Good morning, Fr. Rod, Sister Leoba, George, Ladies and
Gentlemen …
As most of you probably know, the much awaited PERA Bill was
signed into law last August 22. Known as the Personal Equity
and Retirement Account Act of 2007, this bill was enacted in
order to pursue the government’s policy to “promote capital
market development and savings mobilization”.
My purpose this morning is to answer three questions:
- What, exactly, is PERA?
- Will PERA result in greater retirement savings for our
teachers?
- What opportunities does PERA present to CEAP?
Let me begin. Just last year, Citibank conducted an online survey
among Filipino adults who owned either a credit card or had a
bank account. The results showed that only about 1 in 10 of the
respondents have a retirement plan,and that the average
respondent’s savings will only last a little over two months.
While most of you are probably not surprised about this, it’s just
staggering to be reminded about it again.
Of course, I presume that all of our teachers within CEAP do
have a retirement plan of some sort. Whether these retirement
plans are sufficient for our teachers’ future is another, and
probably lingering, issue for some. Be that as it may, I know
we’re all doing our best to encourage savings and planning for the
retirement of all our teachers and employees.
But sometimes, our best isn’t good enough, and that’s why I think
PERA may provide an extra boost in our effort to help our
teachers and employees be better prepared for the future.
What exactly is PERA?
Basically, PERA is an effort by the government to encourage
voluntary personal long-term savings by eliminating taxes on
interest earnings, and offering additional tax credits depending on
the amount saved each year.
Here are the features of PERA:
1. It involves voluntary personal savings and encourages the
individual to save until he is 55 years old. This means that
this is not a program implemented by a company,
requiring employees to participate. It is purely voluntary,
and is a choice that an individual makes.
a. Any individual who wishes to take advantage of
the tax benefits of this PERA law can select upto 5
savings vehicles and designate these as his/her
PERA account(s).
b. The allowed savings vehicles are: mutual funds,
unit investment trust funds (UITFs), annuity
contracts, insurance pension products, pre-need
pension plans, listed shares of stocks and
exchange-traded bonds or any other investment
product or outlet allowed by the regulatory
authorities (SEC, BSP, Insurance Commission).
c. The law also requires that the individual should
select an Administrator to manage his PERA
accounts. It is likely that those companies offering
these investment vehicles will have a designated
individual or individuals that can serve as
administrator. Administrators have to be
accredited by the BIR as such.
2. What are the tax benefits? Here’s the good news.
a. At present, financial investments, whether they are
retail treasury bills, government securities, stocks
or bonds, mutual funds and UITFs, are subject to a
standard 20% withholding tax. With PERA, all
income derived from the PERA accounts are tax
free. Any account that an individual designates as
his PERA account will not have withholding tax.
b. Not only are the earnings of a PERA account tax
free, but a PERA investor is entitled to an income
tax credit equivalent to 5% of his total PERA
contribution for the year. Essentially, what the
government is doing is giving the PERA investor
an amount equal to an additional 5% which he can
add to his investment.
c. A shorthand way to remember this is that a PERA
account is TAX-FREE INTEREST PLUS FIVE
PERCENT (free).
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3. What are the conditions and restrictions? Now for the bad
news.
a. First of all, PERA is for individual investors; not
corporate or institutional investors. Sorry to the
school treasurers here who think they can invest
their school money and earn 5% more than usual.
b. Second, deposit products such as savings deposits
and time deposits are not allowed as PERA
accounts. This is in order to encourage the growth
of the capital markets. The implementing rules are
not yet out, so, we suspect this list would change.
c. As indicated earlier, the maximum that an
individual can save in his PERA account in one
year is P100,000. Even if he had more money to
invest, the tax incentive caps it at P100,000 for an
individual. Double for a married couple. Double
that further for OFWs.
d. Finally, in order to encourage long term savings,
these tax incentives will apply so long as the
individual keeps his savings in the PERA accounts
for at least 5 years or until he is 55 years old,
whichever is later.
Specifically, what is the impact of PERA on the mutual fund
industry and on CEAP Retirement?
My view is that PERA should have no significant impact as far as
the CEAP Retirement fund per se is concerned. This is because
your retirement fund is already in place and catering to the needs
of the schools to raise funds for the retirement of their teachers.
Remember, PERA involves voluntary personal savings, and has
no provisions incentivizing employer contributions. Therefore,
rather than compete with CEAP, PERA will supplement whatever
existing retirement plans are in place.
As for the mutual fund industry, in the long run, we foresee
growth because when personal investments shift to a PERA
account it is likely that mutual funds will be the investment
vehicle of choice for many. By nature, mutual funds, especially
equity or balanced mutual funds, provide the best overall return in
the long run as compared to other investment instruments.
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Will PERA induce more teachers to save for their retirement?
