance and management standards as privately-managed funds. In addition,
public pension funds require governance mechanisms that should “isolate (them) effectively from
undue political influence”.7

Finally, the Asian Development Bank (ADB) has also supported research on pension systems,
expectedly covering those in Asian countries. Park and Estrada (2013) analyzed the pension
systems of China, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam. The
authors found key shortcomings, particularly in terms of coverage and adequacy. Notably, the
authors also observed that Asian pension systems suffered from weak regulation and governance

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While the WB’s multi-pillar approach largely found favor with policy makers and academics , criticism of
some of the World Bank’s prescriptions, e.g., the preference for funded and privately-managed pension
systems, exist (c.f., V. Wodsak and M. Koch (2012), From Three to Five: the World Bank’s Pension Reform
Policy Norm in S. Park and A. Vetterlein (eds.), Owning Development: Creating Policy Norms in the IMF and
the World Bank, Cambridge University Press).
7
Yermo, J. (2008), "Governance and Investment of Public Pension Reserve Funds in Selected OECD
Countries", OECD Working Papers on Insurance and Private Pensions, No. 15, OECD Publishing.
doi:10.1787/244270553278

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structures. A more recent document is Strengthening Public Pension Systems in Asia: Proceedings
of the 2015 ADB—PPI Conference on Public Pension Systems in Asia, Focus: Cambodia, Lao
People’s Democratic Republic, Myanmar, Viet Nam, and Thailand, where the ADB compiled
several papers studying various issues on pension systems in the region. Park (2015) and Reilly
(2015) noted that pension systems in Asia suffered from much lower coverage, contribution, and
income replacement ratios compared with counterparts in developed countries. As regards areas
for reform, Park and Estrada (2013) endorsed strengthening the institutional and administrative
capacity of Asian pension systems, having a dedicated regulator for the sector, expanding
coverage, and instituting mechanisms to improve sustainability. Park (2015) also suggested a
number of reform initiatives, including the need to improve transparency, accountability, and
professionalism. Park (2015) and Reilly (2015) emphasized the importance of building up public
trust and confidence in the pension system in order to encourage participation and compliance.
A third paper (Asher 2015) also commented on the need to build trust in the pension system,
which it said can come from managing administrative costs effectively and communicating
promptly.

3 METHODOLOGY

The investigation into the regulation and governance of the Philippine Public Pension Funds
involved a review of the main pieces of legislation that created or that govern the two funds. The
research also included looking into existing policies affecting the two pension institutions.
Evidence for the study was obtained as well from a review of the financial statements of the SSS
and the GSIS, as well as those of the National Home Mortgage Finance Corporation (NHMFC).
Both the SSS and the GSIS had lent, in the late 1980s to early 1990s, significant amounts to the
NHMFC to finance the latter’s housing program. How this investment turned out is highly
instructive on the issues this study wants to look into.

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4 REGULATION OF THE PHILIPPINE PUBLIC PENSION FUNDS

This section looks at the principal sources and bases of the regulation over the SSS and the GSIS.
These are the laws (with subsequent amendments) that created them as well as the GOCC
Governance Act, passed in 2011, which subjected both institutions to regulations intended for all
government owned and controlled corporations.

4.1 CHARTER

The table below summarizes key features in the enabling legislation of the two pension
institutions.

SSS GSIS

Enabling Law RA 1161 (1954), as amended by RA Commonwealth Act No. 186 (1936), as
and Year of 8282 (1997) amended by Presidential Decree No.
Creation 1146 (1977) and Republic Act No. 8291
(1997)

Declaration of “It is the policy of the State to establish, “In order to promote the efficiency and
State Policy develop, promote and perfect a sound welfare of the employees of the
and viable tax- Government of the Philippines and to
exempt social security system suitable replace the present pension systems
to the needs of the people throughout established in Acts Numbered 1638,
the Philippines which shall promote so- 3050, 3173, as amended…” (CA 186 Sec.
cial justice and provide meaningful pro- 3)
tection to members and their beneficia-
ries against the hazards of disability,
sickness, maternity, old age, death,
and other contingencies resulting in
loss of income or financial burden. To-
wards this end, the State shall endeavor
to extend social security protection to
workers and their beneficiaries.” (RA
8282 Sec. 2)

