PACIFIC PLANS, INC.
Findings & Recommendations
Re Petition for Rehabilitation &
Suspension of Payments
LIMITATIONS OF
THE STUDY
The findings
and assessments were based on materials made available to us like the (1)
records from the Securities & Exchange Commission (SEC), particularly the audited financial statements of Pacific
Plans, Inc. from 1996 to 2003 (financial statements before and after the said
period were not available) and general information sheet on dates indicated,
(2) newspaper articles, (3) information
received from various sources including former and present officers of the YGC
Group and RCBC, (4) documents and
letters available, and (5) data obtainable from the internet. The findings and assessments were made under
time constraints and limitations and may need further verification.
BACKGROUND
Based
on their officers own accounts[1],
Pacific Plans, Inc. (PPI) started selling open-ended educational plans in 1986,
promising to pay its scholar’ tuition regardless of the amount. At that time, they said, the government
capped tuition increases by no more than 10 per cent per year, allowing all
pre-need companies to predict precisely how much they needed each year to meet
obligations.
But in 1990,
they complained, the cap on college and high school tuition increases was
removed on condition that parents and students would be “consulted”. Elementary schools followed in 1993.
Finally in
1994, they pointed out; the government removed the last restrictions and
allowed a free-for-all thinking that giving schools more money would improve
the quality of education.
In the
following school year, 1995-96, PPI’s Chairman and President Ernesto Garcia
said, the schools, particularly those categorized as “exclusive”, jacked up
their tuition by as much as 36 percent.
For instance, he explained, a plan sold for only P16,300 in 1986 is now
getting high school benefits totaling almost P300,000.
“There was
no way”; he concluded that “Pacific Plans, or any company for that matter,
could earn enough to cover those steady annual increases. But we paid
everybody, using our operating profits through the year”. Garcia further claimed. “PPI was able to pay
in full all claims over the past 14 years, even though the company was not
required in its contract to pay the increasing tuition caused by the
government’s deregulation of school fees.
We tried everything to help our planholders, although we could have
easily hidden behind our contract which shields us from exorbitant obligations
arising from a change in government rules or policy” Garcia added. “ Section XV of the contract specifically
frees PPI from liability, “… resulting from (natural calamities), government
legislation or regulation … that are beyond the control of Pacific, in
connection with the implementation of its obligations under this agreement…”
“But the company”, Garcia lamented,
“cannot do this indefinitely”.
In a
separate interview[2],
PPI’s Atty. Jeanette Tecson said “PPI had foreseen the present trouble in the
early 1990s. That was why it stopped
selling the problem plans way back in 1992”.
It was for
the above justifications that PPI, finally in April 2005, informed its
open-ended traditional planholders that it had filed for rehabilitation and
suspension of payments with the Makati Regional Trial Court. The proposed
rehabilitation, according to the letter of Pacific dated
§
Resulting
value of open-ended plan in 2004 that will be used as full payment for the new
fixed value plan computed at roughly 7% annual return based on pre-need price
from date of full payment, and
§
Resulting
value of the plan in 2004 will carry 7% annual return up to 2010, backed up by
government bonds, when payments will be made by
WHAT THE
PLANHOLDERS CONTRACTED
The
Product as Sold to the Public
Contrary to
what PPI would like the public and the regulators to believe, the planholders
did not buy a “inflation-proof” product.
They also did not “invest” in a mutual fund. They did not merely rely on
PPI’s own corporate strength.
The
planholders simply contracted a good product that was sold by PPI as an
educational pre-need plan that did not only promised but “assure(d) more than just an education”.[4]
It was a product offered by a company, Great Pacific Life Assurance Corporation
(Grepalife), which has been in the business of insurance for the last 50 years,
supported by the Yuchengco Group of Companies (YGC) as clearly implied in their
corporate logo, the hexagon, which is common to all YGC-affiliated companies
related to PPI[5],
and as categorically declared in the group’s slogan – “THE STRENGTHS OF MANY, THE POWER OF ONE”.[6] Lastly, it was a commitment backed up by no
less than the good name, integrity and reputation of its principal owners – the
Yuchengcos, headed by Ambassador Alfonso T. Yuchengco. [7]
The
Obligations under the Contract
Under the
Education Plan Agreement (EPA) between the planholder and PPI, the latter, “in
consideration of the payment of the pre-need price, including handling charges,
guaranteed to pay, irrespective of cost at the time of availment, the tuition
and other standard school fees for enrolment of the SCHOLAR in the Educational
Program contracted by the planholder”.[8]
Nature
of the Contract & Obligation of PPI
The planholders
fulfilled their contractual obligation to pay the pre-need price, including
handling charges, on a mere assurance or guaranty from PPI to comply with their
commitment “to pay, irrespespective of cost at the time of availment, the
tuition and other standard school fees for enrolment of the scholar”. This
contractual relationship, by all gauge or measure, is a trust agreement. And, the obligation of PPI is fiduciary in
nature.
