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 creditsdepending on the amount saved each year.
Here are the features of PERA:
- 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.
- 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).
- 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).
- 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.
- What are the tax benefits? Here’s the good news.
- 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.
- 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.
- A shorthand way to remember this is that a PERA account is TAX-FREE INTEREST PLUS FIVE PERCENT (free).
- What are the conditions and restrictions? Now for the bad news.
- 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.
- 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.
- 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.
- 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.
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,
-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]
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.
- First we will see the well-to-do taking advantage of the PERA to max out their investment returns. The TAX-FREE 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.
- 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.
- 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.
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?
- 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.)
- 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.
- 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.
- 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.
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.
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:
- 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.
- 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.
- 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 long-term 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.
- 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.
- Aim high. Strive to get ALL of your teachers and employees enrolled in a PERA account. It is good for them.
- Lead by example. Begin to set aside some of your personal savings in a PERA account yourselves.
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.
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 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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