Governing Body “The SSS shall be directed and control- “The corporate powers and functions of
led by a Social Security Commission, the GSIS shall be vested in and
hereinafter referred to as ‘Commission’, exercised by the Board of Trustees
composed of the Secretary of Labor composed of the President and General
and Employment or his duly designated Manager of the GSIS and eight (8) other

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undersecretary, the SSS president and members to be appointed by the
seven (7) appointive members, three (3) President of the Philippines, one (1) of
of whom shall represent the workers' whom shall be either the President of
group, at least one (1) of whom shall be the Philippine Public School Teachers
a woman; three (3), the employers' Association (PPSTA) or the President of
group, at least one (1) of whom shall be the Philippine Association of School
a woman; and one (1), the general pub- Superintendents (PASS), another two
lic whose representative shall have a- (2) shall represent the leading
dequate knowledge and experience re- organizations or associations of
garding social security, to be appointed government employees/retirees,
by the President of the Philippines. another four (4) from the banking,
(underscoring added) (RA 8282 Sec. 3) finance, investment, and insurance
sectors, and one (1) recognized member
of the legal profession who at the time
of appointment is also a member of the
GSIS.” (underscoring added) (RA 8291,
Sec. 42)
Per RA 1161 Per RA 8291
Social Security
1. Retirement 1. Separation
Benefits
2. Death 2. Retirement
3. Disability 3. Disability
4. Maternity 4. Funeral benefit
5. Sickness 5. Survivorship
6. Funeral 6. Life Insurance
Type of Defined benefits8 Defined benefits
Retirement
Benefits Plan

Investment of “xxx the Commission shall manage and “xxx investments shall satisfy the
Reserve Funds9 invest with the skill, care, prudence and requirements of liquidity,
diligence necessary under the circum- safety/security and yield in order to
stances then prevailing that a prudent ensure the actuarial solvency of the
man acting in like capacity and familiar funds of the GSIS xxx” (RA 8291 Sec. 36)
with such matters would exercise in the
conduct of an enterprise of a like cha-
racter and with similar aims
xxx in line with the basic principles of
safety, good yield and liquidity xxx” (RA
8282 Sec. 26)

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A defined benefit plan is a retirement plan that pays retirees a prescribed amount of benefits irrespective of the
contributions made towards, and the value of, the fund from which the benefits will be drawn. The employer/fund
sponsor makes itself liable for the amount of benefits it promises to pay to retiring members. It is distinguished from
a defined contribution plan whereby an entity’s obligation to provide retirement benefits is discharged by making
agreed fixed contributions into a separate entity (retirement fund). In a defined benefits plan, the risk of poor
performance of the retirement fund is borne by the employer/fund sponsor while in a defined contributions plan, this
risk is borne by the retirees.
9
The prescribed areas of investment of SSS and GSIS funds are examined more closely in Part 5 of this report.

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Under Article IX (D) of the Philippine Constitution, the Commission on Audit has exclusive
authority to examine and audit the accounts of all government entities, including GOCCs, and
submit to the President and Congress an annual report on the financial condition and operation
of each. The Constitution also gives the COA the exclusive authority to promulgate the accounting
rules and regulations for government entities.

4.2 THE GOCC GOVERNANCE ACT OF 2011

SSS and GSIS are also governed by RA 10149 or the GOCC Governance Act of 2011. This law was
passed by the 15th Congress to enable the State to “actively exercise its ownership rights in GOCCs
and to promote growth by ensuring that operations are consistent with national development
policies and programs” (RA 10149, Sec. 2). The law created the Governance Commission for
GOCCs (GCG), a “central advisory, monitoring, and oversight body” with extensive supervisory
powers over the GOCCs aimed at strengthening the governance in the sector.

RA 10149 identified both the SSS and the GSIS as GOCCs, specifically as Government Financial
Institutions (GFI) (RA 10149 Sec. 3m).

