Looking for take-off: The case for a Mandatory PERA

TOAP Summit Makati, Oct 17, 2017

Roy I. Ramos BDO Unibank Independent Director

Key points

2

PERA has many elements of best practice for provident fund schemes

But there are a few missing (and debatable) elements

…which may, combined with other factors, lead to slow take-up and growth

4 things to consider to PERA accelerate adoption, growth

In particular: the rather compelling case for making PERA mandatory

Note: the views expressed herein are those of the author, which incorporates discussions with BDO management.

Before anything else, 1: Contextualizing PERA …using the World Bank 5-pillar framework

3

Source: BDO Research estimates, Willis Towers Watson 2017 Global Pension Assets Study, various provident fund associations.

Pillar Description Australia China HK Singapore Philippines Malaysia Indonesia Thailand

Zero<Pillar Publicly(funded-safety-nets-&-poverty-alleviation-programs

Age-Pension-(incomes-&-assets-test)

Minimum-guarantee-(Di-Bao)

CSSA,-OALA,-OAA

4P-conditional-cash-transfer,-Senior-Citizens-Act/DWSD-low-income-stipend

SOCSO-(Social-Security-Fund)

BPJS-Law Old-age-allowance-system

Pillar<1 Publicly(managed-mandatory-contribution-plans,-mostly-pay(as(you(go-(PAYG)-basis

Mandatory-social-pool-old-age-pension-(ER-20%-of-salary)

Nil Central-Provident-Fund-(DC-not-DB)

SSS-(7.4%-ER,-3.6%-EE)-and-GSIS-(12%-ER,-9%-EE).-Pag(IBIG-Fund-(2%-ER,-1%(2%-EE).

BJPS-Old-Age-and-Pension-Security

Old-Age-Social-Security-Pension-(3%-ER,-3%-EE)

Pillar<2 Privately(managed-mandatory-occupational-or-private-pension-plans,-employer-and-employee-funded

Super(annuation-Guarantee-Scheme-(ER-9.5%-of-salary)

Mandatory-Individual-Account-(EE-8%-of-salary)

MPF-mandatory-contributions

Central-Provident-Fund

RA7641-min-mandatory-retirement-benefits-(22.5-days/yr-of-service-or-~2.2-yrs-pay-for-35-yr-tenure)

EPF-(but-publicly-not-privately-managed)

Nil

Pillar<3 Voluntary-contributions-or-savings-to-occupational-or-private-pension-plans

Super(annuation-Guarantee-Scheme

Voluntary-enterprise-annuities

MPF-voluntary-contributions

Supplementary-Retirement-Scheme

PERA Voluntary-tax(exempt-provident-funds-(Bt300,000/yr-cap)

Pillar<4 Public-serves,-family-support,-personal-assets

Family-support,-subsidised-healthcare-&-housing

Public-housing,-healthcare,-transpo-fare-discounts-etc

Family-support

Legend:<<MPF=Mandatory<Provident<Fund.<DC=Defined<contribution.<DB=Defined<Benefit.<ER=Employer.<EE=Employee.

Before anything else, 2: Contextualizing PERA …against other individual provident fund schemes in US and Asia

4

DC Cap%on%annual EmployeePillar%2%(or%3) or% Voluntary/ Contributions%by Employee Income/ Payments%on contributions%by investment%

Country Scheme DB? Mandatory Employer Employee employer contribution capital%gains retirement employee/employer choice

Philippines PERA%

(Personal%

Equity%and%

Retirement%

Account)

DC Voluntary None%E%voluntary.

None%;%voluntary. Yes,%subject%to%P100,000%annual%contributions%

cap.

Tax%credit ,%but%capped%to%5%%of%ann'l%contrib.%

Equal%to%tax%deduction%

on%P15,625%annual%

contribution%if%at%32%%

income%tax%rate

Yes. %Income/%

gains%not%

taxable

Yes,%payments%

(from%age%55)%

not%taxable

De;facto%caps%given%

P100,000/yr%cap%for%

tax%exemption%for%

local%EE,%P200,000%

for%overseas%EE.%

Yes,%but%limited%

to%plan's%fund%

offerings

Hong%Kong Mandatory%

Provident%

Fund

DC Mandatory 5% 5%%if%monthly%income%>%

HK$7,100

Yes%;%tax%deductible%up%to%15%%of%employee%total%

compensation

Yes%;%tax%deductible%up%to%HK$18,000/yr%

(equating%to%

HK$360,000%annual%

income)

Yes.%Not%taxable.

Yes,%payments%

(from%age%65)%

not%taxable

No%limit,%but%HK$18,000/yr%tax%

deduction%cap%for%EE

Yes,%but%limited%

to%plan's%fund%

offerings

Australia Super;

annuation

DC Mandatory 9.5% None.%But%EE%can%opt%for%salary%sacrifice%contrib%up%

to%A$35,000/yr.%Can%also%

make%after;tax%contrib%up%

to%$180,000/yr.

