A. OBSERVATIONS AND RECOMMENDATIONS
Total assets and Estimated Liabilities on Membership Contribution
1. The System’s total assets of P14.339 billion as at year-end is short by P47.291 billion against the estimated funding requirements of P61.63 billion based on GSIS actuarial study. The absence of a clear policy, procedure and guidelines approved by the Board of Trustees in setting up the estimated liabilities on Membership Contribution might affect the future payment of benefits of the retiring members as provided for under the mandate of the System.
1.1. The System was created by virtue of Presidential Decree (PD) No. 361, which was promulgated on 30 December 1973 and started operations in 1976. The System was established as a funding mechanism to ensure the continuous payment of retirement and separation benefits to the members of the Armed Forces of the Philippines (AFP). Forming part of the approved PD is the government share of P200M paid in four equal annual payments from the funds of the Treasury.
1.2. Likewise, PD 1656 dated 21 December 1979 and PD 1909 dated 22 March 1984 amended PD 361 on the amount of contribution to the System, which increased from 4 per cent to 5 per cent of monthly base and longevity pay, which contribution shall be deducted from the pay of Officers and enlisted personnel in the active service of the Armed Forces of the Philippines and paid to the System. Upon retirement, the amount contributed to the System plus an interest of 6 per cent will be refunded to the retiring member.
1.3. To support its operations, the System is authorized to invest in various revenue generating business activities, which include the management of funds invested in the stock market, money market, corporate loans, real estate property and equity holdings in subsidiaries and associates. It also has interests and participation on real estate projects, involving the development and construction of commercial and subdivision projects, memorial parks, golf courses, and condominium buildings in partnership with reputable real estate developers and contractors.
1.4. All these activities are geared towards generating income and ensuring the availability of funds to meet maturing obligations specifically the payment of membership refund of retiring members of the AFP plus interest thereon.
1.5. However, audit of the accounts disclosed that the System has not set up the actuarial reserve for its obligation to members. Actuarial reserves are the funds that must be set up to ensure payment of the benefits as and when these fall due. It is also a measure of the System’s fund sufficiency to finance payment of benefits on a continuous basis. An indication of how much resources maybe required to fulfill said obligations. Instead, the Controllership Department set up an Estimated Liability on Members’ Contributions Earnings, which is further classified into Current Portion of Estimated Liability (to be paid during the year) and the non-current portion.
1.6. Interview with the head of the Controllership Department (CD) disclosed the following:
a. To compute for the amount to be set up as membership contributions payable, they get the total disbursements (membership refund) made in the immediate prior year, get the average, then multiplied by 13 months.
b. Since they have no data on how many will retire the following year, a good estimate is not possible, however, according to them the present computation has been close to the actual amount to be disbursed.
c. Adjustments are made anytime within the year if they determine any overstatement or understatement of the amount already set up.
1.7. In 2010, the Secretary of the Department of National Defense (DND) requested the Government Service Insurance System (GSIS) to make an actuarial study on the rationalization of the pension system and retirement benefit fund of the AFP. This study was borne out of the directive of the Office of the President, through the Department of Finance.
1.8. The objective of the study is to determine the funding requirements needed to manage the existing pension system of the uniformed personnel of the AFP. This will also pave the way for the proposed draft bill by DND-AFP-RSBS, otherwise known as the proposed Philippine Military Pension System (PMPS) Bill, “An Act Creating the Philippine Military Pension System, Instituting Reforms in the Retirement Benefit System of the AFP and for other Purposes”.
1.9. On 17 October 2011, the President and General Manager of the GSIS submitted the Executive Summary of the Actuarial Study on the Existing Retirement Scheme of the AFP. Salient facts are as follows:
a. The study considered the retirement scheme as stipulated under PD 1638 (Establishing a New System of Retirement and Separation for Military Personnel of the AFP and for Other Purposes) and other related amendments. Under this PD, survivor benefits increase from 50% to 75% of monthly pension and stipulated under Section 17 is the provision for the indexation of pension benefits (maximum of 85% of the monthly base pay plus longevity pay of the next higher grade at current/prevailing pay rates).
b. The GSIS used the data on active membership and pensioners based on the listings provided by the AFP as of year-end 2010. Likewise, the benefits on retirement, disability, death survivorship and withdrawal and key assumptions like interest rate, salary increase etc. were considered.
c. GSIS also presented an illustration and summarized the highlights of the funding requirements under the two scenarios. In conclusion, the actuarial study/assessment of the GSIS revealed that the estimated funding requirements for CY 2012 of the System are as follows:
Scenario 1: with indexation of pension to salary increases of active members (current practice) / P61.63 billionScenario 2: with no indexation of pension to salary increases of active members / P54.21 billion
d. The GSIS based the results of the actuarial study on a specified set of assumptions, like the actuarial cost method, the decrement rates and valuation rate, meaning, the results of any actuarial valuation are valid only to the extent that the data on which it was based is itself reliable and complete.
e. However, GSIS recommended that these actuarial studies be reviewed and certified by an accredited Fellow of the Actuarial Society of the Philippines (ASP).