Pursuant to RA 10149, the GCG adopted an Ownership and Operations Manual and corporate
standards for the GOCC sector. In this Ownership and Operations Manual (GCG Memo Circular
No. 2012-06), the SSS and GSIS, along with the Home Development Mutual Fund and the
Philippine Health Insurance System, were more specifically classified as Social Security Institutions
under the GFI group. Articles 6 and 8 of the said manual are also directly relevant to the SSS and
GSIS. Article 6 explains the State’s role in GOCCs that are essentially trustees of funds contributed
by the public, while Article 8 enumerates the powers of the State over all GOCCs, as exercised
through the President or the GCG as the State’s agents. Article 6 is reproduced in full in the
succeeding paragraph, while selected powers of the State over GOCCs including the SSS and the
GSIS, as exercised through the GCG, are listed after.

Art. 6. State's Role and Relationship with GOCCs Holding in Trust the Funds or
Contributions of Members. - The State recognizes the exemplary role of certain
GOCCS which are constituted and operated to hold in trust the contributions of
their members, such as the Social Security System (SSS) and the Government
Service Insurance System (GSIS), where the role of the State is not that of an active

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owner or investor, but as a guardian to promote the best interests of the
members/contributors, whose contributions are to be prudently invested for their
benefit, and also as a guarantor for the contingent liabilities that the State may
assume in instances when such GOCCS are financially unable to provide the
benefits to the members/contributors of such systems.
Art. 8. State Acting Through the National Government – The National Government
is the direct Agent of the State in pursuing the State’s role and responsibilities,
and enforcing the State’s rights and prerogatives as the active owner of GOCCs
and Subsidiaries, and as an investor in Affiliates.
Art. 8.2. xxx In the following specific instances under the Act, the National
Government is represented by the GCG to exercise specified State rights of
ownership over GOCCs, thus:
(a) Evaluate the performance and determine the relevance of GOCCS, and pursue
the re-organization, merger, streamlining, abolition, or privatization of
GOCCS;
xxx
(e) Promulgate, with the approval of the President of the Philippines, and
implement the Fit and Proper Rule that shall identify the necessary skills and
qualifications required of Appointive Directors;
(f) Establish and implement Performance Evaluation Systems including
Performance Scorecards, applicable to all GOCCS in general, and to the
various GOCC classifications, in particular;
(g) Conduct periodic study, examination, evaluation and assessment of the
performance of the GOCCS, receive, and in appropriate cases, require reports
on the operations and management of the GOCCs including, but not limited
to, the management of their (sic) assets and finances of the GOCCs;
xxx
(i) Conduct compensation studies and, pursuant thereto, develop and
recommend to the President a competitive Compensation and Position
Classification System (CPCS) which shall apply to all officers and employees of
GOCCS whether covered by or exempt from, the Salary Standardization Law
(j) Formulate the per diems, allowances, incentives and compensation structure
for the members of the Governing Boards;
xxx

5 FINDINGS AND ANALYSIS

The World Bank multi-pillar pension systems framework is informative in that it highlights the
multiple objectives that mechanisms, such as pension institutions, may have in addressing the
risks arising from an aging citizenry. This clarity of objective is needed at the outset so desired
outcomes and governance structures, including accountabilities, can be appropriately prescribed.

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A review of the provisions of legislation and other documents embodying State policies affecting
the SSS and the GSIS shows conflicting aims that significantly weaken the ability of the funds to
serve their supposed principal mandate of providing social security protection to their members.
The primacy of contributing members as stakeholders of these pension institutions is not evident
in the governance structure of these funds. Evidence is also obtained that greater transparency
and quality reporting are needed in the management of the pension institutions. These findings
are discussed in greater detail in the succeeding paragraphs.