It is
precisely for these reasons that planholders entrusted their children’s future
in the hands of those they considered credible, trustworthy and with impeccable
credentials as PPI, its owner, and its supporting conglomerate and principal
stockholders presented themselves to be.
Unfortunately, PPI, the YGC Group and its principal owners, did not only
renege on their obligations but abused the fiduciary relationship.
PPI, RCBC, ET AL
SUBJECT TO HIGHER STANDARD OF FIDUCIARY ACCOUNTABILITY
Cardinal
Principle of Trust Relationships
The cardinal
principle common to all trust and other fiduciary relationships is
fidelity. PPI, et al, as trustees, are
obligated to scrupulous care, safely and prudently manage the planholders funds
entrusted to them, adhere and conform with the terms of the instrument or
contract; and maintain absolute separation of property free from any
intrusion of conflict of interest. [9]
Fiduciary
Accountability of PPI, RCBC, et al
In the case
of PPI, its owner, supporting group and principal stockholders, they should be
subjected to a higher standard of fiduciary accountability because of (a) their
interlocking ownership, management and investment commitment structures, (b)
appointment of a related bank, Rizal Commercial Banking Corporation (RCBC), as
administrator of the planholders’ trust funds, and (c) the hugely profitable
relationship PPI’s parent company, and other members of the YGC Group enjoyed,
as will be revealed later.
Interlocking
Relationships and Structures
A review of
the records of Securities & Exchange Commission (SEC), PPI, RCBC and the
Philippine Long Distance & Telephone Company (PLDT) only for the years
2003, 2004 and 2005 already seem to indicate strong interlocking relationships,
which reasonably led us to suspect that a serious intrusion of conflict of
interest in the management of the company’s resources may have, in fact, caused
the problems of the PPI to the detriment of the planholders.
The
following officers and owners of the YGC Group were found to be commonly
occupying sensitive and/or dominant positions in PPI, RCBC, Grepalife, Pan
Malayan Management & Investment Corporation (PMMIC), Grepalife, GPL
Holdings (GPLH), and PLDT. Except for
PLDT, the rest have the Yuchengco’s as the principal stockholders.
PMMIC[10]
PPI[11] Grepalife[12] GPLH[13] RCBC[14] PLDT[15]
2004
2003 2004
2004 2004
2005
Alfonso T. Yuchengco
C D C C
Rizalino S. Navarro O
D/I
D D/O
Susanne Y. Santos D/O
D/I D P/D D/O/I
Cesar E. A. Virata D D/I
Alfonso S. Yuchengco, Jr.
P/D
D
Alfonso Yuchengco III D D D/O
Yvonne S. Yuchengco
D/O D/O D
Helen Y. Dee C/I
D
Legend:
C - Chairperson
P - President
D -
Director
O - Officer
I - Investment Committee[16]
RATIONALE FOR
RENEGING ON ITS OBLIGATIONS AND IN SEEKING REHABILITATION
Principal
Reason
Basically,
the justification of PPI for reneging on its fiduciary obligations and in
filing for a suspension of payment and rehabilitation with the court is its
alleged failure to generate sufficient revenues to match the increases in
tuition fees. In the words of its present Chairman and President, Mr. Enrique
Garcia, “there was no way that Pacific Plans, or any company for that matter,
could earn enough to cover those steady annual increases”.
Average
Tuition Increases Versus Investment Options
According to
a study conducted by PPI sometime in the late 90s, the annual tuition hike of
exclusive schools averaged about 15% per annum[17].