Yes. Salary%sacrifice%contrib%

taxed%at%15%%

concessional%rate%(vs%

47%%top%marginal%

income%tax%rate)

15%%

concessional%

rate%(vs%47%%

top%marginal)

Yes,%lump%sum%

&%stream%

payments%

(from%age%60)%

not%taxable

A$180,000/yr. Yes.%Default%MySuper%plan%or%

other%investment%

choices.

Malaysia Employee%

Provident%

Fund

DC Mandatory 13%.%12%%if%EE%salary%

below%

RM5,000

8%. Yes%;%capped%to%19%%of%EE%basic%salary.

Contributions%up%to%

RM6,000/mo%tax%

deductible%(addt'l%

contrib%not%deductible).

Yes.%Not%taxable.

Yes,%payments%

(from%age%50)%

not%taxable

No%limit%other%than%

for%tax%deductibility

Nil/limited.%EPF%invests%bulk%of%

funds.

Singapore Central%

Provident%

Fund

DC Mandatory 17%%(age<55)

20%%(age<55) Yes%for%mandatory%

contribution%amount,%no%

for%amounts%above.

Yes%for%mandatory%

contribution%amount,%no%

for%amounts%above.

Yes.%Not%taxable.

Yes,%payments%

(from%age%55)%

not%taxable

No%limit%other%than%

for%tax%deductibility

Yes%for%OA%balances>%

S$20,000,%SA%

bal>$40,000

USA 401K DC Voluntary,%company%

sponsored,%

ERISA%sets%

standards

None. %But%often%ER%

partial%or%full%

matching%of%

EE%amount.

None.%Voluntary. Yes.%But%total%EE%and%ER%contributions%capped%at%

$53,000/yr

Yes. %Tax%deferred%up%to%$18,000/yr.%

Contributions%capped%at%

$18,000/yr.

Yes. %Tax;deferred.

None. %Full%income%tax%

(from%age%

59.5)

US$53,000. Yes.%Most%401k%

plans%have%wide%

range%of%choices.

Minimum%contribution%rate Tax%benefits%for%employee%and%employer

Legend:%ER=employer.%EE=employee.%DC=Defined%Contribution%scheme.%DB=Defined%Benefits%scheme.%OA=ordinary%account%for%Singapore%CPF.%SA=special%account%for%Singapore%CPF.

Source:%BDO%research%estimates,%Willis%Towers%Watson%2017%Global%Pension%Assets%Study,%various%provident%fund%associations.

5 Source: Willis Towers Watson Global Pension Assets Study, 2017

Global pension assets vs. GDP in local currency

19

Country 2006 2016e Change1

Australia 104% 126% 22%

Brazil 16% 14% -2%

Canada 73% 103% 30%

Chile 58% 73% 15%

China2 — 1% —

Finland2 — 83% —

France 7% 6% -1%

Germany 11% 12% 1%

Hong Kong 32% 42% 10%

India2 — 5% —

Ireland 50% 42% -8%

Italy2 — 8% —

Japan 64% 59% -5%

Malaysia2 — 63% —

Mexico 10% 14% 4%

Netherlands 135% 168% 33%

South Africa 59% 74% 15%

South Korea2 — 41% —

Spain 3% 3% 0%

Switzerland 111% 123% 12%

UK 91% 108% 17%

US 100% 121% 21%

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

1 In percentage points, figures are rounded. 2 2006 figures are not available for China, Finland, India, Italy. Malaysia and South Korea.

Pension assets as a % of GDP

Source: Willis Towers Watson and secondary sources

P22

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%C

hina

Spa

inIn

dia

Fran

ceIta

lyG

erm

any

Bra

zil

Mex

ico

Sou

th K

orea

Hon

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ong

SAR

Irela

ndJa

pan

Mal

aysi

aC

hile

Sou

th A

frica

Finl

and

Can

ada

Uni

ted

Kin

gdom

Uni

ted

Sta

tes

Sw

itzer

land

Aus

tralia

Net

herla

nds

Pension assets as % of GDP

2006 2016

Before anything else, 3: Pension assets as % of GDP, in context Philippine pension assets at around 4%-8% of GDP (as per various surveys)

PERA has several “best practice” elements as a Pillar 3 scheme

6

•  Ownership: individual accounts, not pooled/commingled fund

•  Discretionary: individual decides what to invest in

•  Equity investing culture: may help develop this mindset in time

•  Competition: scope for choice of funds, fund managers

•  Transparency: regular disclosures, NAV mark-to-market

•  Portability: scope for portability (not forfeiture) if employee moves to new firm

•  Tax incentives: EEE tax structure •  Tax credit for contributions •  Tax-exempt income and capital gains •  Tax-exempt lump-sum or annuity payments on retirement

The luxury of time: good macro + still favorable demographics gives PERA time for ramp-up, needed enhancements

