Filipinos go private to top up meagre state pensions

  • Filipinos are almost evenly divided between those who think they will live comfortably in retirement and those who are unsure or think they won’t.
  • Government pension schemes must be reformed to ensure their sustainability, but this is unlikely before elections in 2019.
  • Private plans are becoming more popular as Filipinos seek to supplement their state pension and take advantage of a healthy stock market.

The young population of the Philippines is investing increasingly in retirement insurance to secure its future amid uncertainty surrounding the state pension system.

A recent FTCR survey of 1,000 urban Filipinos showed 51 per cent think their retirement years will be comfortable, although 46 per cent think they will have to work beyond the mandatory retirement age of 65 to sustain a decent living.

The country’s two state-owned pension schemes risk running out of money unless regulatory reforms are implemented that would allow greater member contributions. In the meantime, the funds pay only a meagre monthly amount when measured against the poverty line and the minimum wage. The inadequacy of state pension funds, amid rising prosperity, has led to an increasing number of Filipinos buying private plans.

Pension funds at risk

Our survey showed that 53 per cent of respondents are covered by one of the two state-owned pension funds, the Social Security System (SSS) for private sector workers or the Government Service Insurance System (GSIS) for civil servants. Almost a quarter do not have any pension plan (see chart).

All salaried workers are required to contribute to the SSS or GSIS, with an additional contribution from their employers, for at least a decade to qualify for a monthly pension upon retirement. While membership of these plans has continued to rise as more Filipinos enter the workforce — with 36m members of the SSS (as of October 2017) and 1.8m of the GSIS (at the end of last year) — the actuarial fund life of the GSIS has remained between 32 and 35 years since 2012, while the fund life of the SSS fell by 11 years to just 15 years in 2017 after the government increased its monthly payout (see chart). The actuarial fund life measures how long a fund will last if contributions stopped, and 70 years is generally considered to be ideal.

The stipend paid to SSS members has increased in recent years while the amount paid by the GSIS has fluctuated (see chart). The amount paid by either is unlikely to be enough to sustain a decent standard of living. The current average SSS pension is only 4,425 pesos ($87.41) a month, less than half the government’s poverty threshold of 9,064 pesos.

The GSIS offers a higher average pension of 17,231 pesos a month, a little more than minimum wage levels. The company says expenditure from monthly payouts will surpass contributions from members in about five years. However, the head of the GSIS, Jesus Clint Aranas, has ruled out increasing member contributions because of the “political implications”, making higher investment income crucial to the fund’s sustainability.

Most Southeast Asian state pension funds get the majority of their income from investments, whereas the Filipino schemes rely more on contributions. While this model ensures they get a steady revenue stream from the young workforce, it has also made the topic of increased contributions contentious.

Fearing opposition from employees and employers, President Rodrigo Duterte has refused to approve higher SSS contributions to offset last year’s 1,000-peso-a-month pension rise.

The SSS is now waiting for the passage of a bill which would allow it to increase contributions without Mr Duterte’s approval. We anticipate delays as congress becomes preoccupied with the impeachment proceedings against Chief Justice Maria Lourdes Sereno and a plan to amend the constitution. Congressional elections in 2019 may make legislators unwilling to pass laws that risk angering their voters.

Private insurers step in

Uncertainty about the long-term viability of the state pensions and their meagre payouts have opened the door for private pension providers. Our survey showed that 28 per cent of respondents in the Philippines have private policies, the second highest among the Asean-5 countries.

Our data corroborate official figures that show the rapid growth of variable unit linked (VUL) life insurance products: investment instruments that can be used to provide income in retirement. The latest official figures show VULs make up more than 60 per cent of new life insurance plans, overtaking ordinary life insurance (see chart). There is space for expansion because only 4 per cent of insured individuals are covered by VUL products. 

We believe VULs will gain in popularity as young Filipinos take advantage of the better financial market returns that have resulted from a booming economy. The Philippine Stock Exchange ended 2017 up 25 per cent year on year and has already broken five trading record highs this month. Many commentators expect the bourse to rise further this year on the back of greater infrastructure and consumer spending.

More industry players are shifting from traditional life insurance to VUL products as clients seek to leave something behind for loved ones and profit from the premiums they pay.

— Prinz Magtulis, Philippines Researcher

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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