5.1 EVIDENCE OF CONFLICTING AIMS AND WEAK ACCOUNTABILITY

5.1.1 Investment of Public Pension Funds in Low-Cost Housing Programs

The State policy that underlies the creation of both the SSS and the GSIS was clearly for the social
security protection and welfare of workers and employees who shall become the members of
these institutions. The enabling legislation also explicitly required that the principal criteria that
should guide the investment of these institutions’ pension funds are safety/security, yield, and
liquidity.

In the list of allowed investment instruments for both pension institutions, however, loans for
housing, particularly low-cost housing, appear, which, particularly in the 1980s and 1990s, is
arguably not the kind of instrument that can be considered safe and liquid. The actual provisions
are reproduced below:

For the SSS

"xxx (e) in bonds, securities, promissory notes or other evidence of indebtedness


of agencies of the National Government or financial intermediaries to finance
housing loans of members; and in long‐term direct individual or group housing
loans giving priority to the low‐income groups, up to a maximum of ninety percent
(90%) of the appraised value of the properties to be mortgaged by the borrowers;
xxx Provided, That not more than thirty five percent (35%) of the Investment
Reserve Fund at any time shall be invested for housing purposes; xxx” (RA 8282
Sec. 26)

For the GSIS

“ xxx (c) in direct housing loans to members and group housing projects secured
by first mortgage, giving priority to the low income groups and in short and

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medium term loans to members such as salary, policy, educational, emergency
stock purchase plan and other similar loans: Provided, That no less than forty
percent (40%) of the investible fund of the GSIS Social Insurance Fund shall be
invested for these purposes;

(d) in bonds, securities, promissory notes or other evidence of indebtedness of


educational or medical institutions to finance the construction, improvement and
maintenance of schools and hospitals; xxx” (RA 8291 Sec. 36)

Both institutions were actually tapped to provide funding for the government’s housing program.
As disclosed in the 2004 Financial Statements of the SSS (Note 11):

The National Home Mortgage Finance Corporation (NHMFC) administered the


United Home Lending Program (UHLP) created by the Aquino administration in
1988. The SSS, together with the GSIS and the Home Development Mutual Fund,
provided funds for home mortgages of its members through UHLP Loans released
to NHMFC on various dates from 1988 through 1995 amounted to P30.075 billion.
On December 17, 2003, the SS Commission … approved the restructuring of the
P40.5 billion obligation of NHMFC to SSS. One of the conditions of the
restructuring agreement is the sale by NHMFC of its highly delinquent portfolio.
On May 18, 2004, said portfolio was successfully bidded (sic) out and the SSS net
share in the proceeds is P3.464 billion. This amount is reflected in the accounts as
a receivable from NHMFC.

For the GSIS, the following was disclosed regarding this loan in its 2011 Financial Statements
(Note 6.3):

Restructuring of National Home Mortgage and Finance Corporation (NHMFC)


account

The GSIS Board of Trustees in its Resolution No. 89 dated March 31, 2011,
approved the 100 per cent provision for impairment loss in 2010 for the NHMFC
account, both for the outstanding balance of the principal obligation and interest
due to non-payment of the account for the past seven years. Details are as
follows:

Principal 6,214,907,610
Interest 1,669,353,075
Balance per books as at December 31, 2010 7,884,260,685

The note also disclosed that a Dacion-en-Pago arrangement was subsequently worked out with
NHMFC, which included an agreement to receive from the NHMFC the amount of P1.886 billion
in installments over the next 10 years.

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Nothing is subsequently disclosed regarding the NHMFC loan in the 2012 to 2015 Financial
Statements of the GSIS. The SSS, however, continues to recognize a receivable from the NHMFC
as shown in the table below:

Table 3 – Loan Receivable from NHMFC for years ended 31 December -

2014 2013 2012


Current
Loan to NHMFC 481,114,295 740,582,738 740,582,738

Noncurrent
Loan to NHMFC 10,491,014,866 10,369,163,018 11,263,103,886
Impairment Allowance 1,025,498,216 985,090,243 625,868,801
9,465,516,650 9,384,072,775 10,637,235,085

Total Gross Loan


10,972,129,161 11,109,745,756 12,003,686,624
Receivable NHMFC

While in the 2014 Financial Statements (Note 17) of the National Home Mortgage Finance
Corporation, the following liabilities regarding the UHLP are disclosed:

The above information does not only give an idea of the magnitude of the losses incurred by the
SSS and the GSIS from their “investment” in the Government’s UHLP, it also provides an indication
of how much of the remaining loan receivable from NHMFC in SSS’ books may still be collectible.

