Primer on Savings and Investment in the

Philippines

Research Advocacy and Advisory Group (RAAG)

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract Many Filipinos aim for financial security by setting aside a portion of their disposable income to be placed in better yielding instruments. This primer discusses places to accumulate savings and identifies common investment options. It also lists factors to consider when selecting savings and investments. In an attempt to describe the basic features of savings and investment instruments currently available in the market, this primer will hopefully educate the public, particularly the small savers, on the risks and opportunities involved in saving and investing.

Primer on Savings &Investment in the Philippinesby Research Advocacy andAdvisory Group, Ateneo-EPRA ProjectRoom 408, Ateneo Professionals Schools,Rockwell Drive, Rockwell Center, Makati CityTel. No. (+63 2) 899-4590Lay-Out and Design: CJC Designs

savingson

& investment

Many Filipinos aim for financial security bysetting aside a portion of their disposableincome to be placed in better yieldinginstruments. This primer discusses places toaccumulate savings and identifies commoninvest-ment options. It also list factors toconsider when selecting savings andinvestments. In an attempt to describe thebasic features of savings and investmentinstruments currently available in the market,this primer will hopefully educate the public(particularly the small savers) on the risksand opportunities involved in saving andinvesting.

?why a primer

3

Saving and investing presents numerousbenefits to an average Filipino. First, fundsallocated to savings and investments providefinancial security in times of emergencies andhelp people cope with unexpected events suchas illness, unemployment, and accidents. Inaddition, saving and investing advances aperson’s financial goals like a new car,education, a trip, or even a down payment fora house. Naturally, a more important benefitof saving and investing is to guarantee acomfortable and financially secure retirement.Lastly, saving and investing allows a personto earn more money.

?WHYSHOULDFILIPINOS

SAVE&INVEST

In most cases, saving does not involve any element ofsignificant risk. It simply implies not spending. It is thedifference between income and expenses. Almost allFilipinos have savings accounts and ATMs. Placingone’s savings in a bank deposit allows Filipinos toaccess their hard-earned cash to meet short-termexpenses and store extra cash in a place safer than amattress or cabinet at home. The rates of return offunds placed in savings account are lower than those

in investment instruments.

In contrast, investing takesa more active approach towealth accumulation andinvolves risk. In aninvestment, a personcommits capital for thepurchase of securities,business, property, oreven art work and jewelrywith expectations ofrealizing profits or returnsin the future.

between ?what is the differenceSAVING&INVESTING

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HOW DO YOU KNOWWHICH KINDS OF SAVINGSOR INVESTMENT VEHICLESARE THE BEST?

Before making decisions on where toput one’s hard-earned cash, a personshould look into four (4) majorconsiderations: liquidity, return, taximplications, and risk.

Liquidity: How quickly will this person need the money? Wheninvesting or placing funds in a savings or a time deposit, a personmust determine how soon he or she will need the money andassess the amount of his or her short-term expenses andemergency money.

Return. Returns may come from earnings or growth. Earning orprofits from investments may be in the form of interest, dividends,or rent payments. Growth, in contrast, comes from the appreciationin the value of the investment that is bought and sold.

WHATDOYOUMEANBYRISK&RETURN

inINVESTMENT?Risk refers to the uncertainty of receiving profitor return from an investment. The return is thecompensation to the investor for taking riskand depends on the level of risk involved.

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Tax Implications. How much will a saver or investor pay to placehard-earned cash in savings and investment vehicles? Moneymay grow faster in a tax-advantaged savings or investment planbecause the money that would have been paid in taxes will earn.

