THE Capital Market Development Council (CMDC) chaired by Finance Secretary Carlos G. Dominguez III is considering making it mandatory for private companies to partially or fully fund retirement plans for their workers.
In a statement, the Department of Finance said Dominguez backed the recommendation by Fund Managers Association of the Philippines (FMAP), saying this will help provide sufficient funds for the pension or retirement plans of private sector workers, while boosting the demand side for investments that could boost the growth of the Philippine capital market.
Dominguez also wrote a letter to Labor Secretary Silvestre Bello III, saying the CMDC has decided to consult the Department of Labor and Employment, given DOLE’s regulatory authority on the implementation of the Labor Code and Republic Act 7641 or the Philippine Retirement Pay Law. The latter mandates private companies employing more than 10 workers to either provide a retirement plan or retirement pay for their respective qualified employees.
“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.
With representatives from the public and private sector, the CMDC is a coordinating body tasked to facilitate the development of the Philippine capital market. Atty. Benedicta Du-Baladad, the cochairman from the private sector, spearheaded the project on the implementation of reforms in the corporate pension system.
In his letter to Bello, Dominguez said 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.
“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. 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,” Dominguez said in his letter.
Dominguez said the FMAP studies also 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, adding that 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.
The studies done by FMAP formed part of the process done by the CMDC in identifying projects, programs, and action plans under the Capital Market Development (CMD) Third Blueprint 2019-2025.
One of CMDC’s priority projects is the implementation of reforms in the corporate pension system to achieve a robust supply and demand resource in the Philippine capital market and ensure adequate retirement benefits for private sector workers.
Dominguez also told Bello that CMDC has created a technical working group (TWG), headed by National Treasurer Rosalia de Leon, for this priority project that will coordinate with DOLE to discuss the FMAP recommendation, which was supported by the Asian Development Bank.
Fiscal risk
In a separate message to reporters on Sunday, Dominguez also said the CMDC is studying higher levels of funding for pension and retirement pay system compared to the present situation.
“This is to reduce fiscal risk in the system as the country ages over the longer term and also as an ancillary measure to make pensions more portable,” he said.
While he said encouraging the adoption of Personal Equity and Retirement Accounts (PERA) under Republic Act 9505 helps increase funding levels, the finance chief said increased funding over broader pension system like the popularity of the 401k product in the United States is “similarly desirable.”
Filipinos are able to prepare for their eventual retirement by opening a voluntary account or PERA. Unlike existing national or corporation pension schemes, PERA does not require deductions from one’s salary to accumulate funds but relies on local worker’s decision to invest up to P100,000 annually to prepare for retirement and up to P200,000 annually for overseas Filipino workers. Contributions to employees’ PERA can also come from employers.
On the other hand, the 401k plan in United States is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan.
“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 said.