7

Allianz International Pension Papers 1/2016

29

Country Total Demographics Public finances Pension systemScore Ranking Score Ranking Score Ranking Score Ranking

Australia 8.08 1 8.20 9 8.40 5 7.85 5

Denmark 7.93 2 7.40 18 7.30 22 8.53 2

Sweden 7.81 3 7.80 15 7.40 20 8.05 3

Netherlands 7.75 4 6.80 29 7.10 25 8.60 1

Norway 7.59 5 8.00 11 6.60 31 7.90 4

New Zealand 7.51 6 7.60 17 7.90 15 7.30 10

Latvia 7.41 7 7.40 20 8.10 12 7.10 16

Estonia 7.28 8 7.00 28 8.20 8 6.95 20

USA 7.23 9 8.00 13 6.70 30 7.10 17

Chile 7.23 10 6.80 32 8.40 4 6.85 24

United Kingdom 7.20 11 7.40 19 6.40 36 7.50 9

Mexico 7.13 12 8.00 14 7.90 14 6.30 34

Switzerland 7.11 13 6.80 30 6.50 34 7.60 8

Hong Kong 7.09 14 5.80 43 8.20 10 7.20 13

Canada 7.05 15 7.20 22 6.70 29 7.20 12

Lithuania 6.94 16 8.00 12 7.40 21 6.20 35

Finland 6.93 17 7.00 25 5.60 44 7.60 7

Luxembourg 6.85 18 8.00 10 6.70 27 6.35 31

Peru 6.76 19 8.40 5 9.10 1 4.80 47

Czech Republic 6.70 20 6.40 38 6.60 33 6.90 21

Malaysia 6.68 21 8.40 8 8.00 13 5.15 44

Argentina 6.64 22 9.00 2 7.20 23 5.20 43

Philippines 6.59 23 8.80 3 8.60 3 4.50 49

Singapore 6.55 24 5.60 45 7.50 18 6.55 29

Germany 6.49 25 6.00 41 5.70 42 7.15 14

Poland 6.48 26 5.80 42 6.40 37 6.90 22

Figure 14: PSI – Total and sub-indicator scores and rankings

Philippines ranks fairly well globally on Allianz 2016 Pension Sustainability Index •  This reflects attractive demographics

•  …as well as strong public finances

Allianz 2016 Pension Sustainability Index global rankings

A pretty good ranking for Philippine pension sustainability, again thanks to demographics and strong macro

8

Allianz 2016 Pension Sustainability Index global rankings

Allianz International Pension Papers 1/2016

6

Figure 1: 2016 Pension Sustainability Index*

Source: Allianz Asset Management, International Pensions, September 2016 * Scale from 1 – high need for reforms to 10: minor need for reforms

0 2 4 6 8

NorwayNew Zealand

DenmarkAustralia

Latvia

Sweden

Estonia

Netherlands

ChileUnited States

United KingdomMexico

SwitzerlandHong Kong

CanadaLithuania

FinlandLuxembourg

PeruCzech Republic

MalaysiaArgentina

PhilippinesSingaporeGermany

RussiaAustria

BelgiumRomaniaBulgaria

TurkeySouth Korea

HungaryFrance

Slovak RepublicIreland

ColombiaTaiwan

IndonesiaCroatia

Cyprus

India

Portugal

Spain

MaltaItaly

BrazilGreece

SloveniaChina

Thailand

South Africa

Japan

Poland

Attractive demographics: 1) Young population. 2) Ideally-shaped demographic tree, for some time to come.

9

October 11, 2016 BDO Unibank

10

II. The need for jobs, jobs, jobs…

…Our distinctive demographic edge cuts both ways• The Philippines has a distinctive and rate demographic edge: median age of a very young 23.5

years, working age population rising by c.16.4mn to c.80mn by 2030 and not peaking until 2055, dependency ratio (dependents as % of working-age population) falling until 2080.

• This distinctive demographic edge cuts both ways however.

• It requires massive jobs creation for this to be a sweet, not trouble, spot, esp. if we also add the still high % of underemployed workers (17.1%) and OFWs (3.8%).

• The alternative of course is highly undesirable: yet many more underemployed worked, yet many more people migrating to NCR or having to become OFWs in absence of decent-paying jobs locally.

• We estimate the country needs 17.6mn new jobs by 2030 to accommodate these new labor entrants, and to halve the number of underemployed workers and OFWs.

• That’s 1.1mn jobs/year versus a jobs creation run-rate of 620k/year of late.

Dependency ratios and working-age population growth trendsMuch has been written about the country’s demographic sweet spot. What this means, and what’s needed to realize its dividends (as opposed to becoming a trouble spot) is our focus in this section.

Observers talk about how young the country is – median age of 23.5 years, versus 36.2 for Thailand, 36.7 for China, 37.6 for the USA and 46.1 for Japan (Exhibits 8 and 9).