Risk: How willing is the person to take risks? Can this personsleep well at night when the value of the investment goes down?As a general rule, the greater the return, the higher is the risk.Risk tolerance is a person’s strength to endure the ups and downsof the market without panicking when the value of investmentsgoes down. The list below describes five varieties of risk.

a) Interest Rate Risk. This is relevant for fixed-incomeinvestments such as bonds or mutual bond funds.Changing interest rates can have a major effect on fixed-income investments. The value of a fixed-incomeinvestment decreases when interest rates rise andincreases with a decline in interest rates. When a personbuys a long-term fixed income investment and interestrates go up, he or she loses the value of higher returns.

b) Business/Event Risk. This refers to unforeseencircumstances that may adversely affect the value of aperson’s investment. This risk can be either company-specific or industry wide.

c) Credit Risk (or Default Risk). In the case of a bond, it isthe possibility the issuer (e.g. a corporation or agovernment institution) will fail to meet the terms of theobligations with respect to the timely payment of interestand principal. If the bond is part of a mutual fund or a unitinvestment trust fund (UITF), the risk will certainly affectthe net asset value of that fund. For stocks, credit risk isthe likelihood the company issuing the stock may havefinancial problems that may lead it to cut or suspend itsdividend payments.

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d) Market Risk. This arises from the ups and downs andsentiments of the markets, which may affect the prices orvalue of bonds and stocks.

e) Purchasing Power/Inflation Risk. This happens when thefinancial return on an investment loses purchasing powerdue to a general rise in the prices of goods and services.To deal with this risk, a person must ensure that theinvestment rate of return exceed the rate of inflation.

f) Political Risk. Political risk stems from changes to thepolitical and socio-economic conditions of the Philippinesthat may affect market sentiments, business profits, andinvestment returns.

HOW CAN I ASSESSMY RISK TOLERANCE?

You can take the short survey to assess your risk tolerance andlevel of comfort with the way money is invested. This short five-question survey is a modified version of the Risk Tolerance Surveyof Wells Fargo.1

1. With which types of savings or investments are you mostcomfortable?a. Savings Accountsb. Money Market instruments and Government savings bondsc. Corporate bonds or bond fundsd. Stocks or stock funds

2. After you make a savings or investment decision, you feel:a. Worriedb. Satisfiedc. Hopefuld. Invigorated

1

http://www.wellsfargo.com/investing/basics/goals_risk

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3. Say you invest $20,000. Each of the following answers showsthe range of returns that your investment may experienceafter just one year, based on the underlying holdings. Whichinvestment would you be most comfortable holding?a. PhP 10,000 –PhP50,000b. PhP 60,000-PhP 100,000c. PhP 100,000-PhP 200,000d. PhP 200,000-PhP 500,000

4. For the last five years, your investment has returned anaverage 10% per year — in line with other similar investments.However, it loses 20% over the next year. What do you do?a. Sell all of the investment.b. Sell a portion of the investment.c. Nothing.d. Buy more of the same investment.

5. Which phrase best describes your take on life?a. Proceed with caution — take no unnecessary risks.b. Take small, measurable risks and patiently pursue your

dreams.c. Prepare well, but follow your goals without fear.d. No hesitation — go for it!

Results of Risk Tolerance Survey (Source: http://www.wellsfargo.com/investing/basics/goals_risk)

If you selected mostly (a)’s:You are highly risk-averse. You’re also a strong candidate to learn as much as you can about investing becausethe more you know about risk-and-reward potential, the better you can manage your portfolio to take advantage ofgrowth opportunities.

If you selected mostly (b)’s:You are somewhat risk-averse, but you understand the importance of investing and do so with a measure ofcaution and calculated risk. You would probably benefit from a diversified portfolio. It’s important to remember tobuild in some component of growth in your portfolio in order to mitigate the impact of taxes and inflation.

If you selected mostly (c)’s:You understand the concept of risk and are prepared to deal with the consequences in an effort to attain greatergrowth opportunities. You seem comfortable with your investment selections, which generally are the product ofresearch and a balanced strategy that combines conservative-, medium-, and high-growth oriented investments.