Aside from the actual losses incurred by both pension funds as a result of bad loans in the UHLP
portfolio, the funds also incurred opportunity costs to the extent of the difference between the
rates charged to NHMFC and market yields. A study by the Philippine Institute for Development
Studies on the National Government’s Housing Programs estimated that the “interest foregone”
by the three funders of the UHLP (just) for the period 1993 to 1995 was P8 billion (Llanto and

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Orbeta, 2001). Among the three funders, the SSS and GSIS provided the bulk of the funds for the
program.

That Government policymakers continue to see the SSS and the GSIS as potential funders for
government housing programs is evidenced by the 2011 to 2016 Philippine Development Plan.
Among the policies and strategies to address the backlog in the housing sector was the following
statement: “Create alternative funds and mobilize resources, to spur housing production through
the revival of the SSS, GSIS and GFIs’ contribution in the housing sector pool.” (PDP 2011 to 2016,
p. 271).

5.1.2 Stakeholder Representation in Governing Boards

Public pension funds can be said to have three key stakeholders: the plan participants, the
Government, and the taxpayers (Hess and Impavido, 2003). Plan participants include current
contributors, retired members, and survivors and dependents of plan participants. The
Government is a stakeholder in the sense of being “xxx a guardian to promote the best interests
of the members/contributors, whose contributions are to be prudently invested for their benefit,
and also as a guarantor for the contingent liabilities that the State may assume” as stated in the
GCG Ownership and Operations Manual. Taxpayers are stakeholders since taxes will be used to
answer for any liabilities that may be assumed by Government if the public pension funds are
unable to meet their obligations to plan participants.

Among the three, however, it seems evident that plan participants are the key stakeholder group.
They are the main (in fact, should be the only) beneficiaries of pension assets. They also are the
main source of pension funds. Yet, plan participants are a minority in the governing boards of
both the SSS and the GSIS. For the SSS, workers and employers have equal representation in the
SS Commission. For the GSIS, representatives from the banking, finance, investment, and
insurance sectors outnumber GSIS members in the Board, unless the President appoints a GSIS
member to be the institution’s President and General Manager, which qualification is not required
under the law. All board positions are obtained by Presidential appointment. The provisions of
the GCG Ownership and Operations Manual cited in an earlier section of this paper explicitly give
significant authority to the GCG, including determining how, and on what basis, members of the

15
GOCC boards will be compensated. The foregoing factors significantly weaken the ability of plan
participants to hold the governing boards accountable to them.

5.1.3 Political influence and the moral hazard problem

The need of members of the Philippine Congress to mandate pension increases may have been
triggered by a laudable intention. However, it raises and becomes an issue of undue political
influence on the disposition of the pension fund which has far-reaching implications. Politicians
deciding on the pension increase are not immediately and directly subject to the consequences
of any problems their decision may cause which is a moral hazard concern. It does not help when
explanatory notes accompanying the proposed legislation from various lawmakers did not refer
to an in-depth analysis or study to substantiate the amount of the proposed increase or to justify
why an across-the-board increase is being put forward. The disregard for the evidence presented
by the SSS of how the pension increase without identifying a fund source will significantly shorten
the fund’s life is disturbing, especially to plan participants who are not yet retired and on whom
the onus of any adverse consequences of the proposal will directly fall. It cannot be discounted
that plan participants’ trust and confidence in the pension system can be seriously undermined
by the actions of Congress. This in turn will jeopardize efforts to encourage greater participation
in the pension system, particularly by the self-employed and the professionals, which is
particularly crucial for the SSS.