Exhibit 8: Demographic sweet spot: median age of 23.5 years for PhilippinesHalf of all Filipinos were born after 1992, with zero or little memories of Philippines under martial law or the 1997 Asia FX/banking crisis.

Exhibit 9: Emergence of the Filipino millennial: half of all Filipinos under 24 yrsQualities of Filipino millenials: Relatively optimistic, no political baggage; Tech savvy (millenials make up 70% of internet users); Community focused; Considerable purchasing power (makes up 50% of all workers); Values convenience and quality of life, experiences over physical goods.

Median age, 2014

PhilippinesIndiaMalaysiaIndonesiaVietnamSingaporeThailandChinaUSKoreaJapan

23.527.027.729.229.233.836.236.737.640.846.1

Source: CIA World Factbook, 2014 Source: Philippine Statistics Authority, BDO Nomura Research estimates.

Attractive demographics, amidst ageing, shrinking populations elsewhere: 3) Phil working-age population growing all the way through 2055!

10

October 11, 2016 BDO Unibank

11

For us, however, the more important dimensions to this distinctive demographic edge are:

• Dependency ratio - the ratio of dependents4 to the working-age population, and how this dependency ratio reduces (good from a macro perspective) or increases (bad, in general) or inflects (key impact for growth and equity markets) over time. Here, the Philippines shines, in terms of a projected declining dependency ratio ratio all the way to 2055 and a working age population that does not peak until 2080, instead of an already rising dependency ratio for many countries globally including Japan, China and even Thailand (Exhibit 10). More specifically, the UNDP estimates the Philippine’s dependency ratio (aged 0-14 and 65+ per 100 people aged 15-64) at 57.6% in 2015, falling to 53.9% by 2030 and to 50.1% by 2050.

• The pace of working-age population growth, which our experience shows directly impacts potential/sustainable GDP growth rates. Here again, the Philippines shines, in projected growth in the working age population, i.e. c.1.7% per annum growth through 2030 and 55% cumulative growth through 2050 (Exhibit 11).

Exhibit 10: Several countries have passed their peak in working-age people, while a few including the Philippines have decades to goProjected year of peak working-age population, 2010 to 2100

Exhibit 11: Projected changes in the sizes of working age populations between 2015-2030 and 2030-2050: declines for East Asia and Thailand, still robust growth for Philippines at c.1.7% per annum (overall population growth rate of 1.58% per annum in 2010-2015)

Year of maximum share of working-

age population

Year of maximum number of

working-age population

East Asia

China 2010 2015

Japan 1990 1995

Korea 2010 2015

ASEAN

Indonesia 2030 2060

Malaysia 2020 2045

Philippines 2055 2080

Thailand 2010 2015

Vietnam 2015 2040

South Asia

India 2040 2050

Pakistan 2070 2080

Oceania

Australia 2010 2100+

New Zealand 2010 2070

Changes in the sizes of working-age populations between 2015-2030 and

2030-2050

Year of maximum share of working-

age population

Year of maximum number of

working-age population

East Asia

China -4 -17

Japan -10 -20

Korea -10 -18

ASEAN

Indonesia 16 6

Malaysia 17 9

Philippines 26 23

Thailand -7 -21

Vietnam 8 -2

South Asia

India 20 11

Pakistan 37 32

Oceania

Australia 11 14

New Zealand 5 7

Note : working-age population generally defined as between the ages of 15 to 64 years.

Source: Asia Pacific Human Development Report: Shaping the Future – How Changing Demographics Can Power Human Development, United Nations Development Program, 2016.

Note : working-age population generally defined as between the ages of 15 to 64 years.

Source: Asia Pacific Human Development Report: Shaping the Future – How Changing Demographics Can Power Human Development, United Nations Development Program, 2016.

4 Working-age population generally defined as those between the ages of 15-64 years. Dependents generally defined as those below 15 and above 64 years.

A momentary digression – we wrote about HK’s Mandatory Provident Fund in Nov 2000 – just as it was launching

11

The Game Moves On,Part 1

" "

November 14, 2000

Related research:

Singapore Unit Trusts: The party is

just starting; DBS, UOB lead,

September 26

Australia Superannuation: Super

for some, not so super for others,

June 29

Mandatory Provident FundHong Kong

Modest metrics at outset, outsize impact in time. We expect theMPF to snowball into a US$1 billion fee business by 2011, with35% asset CAGR. We see this as more proof that the game ismoving on and the strong are getting stronger, with HSBC/HangSeng Bank likely to win the lion’s share of the business.

Roy Ramosroy.ramos@gs.comHong Kong: 852-2978-0457

Carol Cheungcarol.cheung@gs.comHong Kong: 852-2978-1677

Darwin Lamdarwin.lam@gs.comHong Kong: 852-2978-0528

Ryan Fisherryan.fisher@gs.comSydney: 61-2-9320-1411

John Moranjohn.moran@gs.comSydney: 61-2-9320-1412

Goldman SachsGlobal Equity Research

https://www.gs.comImportant disclosuresappear at the back ofthis report.