If you selected mostly (d)’s:You like taking risks and probably have an aggresive growth-oriented portfolio. If you are quite young (in your 20sor 30s) with sufficient income so that you’re not dependent on your investments, taking the hig-risk roadmay reward you over time. However, make sure that your equity holdings are diversified and always maintaina long-term perspective.

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Do you have summary of the risk, liquidity, return, and taxconsequence of the instruments covered in this primer?

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?what are the most

SAVING&INVESTMENTbasic

instrumentsoffered by banks

Savings AccountsThe most basic of savingsinstruments housed in banks is thesavings account. However, interesthere is almost nil; hence, the only useof savings account to many is forsafekeeping purposes. In addition tosafekeeping, some people findkeeping money in a savings accounta good way to prevent mindlessspending or an effective tool toprudent savings.

Current/ Checking AccountsAnother simple deposit instrument offered by banks is the checkingaccount. The best way to settle payments/ obligations is by wayof issuing checks because one is able to issue large sums ofmoney safely without risk of theft. However, checking accountsdo not earn interest. Hence it is advisable not to keep a largemaintaining balance in your current account. Some banks havepackaged a two-in-one savings and checking account to facilitate

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easy transfer from checking account to savings andallow the depositor to still enjoy the interest that regularsavings accounts offer while maintaining a checkbook.

A person who holds a checking account should alwaysensure that there are sufficient funds to back up anycheck that he issues. A check that is drawn againstinsufficient funds (DAIF) or drawn against an uncleareddeposit (DAUD) will be charged by the bank at leastP2, 200. If an account holder issues bouncing checkfor more than three times, his or her name is reportedto the Bangko Sentral ng Pilipinas (BSP). The namebecomes part of a list that banks usually refer to beforegranting loans and credit cards and is a negative pointto one’s “credit-worthiness”.

Time DepositsIf one wants to keep excess funds (defined as that overand above your daily requirements), time deposits canoffer a depositor slightly higher interest than savings

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accounts. Moreover, the bank assures the depositorof a fixed rate, often based on the 30-day, 90-day or180-day Treasury bill rates, but sets a fixed durationwhere no withdrawals should be made. Hence, thedepositor is advised to ensure that the amount placedin the time deposits will not be used during theplacement period or else pay penalties.

Dollar Savings AccountsDollar Savings accounts allow a depositor to keep hisdollars in a savings account and earn an interest rateof 0.5% to 0.75 %. Attached to this is the bank servicethat allows remittances from relatives abroad viatelegraphic transfers. It can come with an internationalATM for easier access when out of the country.

Dollar Checking AccountSimilar to the peso checking account, the dollarchecking account earns no interest. When packagedas a checking cum savings account, it is able to earnminimal interest (0.5%) as a regular dollar savingsaccount. The real selling point is the ease it offerswhen one needs to settle major obligations abroad suchas paying tuition fees or purchasing real estateoverseas. For businessmen, import transactions canalso be facilitated.

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WHICHGOVERNMENTAGENCY

MONITORINGBANKSis there an insurance for my deposits?

?ISRESPONSIBLEFOR

The banks are governed by BangkoSentral ng Pilipinas (BSP) under theGeneral Banking Law of 2000, the NewCentral Bank Act of 1993, and the ThriftBank Act of 1994. Today, the PhilippineDeposit Insurance Corporation (PDIC)insures deposits to up to PhP 250,000.

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Depositors can help imposemarket discipline on banks by observing the following smartsavings tips from PDIC in safeguarding their deposits:

1) Know the bank’s reputation. Depositors shouldread newspapers and surf websites of BSP and thebank to know about the bank’s capitalizationincreases, ranking among peers, financialstatements, income projection, and products andservices.

2) Know the bank’s products. Depositors should alsodetermine whether a particular bank product is adeposit or not. They may confuse deposit productswith investment schemes not covered by PDIC.

3) Know the current market interest rates.Depositors should be cautious with overwhelminglyhigh interest rates. Unusually high interest ratescompared to market interest rates may meanliquidity problems and higher risks.

