New corporate pension system favors workers, economy–dof
REFORMING the corporate pension system will ensure workers are financially stable post-retirement, while deepening the domestic capital market with a fully-funded and portable program, Finance Secretary Carlos G. Dominguez III has said.
The Department of Finance (DOF) and other government agencies backed the passage of the proposed Capital Market Development Act of 2021.
At a recent hearing of the House Committee on Banks and Financial Intermediaries, Dominguez stressed the need to reform the “underdeveloped” current corporate pension system to expand and diversify the investor base of the capital markets, as well as to ensure that workers get to receive adequate benefits once they retire.
Dominguez said the corporate pension reform will make it possible for small investors to grow their hard-earned savings through investments in capital markets.
“Pension systems are seen as active participants in capital markets. They help increase contractual savings that would aid in funding productive long-term investments in the national government and the private sector as well,” Dominguez said.
The bill centers on the establishment of an Employee Pension and Retirement Income (EPRI) Account, similar to the portable, employeemanaged retirement accounts in developed economies that ensure workers continue to contribute to, and grow, their pension accounts even when they transfer from one job to another.
Dominguez pointed out that under the existing Retirement Pay Law, employees are entitled to at least one-half of their monthly salary for every year of service. This, on the average, means their pensions will only last for three years even after they have worked for 40 years in a single company.
“Under this law’s pay-as-you-go structure, more than 90 percent of employers pay their workers out-ofpocket, resulting in underfunded pensions and a lack of an investable pool of assets to grow these accounts. The current system is also a disadvantage to the highly mobile work force, as employees can only start benefiting from their retirement funds at the age of 60, and only their respective final employers contribute to their pensions,” the DOF chief said.
Such weaknesses in the country’s corporate pension system, he added, were confirmed by the 2020 Melbourne Mercer Global Pension Index, which ranked the Philippines only 36th out of 39 retirement systems around the world.
The study, which measures pension systems in terms of sustainability, adequacy, and integrity, placed the Philippines’s overall index value of 43, with 82.6 being the highest.
Because of these disadvantages, the Philippines has a very minimal pension assets-to-gdp ratio of 16 percent in 2017, far from the ideal and sustainable ratio of 100 percent of GDP, Dominguez said.
“The average ratio among developing economies is 36 percent—or more than double ours,” he added.
Bill’s features
THE proposed measure is also being supported by the Capital Market Development Council, as well as government agencies including Securities and Exchange Commission, the Insurance Commission, the Department of Trade and Industry, among others.
Based on the bill, employers and employees will both contribute to the pension account of the employees.
National Treasurer Rosalia V. de Leon also said the establishment of an EPRI account will be compulsory for all employees defined under Labor Code, all employers, such as domestic corporations, resident foreign corporations, general professional partnerships, registered or not, regardless of the number of employees. However, this will not be required or will be done on a voluntary basis for self-employed and professionals, government employees, domestic workers covered by the Kasambahay Law and those excluded by the regulatory authority in the implementing rules and regulations.
The bill also provides tax exemption on investment income earned by EPRI and on all benefits and distributions received by the employee at the time of vesting or retirement.
Bureau of Internal Revenue (BIR) Deputy Commissioner Marissa Cabreros pointed out that the proposed measure “will have an impact on the revenues to be collected by the government,” but said, “this however, outweighs the opportunity to encourage long term investment savings, creating a robust pool of capital for the financial system.”
Citing an Asian Development Bank study by Dr. Renato Reside of the University of the Philippines School of Economics, Dominguez said a 1-percent increase in the share of pension assets in the economy corresponds to a 1-percent growth in the country’s real GDP per capita.
“Therefore, building a truly robust corporate pension structure makes available huge volumes of capital to our financial system. It is among the most efficient ways to fund our longterm growth,” he said.
Pension systems are seen as active participants in capital markets. They help increase contractual savings that would aid in funding productive long-term investments in the national government and the private sector as well. Finance Secretary Carlos G. Dominguez III