5.2 EVIDENCE OF INADEQUATE TRANSPARENCY

5.2.1 Quality of financial reporting

In a previous study, areas for improvement in the quality of financial reporting of the GSIS were
identified. It was found that, despite an unqualified audit opinion, there was material non-
compliance in the reporting of the GSIS’ retirement and insurance liabilities in 2012. This results
in an overstatement of GSIS 2012 net worth by almost P19 billion and an understatement of
liabilities by the same amount (Valderrama 2015).

Significant instances of non-compliance with financial reporting standards were also found in the
review of the 2014 financial statements of the Social Security System. The non-recognition of

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insurance liabilities and policy of recognizing Membership Contributions as revenue only upon
collection are material deviations from accounting standards. Consequently, the assets, liabilities,
capital, revenues and expenses of the SSS for 2014 are not fairly presented in its financial reports
in accordance with Philippine Financial Reporting Standards.

Two other areas in which disclosure is lacking in the SSS’ financial statements are in receivables
and investments. As a result of the policy of recognizing Membership Contributions as revenue
only upon collection, the collection efficiency of the SSS cannot be assessed. Earlier this year,
news reports quoted a figure of P325 billion of SSS receivables10. This amount cannot be found in
the pension fund’s financial statements.

There is also insufficient information to assess the quality and significance of financial assets on
SSS’ financial position and performance due to inadequate disclosure, in violation of accounting
standards.

Financial assets comprise 94 percent of the total assets of SSS on 31 December 2014. This asset
class is the main source for the payment of SSS benefits; thus, the quality and value of these assets
are of great importance to SSS members and all individuals needing to assess SSS’ financial
condition and performance.

Based on the 2014, 2013 and 2012 Statements of Financial Position of the SSS, the entity has the
following investments in financial assets (amounts in pesos):

Table 4 – SSS Financial Assets as of Years Ended


31 December 2014 31 December 2013 31 December 2012

Cash and cash equivalents 14,083,905,111


17,949,859,943 16,151,334,531
Held-to-maturity investments 17,133,909,303
11,718,489,366 731,066,508
Held-for-trading financial 4,320,944,049
3,926,486,365
assets 2,637,786,634
987,071,510
Loans & receivables 698,177,808
6,935,537,428
Other receivables 10,178,110,135 6,838,058,869

Non-current financial assets 354,840,305,710


317,547,179,666 312,925,169,986
Total Financial Assets 400,860,894,432 359,361,603,403 339,380,895,087

10
Rosario, B., Make Public Audited Computation of Collections, Colmenares Urges SSS (Manila Bulletin, January 25,
2016) http://www.mb.com.ph/make-public-audited-computation-of-collections-colmenares-urges-
sss/#YhAHzsTed4PXT3wa.99

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Total Assets 427,164,923,242
384,633,278,332 362,805,054,982
FA as % of Total Assets 94% 93% 94%

Non-current financial assets, which constitute the bulk of the SSS’ Total Assets, are mostly in the
form of Available-for-Sale and Held-to-Maturity Instruments, as shown in Table 4A below.

Table 4A – Breakdown of Non-Current Financial Assets as of 31 December


2014 2013
Available for sale financial assets 106,434,270,333 30% 96,359,059,054 30%
Held-to-maturity investments 173,992,829,497 49% 147,619,118,062 46%
Member loans 65,925,575,783 19% 64,016,332,962 20%
Accumulated impairment loss (4,699,809,548) -1% (4,447,211,816) -1%
Loan to National Home Mortgage Finance
10,491,014,866 3% 10,369,163,018 3%
Corporation
Accumulated impairment loss (1,025,498,216) 0% (985,090,243) 0%
Housing loans 2,942,552,434 1% 4,249,848,356 1%
Accumulated impairment loss (226,736,478) 0% (638,040,381) 0%
Commercial and industrial loans 416,802,271 0% 409,097,786 0%
Accumulated impairment loss (63,817,391) 0% (63,827,453) 0%
Program MADE 17,219,220 0% 17,219,220 0%
Accumulated impairment loss (17,219,219) 0% (17,219,219) 0%
Loan to government agencies 21,657,436 0% 49,462,389 0%
Sales contract receivable 662,212,666 0% 641,815,874 0%
Accumulated impairment loss (30,747,944) 0% (32,547,943) 0%
Total Noncurrent Financial Assets 354,840,305,710 100% 317,547,179,666 100%