CAN YOU GIVE MESOME TIPS ON HOWTO PROTECTMYSELF FROM LOSSOF DEPOSITS?

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4) Read the fine prints. Depositors should alsobe careful not to miss out the fine prints—tinywords, phrases, or sentences in the passbook,certificate of time deposit, or any documentsthat need to be signed.

5) Secure and update bank records. Depositorsmust secure passbook, ATM card, certificateof time deposit, checkbook and other bankrecords. These records serve as proof of thedeposit accounts.

6) Check for signs that the bank may be introuble. Depositors should be wary when theycannot withdraw their money on demand or ifthey can only withdraw money at a schedulegiven by bank officers. Further, they should becautious of aggressive solicitation by bankmarketing personnel. Finally, depositors shouldalso take note of their bank’s past due loanratios. High levels of unpaid debt may lead to abank’s difficulty in servicing withdrawals.

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investmentotherin addition to

accounts?

do banks offerinstruments

basic savings, dollar & time deposit

Yes. Aside from deposit products, another broadcategory of bank-based products is the moneyand capital market instruments. The moneymarket is a market for low risk, highly liquid short-term evidences of indebtedness. When someoneborrows money, the “promise” of the borrower topay back the amount borrowed (principal) withinterest, which is evidenced or documented byeither a certificate, a promissory note, can bebought by an investor, and resold easily to anotherinterested investor. These promises, or debtsecurities, are usually housed in banks orinvestment houses. Capital market instruments,on the other hand, have long-term maturities,better yields, but higher risks.

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?WHAT KINDS OF

MARKET INSTRUMENTSMONEY&CAPITAL

do bank offer

Banks may offer government securities inthe form of treasury bills, treasury notes,retail treasury bonds (RTBs), or dollar-linked peso notes. Or they may also offerlong-term negotiable certificates of deposits(LNCDs) or unit investment trust funds(UITFs).

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On many occasions, the Philippine NationalGovernment or its agencies issue debt securitiesto finance deficits and development projects. Thesedebt securities, commonly referred to as GS, canbe alternative forms of investments. Further, theyare either directly or indirectly backed by the fullfaith of the Philippine Government. Hence, theycarry lower interest rates than those issued by thecorporate sector. In addition, GS may be used totrack market interest rate movements and asbenchmarks in setting the return rates of corporateissues.

what aregovernmentsecurities?

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Treasury Bills

Treasury Bills (T-bills) are direct and unconditionalobligations of the national government. They are issuedby the Bureau of Treasury (BTr). They carry maturity ofone year or less and can be traded in the secondarymarket before maturity. Various tenors of Tbills exist:91,182 or 364 days. Banks that comprise majority ofthe Government Security Eligible Dealers (GSED) bidfor T-bills in the weekly auctions held by the Bureau ofTreasury. Then, the banks resell the T-bills to investors.Treasury Bills do not bear interest. They are issued andsold at a discount from face value and are redeemed atmaturity for the full face value of the instrument

Treasury Notes

Fixed Rate Treasury Notes (FXTNs) are direct andunconditional obligations of the national government.They are issued by theBureau of Treasury (BTr).They are interest bearingand carry a term of morethan one year and can betraded in the secondarymarket before maturity. Thetenors for these debtinstruments can vary.

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Fixed Rate Treasury Notes are considered one of theprime investment instruments in the market. They aresafe, liquid and offer attractive returns to investors.Tenor can be 2, 5, 7 and 10, years. The interest rateis fixed for the life of the FXTN based on the lowestaccepted yield to maturity on auction date. Thecoupon payment period (or the periodic payment ofinterest) can be payable semi-annually. Fixed RateTreasury notes are issued and sold at a price equalto be face value and are redeemed at maturity for thefull face value of the instrument plus interest/couponof the last period.

