Prospect Educational Plan in crisis Nature and Background of Case: Educational plans are essentially savings/investment accounts where you put money in, the money is invested in financial and other securities within government guidelines, and your money is supposed to grow over the years and eventually gets paid out to cover a beneficiaries school tuition and expenses. Several years ago, and seemingly out of nowhere, accusations came flying from all directions about pre-need companies.
According to the accusations, they were either bankrupt or nothing but a cam, depending on which company you’re looking at. And since a large portion of Filipino families relied on these preened companies in order to send their children to college, widespread panic ensued the moment these accusations hit the press. Prospect Educational Plan paid out huge commissions to agents, so that in some cases out of PH,OHO that a customer paid in, only PHI 5,000-20,000 actually went into the “trust fund” that had to grow to pay off the future tuition fees.
Prospect Educational Plan sold open-ended educational plans, and that the rise In fees storied the actuarial assumptions. Holders of this type of plan can go to the most expensive schools but they pay a higher premium. There are two kinds of Prospect Educational Plan educational plan holders: those who are already getting paid for tuition and those who are called “non-availing” mainly because it takes roughly 10 years for them to start getting their benefits from Day One of the plan. Obviously, the availing placeholders have the edge.
Not so obvious Is the fact that every time they get paid, It Is to the prejudice of the non-availing_ The non-availing outnumber the availing placeholders almost 9 to 1. Of the 780,000 placeholders of Prospect Educational Plan, only 90,000 are availing. The company claimed that the money that was paid in and invested yielded far lower returns than they had projected, so the double whammy of increased tuition costs, and lower returns, meant they couldn’t meet their promises. This Is a very simplified explanation, but the essence of the Issue at hand.
Forget that the company paid out huge commissions to agents, or to cover administrative expenses, etc. So that In some cases out of PH,oho that a customer paid in, maybe only PHI 5,000-20,000 actually went into the “trust fund” that had to grow to pay off the future tuition fees. Prospect Educational Plan was brought to its knees when certain government officials of the Philippines, came out of nowhere and publicly declared that Prospect Educational Plan was bankrupt. They questioned the company’s use of their trust funds and had the Securities and Exchange Commission or SEC freeze their accounts.
Naturally, the families that had subscribed to Prospect Educational Plan at the time were infuriated and began emending their money back, canceling their subscriptions. This caused further problems for the company, as their reputation was ripped apart in one sudden attack as their potential to sustain their income dwindled. In trying to prove Prospect Educational Plan’s bankruptcy, these government officials and the SEC used an accounting principle known as the Actuarial Reserve Liability or EARL to measure PROSPECT EDUCATIONAL PLAN’s Atlantes. Near ten A L, Prospect t educational Plan was running at a staggering loss – billions of Pesos in losses, in fact. Using those exults, the SEC continued to attack the company – using the numbers he found using the EARL to convince all of Prospect Educational Plan’s plan holders to stop their payments. Problem: Should the EARL be used to regulate pre-need companies? If the EARL had not been used as the formula to calculate PEP’s finances, would they still be considered bankrupt?
Prospect Educational Plan questioned the SEC for using the EARL on a pre- need firm. The EARL is an accounting principle that determines the immediate liability of a company, normally implemented to regulate insurance companies. It is important for insurance companies to be regulated by the EARL because the product known as “the insurance policy” does not have a definite and measurable time before lapsing, which means that the insurance company may have to come up with the full amount of promised insurance money at any time. It works out like this – if Mr..
X buys life insurance from Alpha Company worth by paying the first installment of IPPP on January 1, then dies on January 2 without having paid a single centavo more than IPPP, Alpha Company MUST pay Mr.. Ax’s beneficiaries the full – even if Mr.. X paid only a measly IPPP and then died immediately. The EARL ensures that insurance companies always have enough money in their reserves to fulfill their promise of insurance to their subscribers, and is therefore the right principle in observing the finances of insurance companies.
However, in the case of pre-need companies, there IS a definite and measurable time before the plan can lapse, which means that pre-need companies should not be held immediately liable. In other words – if Mr.. X buys a pre-need educational plan for his son from Charlie Company worth by paying the first installment of IPPP on January 1 , there is absolutely no way that Charlie Company will have to come up with Mr.. Ax’s son’s college fund immediately. Depending on Mr.. Ax’s son’s age at the time of the first installment, there is a variable, but definite, amount of time until the son becomes a high school graduate and therefore a college student.
Even if Mr.. Ax’s son died right after the transaction, the pre-need educational plan is transferable. Solutions made: PEP has presented a trust fund road map aimed at addressing its Pl 7-billion deficiency through a five-year asset buildup program and adjustments in the ululation of trust fund assets, as well as a liquidity buildup program. PEP first vice president Kristin Jose explained the trust fund road map would yield PAP. 53 billion, which would be more than enough to address the variance and even result in a PA. 37 billion asset surplus.
However, the SEC officials scoffed at PEPS claims off surplus, saying the trust fund road map would even show a shortfall of POI. 19 billion based on present values. An SEC source noted PEP’s proposed adjustments in the valuation of properties are not based on current market values, but future projected values of he developed property: Right now, many of the properties are not developed, so how can you include the future value of the property? Where will PEP get the funds to develop the properties? More than two years after PEPS problems. PEP is trying to find a new investor to bring in fresh equity and loans.
However, SEC officials are skeptical, especially since PEP has been promising to bring in new investors since 1998. In 2000, PEP has been claiming interested investors from Hong Kong and the us, Duty nothing came out AT tense . PEP McCall claim ten deals were scuttled Owe to he SEC’s non-renewal of its dealer’s license. Conclusion: Therefore, there is no possible situation for the pre-need company to become liable immediately after the first installment is paid. Since this is the case, then why was the EARL implemented over PEP? It doesn’t make sense to force companies to be immediately liable when they actually are not.
Was a whole industry demolished because of a mistake in calculation? Were the dreams of hundreds of thousands, maybe even millions, of Filipinos dreaming of finishing college ruined by certain individuals in the government and the SEC when they suddenly implemented this issued accounting principle? I think of that possibility. While I admit that some other pre-need companies really were nothing more than scams, I think the fact that PEP is still open and is trying to pay back its plan holders is an indication that they were not one of the scam-artists; even if it may now be having difficulties coming up with the money to pay people back.
I think it’s time we realize that the biggest victim here is PEP itself – which was destroyed because of the carelessness of some of our government officials. It is these government officials who should pay the throngs of people who lost their chances to go to college because it was they who misled the people because of seemingly half-studied theories and half-baked plans.
I think it’s also time we realize that PEP remains open for nobody else but the people that were victimized by the sudden implementation of the EARL. It’s important to know that PEP could have Just declared bankruptcy, leaving their plan holders with nothing – it would have been the best option for them business-wise. Yet their doors remain open, even though they receive a lot of criticism from the very people they are trying to help.