CMDC studying funding for private sector workers’ retirement

August 24, 2020

The Capital Market Development Council chaired by Finance Sec. Carlos Dominguez III is considering reforms in the corporate pension system, notably the recommendation by the Fund Managers Association of the Philippines to require the partial or full funding requirement of retirement plans for workers in the private sector.

Dominguez said the CMDC has consulted the Department of Labor and Employment regarding the recommendation.

He said this recommendation would help in providing sufficient funds for the pension or retirement plans of private sector workers while boosting the demand side for investments that could contribute to the growth of the capital market.

Composed of representatives from the public and private sector, the CMDC is a coordinating body tasked to facilitate the development of the capital market.

Atty. Benedicta Du-Baladad, the co-chair from the private sector, spearheaded the project on the implementation of reforms in the corporate pension system.

In a letter to Labor Sec.Silvestre Bello III, Dominguez said the CMDC has decided to consult the DoLE on this issue, given the Department’s regulatory authority on the implementation of the Labor Code and Republic Act 7641 or the Philippine Retirement Pay Law, which mandates private companies employing more than 10 workers to either provide a retirement plan or retirement pay for their respective qualified employees.

Dominguez said in his letter to Bello that studies done by FMAP found that RA 7641 does not require companies to fund their retirement liabilities that are calculated based on the prescribed benefits.

Under this law, companies are mandated to pay pension benefits only upon retirement of their employees, usually based on the minimum requirements set by RA 7641.

This practice deprives employees of sufficiently funded retirement benefits in the absence of a well-funded pension plan that is invested in the capital markets to generate high returns.  

The FInnace chief told Bello that the CMDC has created a technical working group  for this priority project that would coordinate with DoLE to discuss the recommendation of the FMAP, which was supported by the Asian Development Bank.

This TWG is headed by National Treasurer Rosalia de Leon.

“One of the conclusions in the studies is that this creates a social problem because people in their retirement may not have enough retirement savings. As to economic and capital market aspects, the absence of an effective pension fund system affects the demand side for investments that could contribute to the development of the Philippine capital market,” Dominguez said in his letter.

He said the FMAP studies found that pension benefits for private sector employees are usually insufficient, and that the new generation of workers is at risk of receiving even smaller pensions later with the current system.

The FMAP also said in their studies that the low accumulation of pension assets limits the development of capital markets.

As time passes, the issues hounding corporate pensions would become more difficult to solve, according to the studies.

“A mandatory partial or full funding of pension obligation would address concerns on insufficient funding upon retirement of employees as the investment will generate returns to cover the required growth in the fund over time. Such pension investments will boost the demand side of the capital markets as well,” Dominguez said, citing the recommendation of FMAP.

The studies done by FMAP formed part of the process done by the CMDC in identifying projects, programs, and action plans under the Capital Market Development Third Blueprint 2019-2025.

One of CMDC’s priority projects is the implementation of reforms in the corporate pension system to achieve a robust supply and demand resource in the capital market and ensure adequate retirement benefits for private sector workers.