Retail Treasury Bonds

Retail Treasury Bonds (RTBs) are like treasury notesbut are usually longer in maturity (10 years andabove). They are direct and unconditional obligationsof the national governmentthat primarily caters to theretail market or the end-users. They are issued bythe Bureau of Treasury(BTr). They are interestbearing and carry a term ofmore than one year and canbe traded in the secondary

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market before maturity. Retail Treasury Bonds (RTBs)are safe, liquid and offer attractive returns to investors.The interest coupons of treasury bonds are paid tothe investor quarterly.

Further, Retail Treasury Bonds (RTBs) serve as acritical part of the government’s program to makegovernment securities available to small investors.They are issued to mobilize savings and encourageretail investors to purchase long-term papers. Incontrast to PhP 500,000 in the wholesale market, theminimum placement of RTBs is PhP 5,000.

Dollar Linked Peso Notes (DLPN)

Dollar Linked Peso Notes (DLPNs) are direct andunconditional obligations of the national governmentand are issued by the Bureau of Treasury (BTr). Theyare interest bearing andcarry a term of more two(2) and three (3) yearsand can be traded in thesecondary market beforematurity. The notes trackthe movement of thePhilippine Peso and US

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?

Dollar exchange rate. Payments of interest andprincipal are linked to the movement of theexchange rate and computed based on theforeign exchange factor.

Institutions that buy these government securitiesinclude mutual funds, pension funds, insurancecompanies, commercial banks, corporations,state and local governments, central bank, andinternational investors.

Individual clients buy or hold government bondsthrough common trust funds/unit investment trustfunds, mutual funds, or pension plans. Those whoopt to purchase government securities throughthese channels tend to look for dependableincome, relative safety, and diversification(BusinessWorld, 2005). Retail investors may alsopurchase government securities (GS) througheligible/qualified dealers or commercial banks.

HOW CAN IGOVERNMENTPURCHASESECURITIES

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Although government bonds are the safest andare relatively “risk-free”, it does not mean theyare immune from credit/default risk, credit spreadrisk, or downgrade risk. Credit or default risk isthe possibility the issuer will fail to meet the termsof the obligations with respect to the timelypayment of interest and principal. Credit spreadrisks refer to the probability of an increase in thespread of the bond over a default-free security(i.e., US Treasury security) and a decline in theprice of that bond. Downgrade risks pertain tothe chance a credit rating firm (e.g., Fitchratings,Moody’s, or Standard and Poor’s) will lower therating of a bond. In this regard, downgrade risksare closely associated with credit spreads risks.

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The table below summarizes the product features of thegovernment’s four (4) main issues.

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Negotiable certificates of deposit refer to a debtinstrument sold by a bank to the public that paysannual interest and gives back the original purchaseprice at maturity. They can be liquidated anytime atthe current market price, but the investor has topay withholding taxes if held less for less than fiveyears. Investments in NCDs are not subject towithholding tax if held for more than five (5) years.Long- term NCDs are competitively priced andusually carry a premium over the 3-month Treasurybill benchmark.

In the Philippines, only a few banks issue and sellnegotiable certificates of deposits. This year, onlyCitibank and Banco de Oro have issued LTNCDs.

what arelong-term negotiablecertificates of deposit?

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?The Unit Investment Trust Fund (UITF) serves as anaddition to the country’s investment channels createdunder the central bank’s Circular No. 447 in 2004. TheUITF is actually an improved version of the existingCommon Trust Fund (CTF), which is a collectiveinvestment scheme similar to a mutual fund that poolsthe investments of small investors into a larger fundunder professional management that is able to accessmore superior investment opportunities that are notnormally available to individual retail players (BangkoSentral ng Pilipinas, 2004).