1.10. Considering the above findings/assessment of the GSIS, the total assets of the System for CY 2012, which is P14.339 billion is short by P47.291 billion against the estimated funding requirements of P61.63 billion under Scenario 1.
1.11. We recommended that Management:
a. Prepare policies, procedures and guidelines on the Reserve and Actuarial setting;
b. Coordinate with the Finance Center of the Armed Forces of the Philippines re: submission of a complete list/inventory of active military personnel to include among others, the correct full name of the member, date of birth, name/s of beneficiaries, updated salary, years in services, contributions paid and more importantly the retirement dates;
c. Input the gathered data to be programmed in the IFMS Membership Group so that at any given point in time, the CD will know how many are retiring so that they can have an accurate computation of the amount that will be set up as membership refund for the coming years; and
d. The amount that should be set up should not be good only for a year but study the possibility of setting up a reserve up to maturity/annuity which should form part of the policies, procedures and guidelines.
1.12. According to Management, PD 361 issued on 30 Dec 1973 established the System as a funding scheme to guaranty the continuous financial support to the AFP military retirement System. PD 361 envisions that with the P200 million seed capital from the government, the system will be able to shoulder the pension requirements in the excess of P100 million four years after (or in 1978). However, based on actuarial study conducted, the pension in 1977 reached P183 million and the unfunded Past Service liability of the government amounted to P1.606 billion. The RSBS fund equity then (in 1977) was only P196 million. Considering that the implementation of RSBS’ participation in pension requirements as provided for in PD 361 will lead to the early collapse of the System. PD 1656 amended PD 361, providing for an increase in member’s contribution rate and stipulating further that the RSBS “fund shall be allowed to grow to be able to provide perpetually the cash requirement covering the retirement and separation benefits payments to military personnel of the AFP on a self-sustaining basis, provided, that prior to the time when perpetual self-sufficiency of the funds is attained as determined by actuarial valuation, the yearly requirement for retirement and separation benefits shall be funded out of the annual appropriations for the AFP”. PD 1656 further stipulates that “an officer or enlisted personnel who is separated or retired shall upon his separation or retirement be refunded in any lump sum all his contribution to the System.” Based on past actuarial valuation studies conducted for AFPRSBS, the fund never reached the state of self-sufficiency. From its inception, the RSBS fund was underfunded and no further government contribution was infused to the System. As such, pursuant to PD 1656, the payment of retirement and separation benefits of military personnel was, and remains to be funded from the annual government appropriations of the AFP. The System, on the other hand, operated like a provident fund where members’ contributions are refunded upon retirement/separation from the AFP (also in accordance with the provision of PD 361 as amended).
While it is ideal for any pension system to provide actuarial reserves, the enormous funding gap (funding requirements vs. asset level of AFPRSBS) renders the exercise moot and academic. Instead, the System sets up an annual estimated liability to cover the interest on members’ contributions both for members who are projected to retire within the year and those who will remain in the active service.
Policies, procedure and guidelines in the setting up of the estimated liability on member’s contribution may be enhanced.
The management together with the Membership Group initiated discussion with the various offices of the AFP (Office of the AFP Adjutant, AFP Finance Center, Pension and Gratuity Management Center (PGMC) for possible data sharing. This will still be subject to further evaluation as the IT system of the AFP is not the same as what the System has.
As input to the planning activity of the System, the Membership Group also makes representation with the AFP to be furnished with their projected number of retirees for the next five years. It must be noted however, that the retirement date is not merely based on compulsory age. PD 1638 provides for an optional retirement which may be availed of by military personnel who has reached 20 years of accumulated services.
1.13. As a rejoinder, we still believe that the System should provide an actuarial reserve not just a set-up of annual estimated liability on member’s contribution to cover the year’s funding requirement if only to assure its members of the System’s capabilities to pay off its obligations when and as it falls due.
1.14. We further recommend that the System review its investment and asset disposal policies so that funds will be available for more revenue generating activities that will fund the obligations to members. Likewise, we suggest that the System comply with the GSIS recommendation that the actuarial studies they conducted be reviewed and certified by an accredited Fellow of the Actuarial Society of the Philippines (ASP).
Non-consolidation of the financial statements of the parent and subsidiaries
2. The System’s Financial Statements are not consolidated with the financial statements of its subsidiaries and controlled entities where it has invested a total of P2.546 billion. Hence, the said financial statements do not present a reliable and accurate financial conditions and the results of its operations as of and for the year ended December 31, 2012, contrary to pertinent provisions of Philippine Accounting Standard (PAS) 27.
2.1. The following are the provisions of PAS, which requires the consolidation of the parent financial statements with that of its subsidiaries and affiliates:
PAS 27 on consolidation of the financial statements of parents and subsidiaries
Paragraph 9 - requires a parent corporation to consolidate its investment in subsidiaries.
Paragraphs 12 and 22 - require that in preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses and that consolidated financial statements shall include all subsidiaries of the parent.
Paragraphs 28 and 26 - the parent shall use uniform accounting policies for like transactions and other events in similar circumstances as of the same reporting date.
Paragraph 10 - a parent need not present consolidated financial statements if and only if:
a. The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;