Modest initial size understates strategic importance, impact on sector over timeMandatory Provident Fund (MPF) metrics will likely be modest (we estimate US$2.7 billion

in initial annual contributions) initially while contributions ramp up and assets accumulate.

But as the United States 401(k) and Australia superannuation experiences show, the MPF is

bound to have an outsize impact on banks and the broader financial system over time.

Investment implications—the game moves on, strong get stronger: buy HSBC, HSBThe MPF is more proof that the game is moving on, from plain banking to a wider world of

financial services. We expect HSBC and Hang Seng Bank will be the biggest winners with

40%-plus combined market share; both are on our Recommended List. Also worth noting

are Bank Consortium Trust as a workable response to small banks’ scale problems and

Standard Chartered Bank (SCB) for its lead in offering third-party investment products.

A rolling snowball—we project MPF assets accumulating to US$57 billion by 2011A key appeal of the MPF business is assured growth due to mandatory monthly funding. We

estimate MPF assets will grow to US$57 billion by 2011 (35% of current GDP, 14% of total

deposits) if annual investment returns are 5%, and to US$71 billion if returns are 10%.

A ‘sticky’ US$1 billion B2B2C business by 2011 where a few winners take mostWe estimate 35.6% CAGR for MPF revenues to around US$1 billion by 2011, plus two key

strategic benefits: customer stickiness and cross-sell opportunities to both employers and

employees. The flip side is very concentrated market shares, such as in the United States or

Australia, where the top three to five players take more than a 50% share of the market.

US, Australian experiences suggest broader financial system benefits over timeThe US 401(k) and Australian superannuation experiences would suggest: (1) strong MPF

asset growth far outpaces that of traditional bank products; (2) the outset of a longer-term

equity investing culture; (3) deeper capital markets; and (4) strong growth in mutual funds.

Our Exhibit 1 was for 10-year projections on AUM growth – which proved pretty accurate through 2007, pre-2008 GFC

12

Banks Hong Kong

4 Goldman Sachs Global Equity Research

GDP and 14% of total bank deposits at present. This assumes a 60% employer

compliance rate rising to 90% in ten years, a 0% voluntary contribution rate (over and

above the 5% employee limit) rising to 2% by year ten. This also assumes a conservative

average annual investment return of 5%.

Exhibit 1: We expect 35.6% CAGR for MPF assets, to US$57 billion by 2011MPF asset size projections

Profit on

Beginning beginning Annual Outflow of

Balance balance contribution funds

Year (HK$mn) (HK$mn) (HK$mn) (HK$mn) (HK$mn) (US$mn)

2001E — — 20,910 — 20,910 2,688

2002E 20,910 1,046 23,090 (42) 45,004 5,785

2003E 45,004 2,250 25,426 (180) 72,500 9,319

2004E 72,500 3,625 27,925 (435) 103,615 13,318

2005E 103,615 5,181 30,597 (829) 138,563 17,810

2006E 138,563 6,928 33,450 (1,386) 177,555 22,822

2007E 177,555 8,878 36,493 (2,131) 220,796 28,380

2008E 220,796 11,040 39,737 (3,091) 268,482 34,509

2009E 268,482 13,424 43,192 (4,296) 320,803 41,234

2010E 320,803 16,040 46,869 (5,774) 377,937 48,578

2011E 377,937 18,897 50,778 (7,559) 440,053 56,562

End-of-year balance

Assumptions:

(1) Investment return is5.0%

(2) Annual increase in fund withdrawal rate is 0.2%

(3) Annual contributions are made at the end of every year

(4) Initial compliance rate is 60% and annual increment is 3%

(5) Initial voluntary contribution rate is 0% and annual increment is 0.2%

Source: GS Research estimates.

We stress investment returns are a key swing factor; 25% higher total assets if 10%

instead of 5% annual investment return. If we were to assume a more aggressive, but

still realistic, 10% investment return, we estimate total provident fund assets would

reach US$71 billion by 2011, 25% higher than our base-case estimate (see Exhibit 2 for

sensitivity analysis to annual investment returns).

Growth in O/S closely tracked if not exceeded, what we projected until 2008 global fin crisis We projected HK$220,796mn as at YE07 Actual MPF O/S: HK$264,786mn at YE07 MPF O/S balances now at HK$655,486mn as at September 2016

Back on point: we find it difficult to construct credible 3-yr let alone 10-yr projections for PERA total assets

13

Why?

•  Voluntary, not mandatory, scheme

•  Unsure about compliance/take-up on at least four fronts •  Rate/pace of employers sign-up

•  Rate/pace of employee buy-in for companies that have signed up

•  Employee contribution amounts (esp. for millenials – low propensity to save?)