Comparatively,
the average yield on 364-day Treasury Bills from 1986 to 1999 was about 16.4%
per year. On the other hand, the average
yield on 364-day T-Bills from 1986 to 2005 was 14.3% per annum.[18]
Moreover, in
1998 and 1999, there were banks offering 5-year deposits at
“double-your-money”, tax free, which roughly places the simple interest rate at
about 20% per annum.[19]
Both
investment options, more than matches the average tuition fee hike of 15% per
annum. There were other investment instruments in the market in the 80s, which
gave even higher yields e.g. Jobo bills, long-term treasury notes and
bonds, and other government guaranteed bonds and commercial papers.[20]
Comparing
PPI’s Claim of Huge Discrepancy Between
Pre-Need
Plan Sold in 1986 and High School Benefits Today
To dramatize
PPI’s predicament, Garcia, pointed out that a plan sold for only P16, 300 in
1986 is now getting high school benefits totaling almost P300, 000.[21]
While we
find the example ridiculous since we do not see that many planholders holding
on to their plans for 20 years, the present value of the planholders payment of
P16, 300 plus handling charges of about P1, 467, if invested only in 364-day
T-Bills and 5-year double-your-money deposit bank facility, would still have
exceeded the given school benefits of Mr. Garcia by about P58, 000.[22]
PPI’s
Rationale for Suspension of Payment and Rehabilitation is Not the Real Problem
As shown
above, there was not only a way but also many ways for PPI to earn enough to
cover tuition increases, contrary to the claim of Mr. Garcia. Which leads us to
the question – “ Where Did the Planholders’ Money Go? Was it scrupulously cared for,
safely and prudently managed as required under all trust and other fiduciary
relationships?
POOR PERFORMANCE
OF PPI AND RCBC AS TRUSTEES
The
Trust Account
A related
bank of PPI, the RCBC, administers the trust funds of the planholders. Reportedly, the nature of the trust agreement
was changed from discretionary to a directional trust in 1994.[23]
It is estimated that PPI pays about ½% per annum as Trust Advisory Fee[24]
to RCBC.
From 1996 to
2001, the trust assets of PPI increased at an average rate of only 14.6% per
annum, fluctuating from a low of 3% to a high of 25%. In fact, the rate of increase had been
declining, except in 2000 when a slight improvement was reflected. From P2.97
Billion in 1996, trust assets reached P5.79 Billion in 2001.
In 2002, the
trust assets shot up by 126% to P13.18 Billion buoyed by investments of P9.8
Billion in Napocor bonds partly funded by P4.52 Billion in loans from RCBC,
which increased trust liabilities by 153% from P29.5 Million in 2001 to P4.56
Billion in 2003. Investments in bonds in 2002 and 2003 constituted more than
52% of total trust assets.
Another area
where PPI trust funds were concentrated was in loans, which in 1999 reached
more than P1.0 Billion. In 2003, total trust asset was registered at P15.69
Billion, comprising 78% of the total assets of PPI.
2003 2002 2001 2000 1999 1998 1997 1996
|
TRUST FUNDS INVESTMENTS |
|
|
|
|
|
|
|
|
|
Cash & equivalent |
247,141,745 |
512,877,102 |
544,645,312 |
1,045,577,396 |
1,414,486,732 |
838,594,265 |
6,618,835 |
14,397,115 |
|
Short-term cash investments |
|
|
|
|
|
|
565,169,066 |
578,480,096 |
|
Investments
in: |
|
|
|
|
|
|
|
|
|
Peso GS |
21,236,183 |
64,106,624 |
953,429,833 |
1,415,298,065.00 |
675,094,043 |
997,047,096 |
1,463,953,439 |
883,784,853 |
|
US$ GS |
1,280,771,819 |
910,664,196 |
1,655,344,526 |
|
|
|
|
|
|
Loans(net) |
130,211,957 |
144,383,891 |
676,261,913 |
809,075,034 |
1,007,429,681 |
770,891,393 |
0 |
15,515,000 |
|
Allow. For doubtful accts |
42,544,266 |
40,049,181 |
46,950,704 |
45,622,231 |
77,159,773 |
39,432,719 |
|
385,000 |
|
Shares of stock (net) |
2,119,880,084 |
1,573,258,873 |
1,604,616,872 |
2,151,571,771 |
1,706,473,166 |
1,682,413,598 |
1,593,711,326 |
1,429,117,975 |
|
Allow. For decline in value |
11,183,104 |
630,845,155 |
566,062,428 |
66,617,702 |
n.a. |
n.a. |
n.a. |
n.a. |
|
Real Estate (net) |
110,893,326 |
98,391,670 |
60,257,928 |
63,046,141 |
65,834,355 |
68,622,480 |
39,113,401 |
2,555,462 |
|
Accum. Dep'n. |
15,612,156 |
13,773,976 |
12,574,022 |
9,785,809 |
6,997,595 |
4,209,470 |
2,336,599 |
1,117,482 |
|
Bonds (net) |
11,692,967,040 |
9,772,310,322 |
0 |
0 |
0 |
0 |
|
|
|
Net
of unamortized disc. |
6,429,819,993 |
7,103,342,444 |
0 |
0 |
0 |
0 |
|
|
|
Other
Receivables (net) |
84,952,709 |
102,365,740 |
329,010,910 |
169,337,934 |
95,217,279 |
89,740,358 |
37,468,740 |
31,769,469 |
|
Allow. For doubtful accts |
12,868,280 |
5,972,986 |
0 |
0 |
0 |
0 |
385,000 |
|
|
Property & equipment |
|
|
213,400 |
213,044 |
213,044 |
0 |
842,700 |
842,700 |
|
Accum.