Before answering that directly, let me cite the record of the
United States whose counterpart legislation is what we are trying
to emulate in the Philippines. In the U.S., they have the IRA
(individual retirement accounts) and the 401K accounts, adopted
in 1974 and 1981 respectively. There have been numerous
studies determining the effect of these two enabling laws on the
retirement savings of individuals. In general, the evidence is
strong that the way people planned and invested for their
retirement changed significantly over time. Specifically,
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US$4.4 trillion or 26% of America’s US$16.6 trillion
total retirement assets are IRA assets.1
50% of IRA’s assets are employer-based (i.e. through
employer-participation in the IRA program).2
About 36% of American workers with less than one year
of tenure participated in a 401k plan in 2005.3
1
Source: David L. Wray, President, Profit Sharing/401(k) Council of America, Chicago, Illinois, Oct 30,
2007
2
Ibid.
3
Company Efforts Positively Impact Employees' 401k Saving Habits, Hewitt Associates,
LINCOLNSHIRE, IL, May 16, 2006
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Having said that, what do we expect will happen here in the
Philippines?
First of all, let me remind you that the implementing rules and
regulations are not yet in place. We ourselves have a number of
questions about what is and is not allowed, or what can and
cannot be done. But as soon as these are released, you can be
sure that there will be a flurry of activities spurred by fund
administrators, trust banking units, mutual fund companies and so
on urging people to open PERA accounts.
1. First we will see the well-to-do taking advantage of the
PERA to max out their investment returns. The TAXFREE INTEREST PLUS FIVE PERCENT feature giving
them instant incremental savings will be very appealing to
these individuals who can easily save P100,000 to
P200,000 per year. If you work out the arithmetic, this is
even more advantageous to those who are between 50 to
55 years old, because of the added boost in returns within
a short 5-year cycle.
2. The next occurrence will be developmental in nature.
Providers of PERA accounts and administration services
will start calling on your HR heads asking to promote his
or her PERA product to your employees. In turn the HR
heads will likely call on you, as finance heads and
treasurers, to help evaluate the various investment
alternatives being offered. You will probably be swamped
with appointments and sales calls, and it will of course be
to your advantage to listen to what these vendors have to
say.
3. Remember, this is a voluntary savings program. The
ultimate decision maker will be your employees and
teachers. However, it is very likely that, for those who
wish to open PERA accounts, they will need help in
discerning which product is better. This is a role that
either you or your HR department can play. So, if you
choose to take on this role, it is likely that your institution
will shortlist a number of alternate PERA products and
vendors and deal with them directly on behalf of the
employees.
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In short, therefore, those that already have a habit of saving will
certainly find PERA a worthwhile and welcome development.
But let’s be realistic. Inertia rules. My opinion is that PERA will
not automatically result in a wave of new savings from those who
haven’t developed the habit to save – which I predict includes the
great majority of Filipinos, among whom are your school
employees and teachers. Why not?
1. The most common excuse they will give is the lack of
disposable income. It’s tough enough to make ends meet,
they will claim. (I don’t mean to belittle the gigantic
effort to get low income earners to set aside money to save
for the future. But I swear, if a tricycle driver can spend
money on prepaid phone cards to send text messages, he
can save. If anyone has money to pay for his credit card
installments, or for his loans, he has money to set aside to
save.)
2. For those who will have some amount of money left, the
amounts are probably too little to meet the minimum
requirements to open any type of investment account,
PERA or otherwise.
3. Lack or little knowledge of where to invest is another
factor that most employees contend with. Not having
much to save and not knowing “where to” and “how to”
invest results to fear and apprehension and consequently,
inaction.
4. But the worst culprit of all is simply the lack of financial
discipline to save for the future. Listen, billions of pesos
are spent on advertising that encourages people to spend,
nay, to borrow and spend today, rather than to save and
postpone for another day.
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This is what we’re up against. PERA has its virtues, but it will
take more than a few percentage points, and snazzy investment
product offerings to change well-ingrained habits.
Yet, we all know our financial math, and the virtues of
compounding. We all know that retirement savings are not
enough to carry our teachers past retirement. We’ve seen it
happen, we’ll continue to see it happen. The PERA Law is yet
again another brave attempt to make a difference in the lives of
our humble, hard-working teachers. And we know that if only
our teachers would prepare for their personal financial future the
way they prepare their students for the future, that if only they
learned to forego a little today for security tomorrow, the way
they encourage students to carry crosses today for eternal joy in
heaven, then we would not be sitting here thinking of new ways
to get our teachers to save. And we know that the only way out of
a vicious cycle is to start small and begin immediately.
What can you do, as Treasurer or CFO of your schools?
The question is, will you stand idly by while the great majority of
your employees and teachers are either ignorant, indifferent or
disempowered about their financial future? It seems that, at the
end of the day, whether you like it or not, the positive response
by your employees and teachers to PERA will depend on how
you, as treasurers and CFOs of your schools respond to PERA. It
depends on how much you know of PERA, whether you believe
it is worth seriously considering, and whether you can aid in the
smooth and orderly implementation of PERA on behalf of your
employees and teachers.
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Assuming you do believe in the advantages of PERA as a means
to supplement your teacher’s retirement savings, here are some
tips on how you can make PERA work for you:
1. Get the heads of your school on board. Let them
understand what PERA provides, and what it implies for
your teachers, and let them be convinced that it is a good
idea to supplement your school’s retirement program with
PERA accounts.