•  Amount of any contributions from corporate sponsor

14

Where PERA still falls short in our view, …which may lead to slow adoption and NAV ramp-up

HK MPF steady/strong ramp-up: Can we get this for PERA? In HK$bn

•  Voluntary, not mandatory for employers or employees •  Annual contributions capped to P100,000 •  Voluntary contributions over P100,000 de-facto disallowed. •  Only P5,000 tax credit on P100,000 max contribution.

•  Equal to P15,625 tax deduction at 32% marginal tax rate •  In a US 401K setting, same contribution will generate P32,000

tax deduction

•  Lack of clarity on how to get/use P5,000 tax credit •  Corporate contributions not envisioned/encouraged.

Four things to consider, to enhance rate of take-up, participation and NAV growth

15

In rising order of feasibility and likely impact:

1.  Combine RA 7641 plans into PERA – combine employer & employee contributions

2.  Raise level of tax credit (P5,000/yr at present) on PERA employee contributions

3.  Raise maximum cap (P100,000 at present) on PERA contributions

4.  Make PERA mandatory – mandatory scheme, mandatory employee contributions (just like Hong Kong, Singapore, Malaysia)

What could a mandatory PERA look like?

16

•  Mandatory for corporates to set up PERA schemes (as with RA 7641 retirement plans)

•  Mandatory employee enrollment (as with HK, Singapore, Malaysia)

•  Mandatory minimum employee contributions (HK at 5% of incomes, Malaysia 8%, Singapore 20%)

•  Full tax deductions for employee mandatory contribution

•  Encourage additional voluntary employee contributions

•  Encourage/tax-incentivize corporate matching or partial contributions

Filipinos (esp millenials) arguably consume too much and save/invest too little and too late for retirement. Not many realize power of compounding with investing for the long haul. Pro-savings tax policies & mandatory provident schemes can help.

17

October 11, 2016 BDO Unibank

16

Exhibit 16: Philippines ranks 95th out of 138 countries on the World Economic Forum’s overall infrastructure scorePhilippines needs a lot more infrastructure, hard and soft.

Exhibit 17: Philippines could use more R&D researchers, science and technology graduatesResearchers in R&D per million people, scientific & technical journal publications

Country

Hong Kong SAR

Singapore

Netherlands

United Arab Emirates

Japan

Korea

USA

Malaysia

China

Thailand

Indonesia

India

Vietnam

Philippines

1

2

3

4

5

10

11

24

42

49

60

68

79

95

6.69

6.5

6.37

6.31

6.29

5.96

5.94

5.42

4.71

4.39

4.24

4.03

3.88

3.37

InfrastructureRank Score

Table A.13 Education, Research and Development

Literacy rate, adult total (% of people ages 15 and above

Researchers in R&D (per million people 1/

Scientific and technical journal articles

Emerging Markets 1975-1983 1984-2007 1996 2006 1986 2005

Top-Performing 74.1 85.6 325 657 1,761 7,524

Moderately Growing 55.4 73.0 241 199 258 1,599

Slower Growing 79.4 90.2 512 433 1,002 2,864

Philippines 83.3 93.0 189 141 151 178

Source: WB World Development Indicators.1/ Data not available for Egypt, Jordan and Pakistan for 2006.

Source: The Global Competitiveness Report 2016-2017, World Economic Forum. Source: IMF Working Paper: The Determinants of Economic Growth in the Philippines: A New Look, Willa Boots J. Tolo, December 2011.

Exhibit 18: Philippines unbalanced: high consumer spending relative to GDP, not enough investment spendingPhilippines an outlier in terms of high consumer spending as % of GDP; consumes even more as % of GDP than the US, without the latter’s high incomes, wealth, well-developed resources

Exhibit 19: Consumption has historically accounted for 70% of GDP, so structural change needed here if we are to get more investment spending relative to GDPPhilippine GDP (constant 2010, PHP bn)

CountryInvestments as % of GDP,

2015Household final consumption spending as % of GDP, 2014

United StatesPhilippinesJapanNew ZealandThailandMalaysiaASEAN 5AustraliaSingaporeVietnamKoreaIndiaIndonesiaChina

68.4%72.4%60.7%58.0%52.1%52.4%54.1%55.4%36.8%63.6%50.3%58.0%56.8%37.4%

20.2%20.9%22.0%23.1%24.1%25.1%25.5%26.1%26.3%27.6%28.0%33.3%34.6%43.3%

Source: IMF for investment spending metrics, World Bank for household final consumption expenditures metrics.

Source: World Bank, BDO Nomura Research estimates.

Many reasons/benefits for a mandatory PERA 1. Philippine savings rate too low

18

Philippines: Low pool of savings as % of GDP Total banking sector deposits as % of GDP

Many reasons/benefits for a mandatory PERA: 2. Low savings pool – need more to fund infra, investment needs

19

Many reasons/benefits for a mandatory PERA 3. Higher savings rate = higher GDP growth & incomes in time

Positive correlation between savings rate and real GDP growth

Source: Gabriel Roque, BDO Senior Macroeconomist.