Dep'n. |
|
|
|
|
|
|
1,966,297 |
|
|
Provident Fund |
|
|
|
|
|
|
14,811,384 |
10,691,700 |
|
TOTAL TRUST ASSETS |
15,688,054,863 |
13,178,358,418 |
5,823,780,694 |
5,654,119,385 |
4,964,748,300 |
4,447,309,190 |
3,721,688,891 |
2,967,154,370 |
|
TOTAL TRUST LIABILITIES |
4,415,528,875 |
4,561,729,560 |
29,514,742 |
11,338,208 |
9,071,727 |
47,933,535 |
51,075,796 |
4,603,588 |
|
NET TRUST ASSETS |
11,272,525,988 |
8,616,628,858 |
5,794,265,952 |
5,642,781,177 |
4,955,676,573 |
4,399,375,655 |
3,670,613,095 |
2,962,550,782 |
Source: Audited Financial Statements of PPI filed
with SEC
Return
on Trust Funds
Income statement
of PPI showed that from 1998 to 2003 (trust fund income was not indicated or
separately categorized for 1996 and 1997), return on total trust assets
averaged only 8.6% per annum within a low and high range of 6% and 11%,
respectively.
2003 2002
2001 2000 1999 1998 1997
1996
|
Total Trust Assets |
15,688,054,863 |
13,178,358,418 |
5,823,780,694 |
5,654,119,385 |
4,964,748,300 |
4,447,309,190 |
3,721,688,891 |
2,967,154,370 |
|
Total Trust Fund Income (TTFI) |
1,191,647,808 |
726,707,064 |
542,461,040 |
605,979,334 |
449,548,337 |
429,265,293 |
n.a. |
n.a. |
|
Trust Fund Income/ Total Trust Assets |
0.075958927 |
0.055143975 |
0.093145856 |
0.107174839 |
0.090548062 |
0.096522476 |
n.a. |
n.a. |
This
performance miserably pales in comparison with the rate of return on several
investment options in the market that time, which are given below just to cite
a few.
§
Government
securities issues CY 1999-2003 (in percent)[25]
Tenor 2003 2002 2001 2000 1999
T-Bills 364-day 7.49
6.84 11.98 11.80 11.70
T-Bonds 2-year 8.50
9.03 13.40 12.31 12.46
3-year
8.38 9.91
4-year 10.38 10.45
5-year
8.15 12.11 14.53 13.76 14.05
7-year 11.88 14.00 14.94 14.35 14.77
10-year 11.81 12.56 17.00 14.68 15.23
§
Time
Deposit – long-term[26] 8.03 9.18 10.76 10.49 12.84
§
5-year
deposit (double-your-money,
tax free) offered by several banks in
1998 and 1999.[27] 20.00 20.00 20.00 20.00 20.00
Note:
Website of the Bureau of Treasury only provided T-Bills and T-Bonds
yields from 1999 to 2003.
Earnings
Gap Between PPI Trust Investments & Available Investment Options
Comparative
study of PPI return on trust assets against available selected investment
options during the period from 1999 to 2003, indicated that, except for the
year 2003 for 364-day T-Bill rate where PPI enjoyed a positive variance, PPI
was outperformed by all investment options during the 5-year period as shown
below.