Purchase of a UITF. A prospective investor may buy ina UITF by purchasing “units of participation” in the fund.The units of participation correspond to the investor’sproportionate share in the total value of the fund. Unitsof participation are based on the “net asset value perunit” (NAVPU) of the fund for the day. The NAVPU iscalculated by dividing the fund’s “net asset value” (NAV)by the number of outstanding units in the fund. TheNAV of the fund is the sum of the market value of theinvestments of the fund less expenses. (BusinessWorld,2005)

WHAT IS AUNIT INVESTMENT

TRUST FUND (UITF)

27

Further, the UITF is open-ended pooled trust fund suchthat it gives clients the option to invest or redeem theirinvestments at any time subject to guidelines set forthin the UITF Declaration of Trust (or Plan Rules). ThePlan Rules contain the mechanics of for investing,operating, and administering the fund.

Valuation Method. The main difference of UITF fromthat of a CTF lies in the valuation methodology. CTFsare valued using the accrual method, whereby theNAV of the fund takes into account principal andinterest accruing from various investments in the fund.This allows the fund to grow over time regardless ofmarket price movements and hides paper losses.UITFs, on the other hand, are valued based onmarked-to-market method, wherein investments arevalued at market prices, allowing them to move withmarket fluctuations. In particular, with the marked-to-market method, the investors share in the gains andlosses after expenses of the fund, proportionate totheir respective participations in the pool. Thus,unrealized gains and losses are included in earnings.The change in valuation method aligns UITF with bestpractices in trust industry worldwide.

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?Non-bank financial institutions (NBFIs) refer tonon-monetary institutions outside the traditionalbanking sector which are primarily engaged inlong-term financing of productive ventures.Moreover, NBFIs provide alternative avenuesto savings but typically do not take deposits.They consist of mutual funds (or investmentcompanies), investment houses, financecompanies, securities dealers/brokers, pensionfunds, and insurance companies.

what arenon-bank

financial institutions

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Mutual funds (or investment companies) poolmoney from individual investors with smallcapital to purchase bonds and stocks, andcreate a diversified portfolio. The funds arethen run separately by professional managers.Like any other companies, mutual funds issueshares of stock and sell these shares to publicinvestors in exchange for cash. Mutual funds(or investment companies) allow savers tobecome long-term investors and make itpossible to open the public to the securitiesmarkets.

?

WHAT AREMUTUALFUNDS

INVESTMENTORCOMPANIES

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Depending on the investment objectives, professionalmanagers buy, hold and sell assets in equities, fixed-interest instruments like bonds, and money-marketdeposits. In the Philippines, mutual funds fall underthe following:

a) Equity fund. This fund is largely placed instock market and has wide fluctuations.Nonetheless, in the long run, equity fundstend to perform better than fixed incomefunds.

b) Index fund. This fund consists of severalstocks in the same proportion as that of theindex the fund tracks (e.g., PSE Compositeindex), and has less risk than the equity fund.

c) Balanced fund. This makes investment in abalanced portfolio of stocks and fixed incomesecurities. It both has the earning power ofstocks and the stability and income of bonds.

?what are the

different kindsmutual fundsof

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d) Bond fund. This describes a type of investmentcompany that primarily invests in long-termbonds and other types of debt securities.Earnings do not fluctuate as much as the othertypes of funds.

e) Money market fund. This refers to fund thatmakes investment in short-term fixed incomeinstruments (i.e., those securities with lessthan one year of maturity). This portfolio hasthe lowest risk.

In the Philippines, banks are not allowed to sell mutualfunds for the announced reason that it gives“impression that the investor is dealing with the parentbank” (USAID-AGILE, 1999). Unlike CTFs or UITFs,mutual funds are distributed and sold by insurancecompanies and asset management companies andregulated by the Securities and ExchangeCommission (SEC) under the Investment CompanyAct. In February 2001, the SEC allowed Philippine-registered mutual funds to invest 20% of their portfolioin foreign funds or securities in response to weaknessin the local equities market. (EIU, 2004)

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Since mutual funds are professionally managed,investors need to pay specific fees called sales fee/load. Like CTFs/UITFs, the actual price of each shareis calculated defined by what is called net asset valueper (NAVPS), which is the value of all assets held bythe fund (less any liabilities) divided by the numberof shares sold. To realize earnings on a mutual fund,an investor should compare the current NAVPS ofthe fund with its NAVPS at the time he/she bought it,and also take account of cost of sales and redemptionfees. The NAVPS of mutual funds is regularlypublished in BusinessWorld, Philippine Daily Inquirer,and Philippine Star. The table below shows the topmutual funds based on assets at end-2003.