In Note 29 of the 2014 Financial Statements describing the financial risk management policies
and practices of the SSS, however, analysis is provided only for P314.4 billion (78.4%) of the
financial assets portfolio of the Agency, as can be seen below:

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Table 5 – Aging Schedule of SSS Financial Assets per Note 29 of the 2014 Financial Statements (SSS
2014, p. 74)

The list and amounts of Financial Assets on the Statement of Financial Position (shown in Table 4)
do not completely reconcile with the analysis shown in Table 5 which is in the Notes to the
Financial Statements. There is no information provided on the credit risk for around P72 billion
of financial assets in SSS’ SFP11 or on the market risk exposure of the SSS’ financial assets, including
available-for-sale financial assets amounting to P106.4 billion (24.9 percent of SSS’ total assets as
of December 31, 2014).

5.2.2 Administrative cost management

Both the SSS and the GSIS are allowed by their respective charters to incur up to 12 percent of
revenues for their operating expenses. For the period 2010 to 2014, SSS’ operating expenses, as
a percentage of revenues, fell from 7 to 5. As can be seen in Chart A below, the decline is mostly
a result of a faster growth rate in revenues (which includes member contributions) as operating
expenses had actually stayed flat in absolute amounts during this period.

11
Total financial assets in the SFP of P400.86 billion (Table 3) less Financial Assets in Note 29 of P314.4 billion (Table 4)
and cash and cash equivalents of P14 billion

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Chart A

The same observations obtain for the GSIS. As can be seen in Chart B below, the GSIS’ operating
expenses were flat during the period 2005 to 2012. Given the growth in revenues during the
period, operating expenses as a percentage of revenues went down to less than 5 percent by
2012.

Chart B

The concern regarding administrative cost management is the use of revenues, inclusive of
Member Contributions, as basis for determining the appropriate level of pension fund operating
costs. The fact that expenses are below the 12 percent maximum allowed does not indicate
efficiency. A better indicator for administrative efficiency should consider drivers of operating
costs, e.g., number of members/pensioners, rather than revenues. An example of a more relevant
indicator is estimated for the two funds for CY 2014 in Table 6 below:

Table 6

Social Security System Government Service Insurance System

Operating Expenses to Total


5.23% 2.24%
Revenues

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Operating Expenses per Member
229.63 2,765.19
and Pensioner (in Phil peso)

While SSS and GSIS may have been allowed by their charters to incur expenses up to a certain
percentage of revenues, greater transparency in and proof of management’s prudence in the
incurrence of costs is certainly a factor that will inspire greater trust and confidence in the pension
systems.

6 CONCLUDING COMMENTS

“Pension systems represent a commitment between governments and their populations. Thus,
confidence and trust are imperative for long-term sustainability.” (Reilly, 2015)

Studies on pension systems in different countries emphasize how reforms to improve a country’s
pension system’s effectiveness, adequacy and sustainability are context-dependent.
Nonetheless, the statement above regarding the need for confidence and trust in the system to
ensure its sustainability is difficult to dispute. This study has documented evidence that can (and
probably does) seriously undermine this trust and confidence in the public pension funds of the
Philippines. Some of the solutions such as greater participation by Member Contributors in the
pension funds’ governing boards, defining allowable investments solely on the basis of what is
more advantageous to plan participants, and removing undue political influence in the fund’s use,
require amendments to the law. Other solutions pertain to improvements in transparency and
administrative cost management that is within the authority of Boards to implement. Ultimately,
the urgent and immediate goal for the public pension funds in the Philippines is to assure plan
participants that the pension funds to which they contribute for most if not all of their working
life, are managed professionally, have clear accountability for stakeholder-agreed outcomes, and
are not vulnerable to uses that do not directly relate to their welfare. Without these assurances,
no public pension system will succeed.

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