2. Talk to your bankers or your fund managers, and ask for
their help in familiarizing yourself with the provisions of
this law. Do this even before the implementing rules are
released.
3. Once the implementing rules are out, talk to the right
vendors and manage their sales efforts, to avoid being
swamped. Look for companies that you believe can
withstand the test of time. PERA investments are longterm investments. Make sure that the companies that you
deal with will also be around over the long-haul. Look for
the features that will make PERA attractive to the teachers
and highlight those features. In short, you will need to
initiate your own PERA program. The vendors that you
choose should be able to help you do this.
4. Educate the teachers and employees about savings and
investments so that they know what they are getting into.
The last thing you want is to have teachers making the
wrong investment choices and blaming the institution for
their mistakes. Your school’s HR departments together
with your providers should take the lead on this critical
matter.
5. Aim high. Strive to get ALL of your teachers and
employees enrolled in a PERA account. It is good for
them.
6. Lead by example. Begin to set aside some of your
personal savings in a PERA account yourselves.
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What FAMI has been doing with regard to PERA
Our company, First Metro Asset Management Inc., has already
taken important steps that will enable institutions like yours to
easily implement a PERA savings campaign.
Early this year, FAMI, in collaboration with Fr. Reddy Corpuz,
Regional Director for Region IV, and a member of our retirement
commission, started a Monthly Investment Program (MIP) and
offered it to school teachers in selected schools in his region.
This Monthly Investment Program is a voluntary savings program
that enables teachers to save as little as P500 per month through
automatic salary deduction, pool these funds, and then have these
invested in one of the Save and Learn mutual funds which our
company manages. Yes, for as little as P500 per month, those
teachers and employees of Fr Reddy can already invest in mutual
funds, and benefit from sophisticated and professional fund
management that only used to be accessible to individuals and
institutions with very large investment balances.
To his great credit, Fr. Reddy encouraged, cajouled, and in some
cases even mandated his administrators and teachers to appreciate
the benefits of long-term savings, and to begin saving today. He
enticed them with seed capital, and motivated them with his
booming voice.
For your information, First Metro is promoting this Monthly
Investment Program to other schools and companies. Look at it
as a kind of partnership between the institution and our company.
They encourage their employees to sign up, we maintain a data
base and keep track of all these individual investments, and we
manage and pool their investments using one of the Save and
Learn mutual funds (of their choice), thus backing it up with our
fund and investment management expertise and reputation.
As soon as the PERA implementing guidelines are released,
therefore, Fr. Reddy and FAMI are all set to convert and enroll
these monthly investments into PERA accounts, so that the
teachers can immediately reap the benefits offered by this new
law.
I hate to take advantage of this forum to make a sales pitch, so I
won’t. But I hope you appreciate the fact that Fr. Reddy, is
indeed “ready” for PERA.
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What can the CEAP Retirement Commission do to promote
PERA?
First of all, I believe the CEAP retirement commission has
already done something that can help promote PERA. Almost
three years ago, the CEAP, under Fr. Rod’s leadership, together
with the Marist brothers and First Metro Investment joined
together to establish our company called First Metro Asset
Management, Inc. That’s right. Our company, is YOUR
company. Just to refresh your memory a bit, this company of
ours, and I use that word all inclusively, is engaged in the
management and administration of mutual funds. We have
already created three mutual funds, using the brand name, “Save
and Learn” -- an equity mutual fund, a fixed income mutual fund,
and a newly formed balanced fund. Within one year from its
creation, the equity mutual fund of our company was the best
performing equity mutual fund in the market and received special
recognition as such by the Philippine Stock Exchange and the
Securities and Exchange Commission. By virtue, therefore, of
CEAP’s investment into this joint venture, it has already paved
the way in offering would-be PERA-compliant investment
vehicles.
Not only has your joint venture into mutual funds proven itself as
a topnotch investment managemer, it has also, as mentioned
earlier, prepared the groundwork for easy implementation of a
PERA-friendly monthly investment program for you and your
teachers.
So, as you can see, therefore, CEAP, through First Metro Asset
Management Inc., is PERA-ready.
Conclusion
So, there you have it. I’ve presented you with some details about
the key features of the PERA Law emphasizing that PERA
provides a boost to the investment returns of long-term savers by
removing and reducing taxes on the earnings and on income. I’ve
shown how, by setting up a monthly investment program, it
becomes more feasible for your employees to begin saving even
just a little. Finally, I’ve also indicated to you that it’s not enough
to just create incentive programs and systems of investing, but
that it requires team effort on the part of the school
administrators, principally the office of the President, the
Treasurer and the HR department, and the fund managers such as
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your joint venture company, FAMI, in order to get our employees
and teachers out of the vicious spending cycle, and into the
virtuous cycle of saving for the future.
CEAP is ready. FAMI is ready. The ball is in your court.
Thank you very much for your time and attention.
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