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A company with strong credit rating may issuebonds to fund working capital or expansionrequirements. Most corporate bonds are fixed-ratebonds such that the interest rate the company pays(coupon payment) remains constant until maturity.Corporate bonds may either take the form ofdebentures, asset-backed bonds, or convertibles.Debentures have no collateral and are simplybacked by the company’s credit standing and itscapacity to repay interest and principal. Asset-backed bonds come with specific assets that serveas collateral in case of default by the issuer (i.e.,company), while convertibles have the additionalfeature of allowing the holder to convert them intoshares of stock under certain provisions.

?WHAT ARECORPORATE BONDS

35

Investors who want to purchase corporate bonds mustcontact the lead manager/underwriter of the issuer andsubmit an application and other documents forpurchase and verification. The lead underwriterguarantees the sale/distribution the bond issued bythe company, negotiates the pricing with the issuer,secures rating from credit rating agencies, and handlesregistration requirements from the SEC. Alternatively,investors may contact a bank or broker whoparticipated in the sale of the corporate bond, or simplyparticipate in a bond fund.

Corporate bonds involve higher risks than governmentbonds, but higher risks may also mean better returns.They involve more risk because companies arevulnerable to economic shocks, mismanagement, andcompetition. (BusinessWorld, 2005) Returns oncorporate bonds hinge on the issuing company’sperformance and outlook.

?how can ipurchase

bondscorporate

36

Stocks represent ownership of a companyas well as claims on the net income andassets of a corporation. Stocks are eithercommon (voting) or preferred shares.Prices of stocks are determined by marketvaluation based on the performance of thecompany or market perception, andfluctuate daily. The prices of most stocksare listed in major newspapers.

?WHAT ISA STOCK

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Individuals, pension funds, mutual funds, banks, andinsurance companies may hold stocks. A person oran institution makes money on the stock market eitherthrough the dividends declared by the listed companyor when the stock is sold at a higher price than thepurchase price. Investors may purchase stocks frominvestment/brokerage houses, banks, or investmentcompanies (mutual funds). Stocks are usuallyconsidered long-term investments. Moststockbrokerage firms are located in the buildings ofthe Philippine Stock Exchange in Ortigas and Makati.

?how can i

stock marketinvest in the

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Contractual savings institutionsinsure against a future event bytaking in premiums or paymentstoday in exchange for payment uponthe happening of an event. Theirproducts may come in the form ofeducation plans, insurance plans, orpension plans.

?WHAT ARE

CONTRACTUALINSTITUTION

SAVINGS

39

pre-needPre-need companies offer education, pension, andmemorial plans. Based on the Rules on Pre-Needof the Securities and Exchange Commission (SEC),“pre-need plans are contracts that provide for theperformance of the future service(s) or payment offuture monetary consideration at the time of actualneed, payable either in cash or installment by theplan holders at prices stated in the contract with orwithout interest or insurance coverage and includeslife, pension, education, internment and other planswhich the commission from time to time approve.”

?what areplans

40

Pre-need plans come in two forms: open-ended andfixed value plans. Open-ended, actual cost, ortraditional plans are acquired through fixed costs anddelivered to the beneficiary based on actual costsupon the period of availment. They, however, exposepre-need firms to risks of not being able to servicematuring obligations. Fixed-value plans are plans inwhich the amount of the benefit fixed at the time ofpurchase. These plans may yield returns belowinflation rates but have features to compensate for it.(Padojinog, 2005)

In the Philippines, pre-need pension plans usuallyhave the following features (Aquino, 2002):

a.) Payment of contract price averages five years,which can be made in monthly, quarterly oryearly installments.

b.) Maturities of pre-need pension plans areeither upon reaching a certain age of the plan-holder or over a period of years after fullpayment.

c.) Pension benefits may be paid out in lump sumor installments or both at the option of the plan-holder.