20

Many reasons/benefits for a mandatory PERA 4. Singapore, Malaysia GDP outperformance vs Phil prove benefits of mandatory savings

October 11, 2016 BDO Unibank

14

III. Continued infra, reform gains needed to enable massive jobs creation and catch-up growth with ASEAN, Asia peers

• To enable the economy (and private sector) to create a lot more jobs to accommodate the sizable number of new entrants to the labor force for years to come, we need more of many things.

• These include: infrastructure, FDI/domestic capex, STEM6 skills, more exports, manufacturing, tourism, higher-value agriculture, etc.

• We think the government’s 10-point plan directly addresses these needs, as well as the country’s long-standing weaknesses and poor competitiveness.

• The mileposts ahead are easy enough to see: a double from here to Thailand per capita incomes, a 2.7X to China and a 3.3X to Malaysia levels.

Getting (or getting back) to middle-income nation status and betterThe Philippines, at US$2899 in per capita income, is in between the World Bank’s definition of lower middle-income (US$1,988) and middle-income nations (US$4,667, see Exhibit 14). To put this in context:

• Thailand’s per capita income is comfortably middle-income at US$5,816.

• China (at US$7,924) has now broken into upper middle-income levels, which the World Bank pegs at US$7,737.

• Malaysia is comfortably at upper middle-income levels at US$9,766.

• However, the Philippines was ahead of all these three countries in per capita incomes back in 1960; only Japan and Singapore were higher back then. So, it is literally catch-up growth – regaining lost ground – that the country faces.

Exhibit 14: Then and now – Philippines still not back up to middle-income nation status; still a lot of catch-up needed with ASEAN, Asian peers We need more of many things to get to (or more accurately, get back to) middle income nation status or better, including infrastructure, better productivity, more FDI, more manufacturing, more tourism, more value-added agri.

THEN... ...AND NOW

Country

JapanSingaporePhilippinesMalaysiaUpper middle income, per WBKoreaSri LankaMiddle Income, per WBThailandLower middle income, per WBBangladeshChinaIndiaIndonesia*

JapanKoreaMalaysiaChinaUpper middle income, per WBThailandMiddle Income, per WBSri LankaIndonesiaPhilippinesVietnamLower middle income, per WBIndiaBangladesh

4794282542351611551431341019889898456

32,47727,2219,7667,9247,7375,8164,6673,9263,3462,8992,1111,9881,5811,211

CountryPer capita GDP, US$, 1960Per capita GDP, current,

US$, 2015

*as at 1967, earliest available data in World Bank series.

Source: World Bank.

6 STEM refers to science, technology, engineering and mathematics.

GDP per capita in 1960 (Philippines roughly same as Singapore, Malaysia) and in 2015 (Singapore 10X higher, Malaysia 3X higher). Singapore and Malaysia have had mandatory provident schemes since 1958 and 1951, respectively.

21

Many reasons/benefits for a mandatory PERA 5. Multiple macro benefits

Source: Gabriel Roque, BDO Senior Macroeconomist.

•  Recall that: CA = S – I Current account balance = Savings Gap (Savings – Investments)

•  Likely higher savings gap given Phil infra and investment needs

•  Rising savings gap = current account deficits = ongoing pressure on peso

•  Mandatory PERA can reduce savings gap, fund infra needs

•  Mandatory PERA can help strengthen domestic capital markets

•  Mandatory PERA can help strengthen currency, country ratings,

as it has done for Australia, Singapore, Malaysia, HK

22

Many reasons/benefits for a mandatory PERA 6. Social security/equity and the art of the nudge

•  High marginal propensity to consume for Filipinos (average age = 23.5 yrs)

•  Low marginal propensity to save (esp. for bulge-bracket millenials – very consumption-oriented)

•  Low interest rates, deposit rates do not help

•  Lack of appreciation of power of compounding with equity investments (few know “rule of 72”)

•  Lack of planning for retirement needs

•  4% mandatory contribution (HK at 5%) not that painful

•  4% contribution at P240,000 annual income = P800/month

•  That’s just 1 or 2 foregone “family out for pizza dinners” each month!

23

Many reasons/benefits for a mandatory PERA 7. Multiple benefits for domestic banks/financial institutions

•  Stable, steady-growth business – automatic growth from mandatory regular contributions

•  Attractively profitable business once scale is achieved

•  Durable B2B2C business – oftentimes lifetime customer relationship

•  Corporate cross-sell – e.g., payroll accounts, fund mgmt mandates

•  Consumer cross-sell – e.g. mortgages, reverse mortgages, wealth mgmt, insurance

•  Boost for fixed income business

•  Boost for equities business

•  Beyond punting: onset of proper, fundamental equity investment culture

•  Note equities (funds, stocks) are 49% of total assets for US 401K plans

Equities top asset category – makes sense given power of compounding, especially for younger employees

24

52%

40%

82%

94%

96%

95%

13%

48%

60%

18%

6%

4%

5%

87%

DB DC

Global Pension Assets Study 2017

7

Key findings – Figures

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

DB/DC Split 20161,2Asset allocation 2016

Source: Willis Towers Watson and secondary sources

1 DC assets in Switzerland are cash balance plans where the plan sponsor shares the investment risk and all assets are pooled. There are no pure DC assets where members make an investment choice and receive market returns on their funds. Therefore, Switzerland is excluded from this analysis.2 In January 2017, the UK’s Office for National Statistics stated that the figures previously disclosed for DC entitlements were significantly overestimated. As a result there is a significant decrease in UK DC

pension assets this year when compared to the previous editions of this study. This change has a very limited impact on the P7 DC assets; in the order of a one percent reduction.

