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Corporate Securities Info

Hazy SSS premium increase

/ 12:16 AM January 16, 2017

Populism, rather than economic pragmatism, prevailed on the issue of additional pension for 2.2 million retired members of the Social Security System (SSS).

Brushing aside the concerns raised by his economic managers, President Duterte approved a P1,000 increase in the monthly pension of SSS retirees effective this month.

To partly mitigate the adverse effects of the adjustment on its coffers, SSS would raise by 1.5 percent the monthly contributions of its active members starting in May to be followed by annual increases for the next six years.


For this purpose, SSS will ask the President to issue an executive order authorizing such increase in premium contributions.

The legality of this proposed action is doubtful. The SSS charter (Republic Act No. 8282) states that increases in SSS benefits may be made only on the condition that they “shall not require any increase in the rate of contribution.”

The prohibition is premised on the idea that the members’ existing contributions shall be used as seed money to invest in assets, projects or transactions that will generate additional revenues for SSS by way of corporate profits, dividends on equities, yields on securities investments and other forms of financial returns.

The earnings from these investments will defray the costs of the members’ sickness, disability, retirement and other monetary benefits.

The arrangement is similar to a bank accepting deposits from its depositors and lending them to third parties with interest or investing in profitable ventures. A portion of the revenues earned pay the interest on bank deposits.

If the funding from the increase in SSS pensions will be sourced primarily from additional members’ contributions, the arrangement will look like a Ponzi scheme where interest payments to early investors are drawn from the investments of succeeding investors.

An amendatory law, not an executive order, is needed to justify the proposed increase in contributions to fund additional pension benefits.

Take note that SSS funds are private funds. The premium contributions come from the pockets of the member companies and their employees. As mere administrator of those funds, the SSS is obliged to manage them strictly in accordance with the law.


Thus, any active SSS member who believes he will be adversely affected by the increase in contributions may question the legality of that action at the Supreme Court.

And if we go by the earlier decisions of the high court on the treatment, management and administration of SSS funds, that suit stands a strong chance of being favorably acted upon.

There is enough time between now and May for SSS to go to Congress to have that prohibition removed to erase all doubts about the validity of the proposed upward adjustment in contributions.

In theory, this should not be a problem because the President’s party and its allies have the majority in both houses of Congress.

And when it does, the SSS might as well ask the lawmakers to liberalize the provisions of its charter on the management of its Investment Reserve Funds (or revenues that are not needed to meet its current administrative and operational expenses).

Last year, the average return on those funds, which totaled P470 billion, was 7 percent.

Although this “profit” is not something to sneeze at, and by the standards of the Governance Commission for Government Owned or Controlled Corporations that justified the grant of bonuses to SSS officials, it is not something to crow about when compared to the performance of other local financial institutions with approximate resources.

The SSS can do better than the 7 percent yield on its investments. With that amount of money, it can be a major player in the equities and securities markets.

But the problem is its hands are tied on where to invest its funds or how much it can invest to get the best returns possible. The SSS charter puts a cap on the amount of funds it can invest in any financial instrument, institution or industry.

Thus, for example, in private securities, the ceiling is 40 percent; real estate related investments, 30 percent; infrastructure projects, 30 percent; and foreign-currency denominated investments, 7.5 percent.

The financial world has changed considerably since those restrictions were placed in 1997. They are unrealistic and no longer responsive to the needs of the times.

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