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d.) In case of death of the plan-holder beforethe maturity date, pay-out will still be atmaturity date.

e.) To ensure payment of benefits, pre-needcompanies are required to contribute to aTrust Fund which are funded from theircollection

A number of pre-need companies are subsidiariesof banks or insurance companies. Pre-need firmsare regulated by the SEC and not subject toliquidity requirements imposed by the central bank.Recently, however, a few of the big pre-needcompanies have experienced financial difficultiesand failed in fulfilling their contractual obligationsto their clients.

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On the whole, the Philippine market has two typesof insurance companies: life insurers and general(non-life) insurers. Life insurance companies coverpeople against financial hazards following death andsell annuities (annual income payments uponretirement). The other type of insurance covers fire,casualty, and accidents. Like other contractualsavings institutions, insurance companies acquirefunds at periodic intervals (“premiums”) on acontractual basis to keep their policies in force andto use them to purchase investments.

The Insurance Commission, currently under theDepartment of Finance (DoF), regulates insurancecompanies in the Philippines. Some commercialbanks with universal licenses also offer insuranceproducts.

?WHAT IS AN

INSURANCE PRODUCT

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Pension funds provide retirement income throughannuities to employees covered by a pension plan.Funds are obtained through contributions fromemployees or employers. Pension funds differ inmethod of payment although the purpose remains thesame. The first method of payment— known as definedbenefit plan— guarantees payments of benefits thatare not tied to contributions but based on a prescribedformula. Under this type of plan, the sponsor shouldersrisk of shortfall in investment returns. The other type ofplan—defined contribution plan—both the employeeand the employer contribute specific amounts to theplan periodically. Under the defined contribution plan,the employee bears the risk of accumulated funds notmeeting replacement income goal.

The Government Service Insurance System (GSIS) andthe Social Security System serve as the largest pensionfunds in the Philippines. These two government-administered funds invest in government securities, thestock market, commercial paper, and propertydevelopment. Their income usually comes from salaryand housing loans, interest income in investments,

pension ?what areplans

44

dividends, and foreign exchange gains. (EIU,2004) Apart from GSIS and SSS, there is anothersmaller government administered fund: the ArmedForces of the Philippines Retirement Separationand Benefits System (AFP-RSBS). These threepublic pension funds all fall under, mandatorydefined benefit plan.

At present, GSIS and SSS experience difficulty inmeeting their redistribution goal. Specifically,benefits paid to member have outpaced theamount of contributions of members. Meagerreturns on investments, poor compliance andenforcement in payment of premiums, lowcollection rate on loans, huge losses from housingprograms, and the lack of regulatory institutionthreaten the viability of the two government-administered pension funds.

Nonetheless, there have been initiatives to reformthe country’s pension system and enhance its rolein capital market development.

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REFERENCES:

Aquino, Emilio. “Private Pension Schemes in thePhilippines: Regulatory Practices”. OECD, KoreanFinancial Supervisory Service, Korean Ministry ofLabor, and International Network of PensionRegulators and Supervisors (INPRS) Conference onPrivate Pensions October 2002.

Bagatsing, Valentino. 2005. “Government Securities”.Introduction to Financial Markets and Developmentby Ateneo-EPRA USAID Project. 31 August 2005

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Websites:

http://apps.nasd.com/investor_Information/tools/teachers/basics_savings.asp

http://www.asiaweek.com/asiaweek/97/1017/aa1.html

http://www.bir.gov.ph

http://www.mart.com.ph

http://www.pdic.gov.ph

http://www.wellsfargo.com/investing/basics/goals_risk