46%

49%

47%

30%

32%

28%

46%

49%

28%

22%

36%

37%

54%

59%

33%

14%

24%

27%

16%

28%

14%

10%

20%

21%

3%

2%

1%

5%

4%

2%

16%

P7

US

UK

Switzerland

Netherlands

Japan

Canada

Australia

Equity Bonds Other Cash

Provident fund schemes and the role of banks/financial institutions The experience of Australia

25

Assets of retail-sector superannuation licensees as at June 2016 (A$ billion)

The Australian superannuation industry | 23 of 42

Figure1: Assets of retail-sector superannuation licensees as at June 2016 ($billion)*

ANZ

OnePath

$35.3

Oasis

$5.3

wholesaleplatformprovider

Macquarie

$16.0

Mercer

$22.1

AON$3.1

Australian Ethical

$3.1

Equity Trustees

$2.1

Netwealth

$4.4

Zurich

$1.2

TowersWatson

$1.3

TAL

$1.5

DiversaTrustees

$6.3

Perpetual

$5.3

NAB

PFS$25.9

MLC$45.8

Nulis$17.5

CBA

ColonialMutual

$5.7

$10.5

Avantoswholesaleplatformprovider

Colonial First State

$70.8

NM$39.0

AMP$70.8

AMP

Westpac

BT$80.1

WestpacSecurities

$6.2

ClearView

$1.7

Guild

$1.3

IOOF

$24.9

Suncorp

$6.9

Total Risk Management

(Russell Investments)

$10.3

Source: APRA Annual Fund-level Superannuation Statistics, June 2016.* As at 30 June 2016, for licensees with total assets of $1billion or greater. The blue circles represent corporate groups.

Provident fund schemes and the role of banks/financial institutions The experience of Hong Kong (MPF NAV market shares, March 2017)

26

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27

Some final product suggestions

•  Link PERA with corporate retirement plans (RA 7641)

•  Link PERA with corporate payroll accounts

•  Online portal for ease of monitoring accounts, changing investment allocation/funds, etc.

•  Default investment schemes

…“Power of curation from trusted adviser”

…“Simple is better” - too many choices gets intimidating

•  Stress power of compounding with equities investing, particularly for younger employees •  Simplify / streamline procedures (e.g. need for cash custodian?)

28

Our response to pushback against a mandatory PERA It’s un-democractic and coercive •  Australia and Hong Kong (bastion of laissez faire) do it.

It’s burdensome, on top of SSS/GSIS and PAG-IBIG mandatory contributions •  It’s different from SSS/GSIS. Money you put in goes directly to, and compounds, in your own account. •  Assuming 4% of average salary – monthly contribution only 1 or 2 family-out-for-pizza-dinners foregone.

Why not just raise expand SSS/GSIS to allow higher employee and employer contributions? •  SSS/GSIS is DB, PAYG (pay-as-you-go), commingled accounts. •  PERA is DC, involves individual accounts where employees can see exactly what they have, how well their

account has grown, reflecting asset allocation decisions and performance of funds employee has chosen.

We still have the luxury of time and a very young population – why do now? •  For power of compounding to work, best to start saving early, at a young age. •  Even Philippines has seen dependency ratio rise since 2000, rise will accelerate in future. •  Phil has small pool of domestic savings but huge infrastructure needs – better to finance internally.

It’ll hurt consumer spending, it’ll hurt economic growth. •  Yes. But one-time/first-year hit, not sustained drag, to consumer spending and GDP growth. •  And long-term macro, growth, infra, social equity benefits far outweigh one-time hit.

In conclusion: PERA a good start, mandatory will make for strong take-off and multiple benefits

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•  Philippines has luxury of time on provident fund build-out, given strong macro, demographics

•  PERA has many elements of best practice

•  But PERA as currently structured more a third pillar

•  And Philippines could use a stronger, more inclusive second pillar

•  PERA can fulfill second pillar role if employee enrollment & contributions made mandatory

•  A mandatory PERA can/will: •  create multiple macro, micro and social equity benefits (if implemented well) •  help build up domestic capital markets •  help address Phil structural weakness (low savings rate, low savings pool) •  help boost Phil GDP growth rates and per capital income levels in time •  …just as it has done in past several decades for Singapore, Malaysia, Australia