The
opportunity lost by the planholders, due to the poor management of the trust
funds, ranged from a low of P508 Million to a high of P5.5 Billion in only 5
years.[28]
2003
2002 2001 2000 1999
|
COMPARATIVE
INVESTMENT RATES |
|
|
|
|
|
|
|
Actual PPI Performance |
|
|
|
|
|
|
|
Total Trust Assets |
15,688,054,863 |
13,178,358,418 |
5,823,780,694 |
5,654,119,385 |
4,964,748,300 |
|
|
Trust fund
income (net) |
1,191,647,808 |
726,707,064 |
542,461,040 |
605,979,334 |
449,548,337 |
|
|
Trust Fund
Income/ Total Trust Assets |
0.075958927 |
0.055143975 |
0.093145856 |
0.107174839 |
0.090548062 |
|
|
|
|
|
|
|
|
|
|
Comparative Investment Rates |
|
|
|
|
|
|
|
T-Bills
364-day |
0.0749 |
0.0684 |
0.1198 |
0.118 |
0.117 |
|
|
T-Bonds
2 -year |
0.085 |
0.0903 |
0.134 |
0.1231 |
0.1246 |
|
|
5 -year |
0.0815 |
0.1211 |
0.1453 |
0.1376 |
0.1405 |
|
|
7 -year |
0.1188 |
0.14 |
0.1494 |
0.1435 |
0.1477 |
|
|
10-year |
0.1181 |
0.1256 |
0.17 |
0.1468 |
0.1523 |
|
|
Time
Deposit-Long Term |
0.0803 |
0.0918 |
0.1076 |
0.1049 |
0.1284 |
|
|
5-year
deposit in 1999 |
0.2 |
0.2 |
0.2 |
0.2 |
0.2 |
|
|
|
|
|
|
|
|
|
|
VARIANCE
BASED ON RETURN ON TRUST ASSETS |
|
|
|
|
|
|
|
T-Bills
364-day |
0.0011 |
-0.0133 |
-0.0267 |
-0.0108 |
-0.0265 |
|
|
T-Bonds
2 -year |
-0.0090 |
-0.0352 |
-0.0409 |
-0.0159 |
-0.0341 |
|
|
5 -year |
-0.0055 |
-0.0660 |
-0.0522 |
-0.0304 |
-0.0500 |
|
|
7 -year |
-0.0428 |
-0.0849 |
-0.0563 |
-0.0363 |
-0.0572 |
|
|
10-year |
-0.0421 |
-0.0705 |
-0.0769 |
-0.0396 |
-0.0618 |
|
|
Time
Deposit-Long Term |
-0.0043 |
-0.0367 |
-0.0145 |
0.0023 |
-0.0379 |
|
|
5-year
deposit in 1999 |
-0.1240 |
-0.1449 |
-0.1069 |
-0.0928 |
-0.1095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
T-Bills
364-day |
16,612,499 |
(174,692,652) |
(155,227,887) |
(61,206,753) |
(131,327,214) |
(505,842,008) |
|
T-Bonds
2 -year |
(141,836,855) |
(463,298,701) |
(237,925,573) |
(90,042,762) |
(169,059,301) |
(1,102,163,193) |
|
5 -year |
(86,928,663) |
(869,192,140) |
(303,734,295) |
(172,027,493) |
(247,998,799) |
(1,679,881,391) |
|
7 -year |
(672,093,110) |
(1,118,263,115) |
(327,611,796) |
(205,386,798) |
(283,744,987) |
(2,607,099,805) |
|
10-year |
(661,111,471) |
(928,494,753) |
(447,581,678) |
(224,045,392) |
(306,582,829) |
(2,567,816,123) |
|
Time
Deposit-Long Term |
(68,102,997) |
(483,066,239) |
(84,177,763) |
12,862,211 |
(187,925,345) |
(810,410,133) |
|
5-year
deposit in 1999 |
(1,945,963,165) |
(1,908,964,620) |
(622,295,099) |
(524,844,543) |
(543,401,323) |
(5,545,468,749) |
Investments
in Stocks & Other Transactions
Before 2001,
investments in shares of stocks dominated the trust portfolio. From 1996 to 2001, stock investments averaged
more than 40% of total trust assets. Roughly about 79%, from 1996 to 2003, were
directed to “non-current marketable securities”, which peaked at P1.9 Billion
in 2000 and settled at P1.7 Billion in 2003. Of the total amount in 2003,
approximately 45% or P750 Million were channeled to a major telecom company,
presumably PLDT, where Ms. Helen Y. Dee, former Chairperson of PPI’s Board of
Directors, Executive Committee and Investment Committee, now seats in the
Board.[29]
|
TRUST
FUND INVESTMENTS IN STOCKS |
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
1997 |
1996 |
|
Non-current
mktable securities(NCMS) |
1,668,105,719 |
1,136,228,426 |
1,387,474,473 |
1,869,784,834 |
1,285,328,159 |
1,256,000,665 |
1,266,408,332 |
1,098,371,365 |
|
Market value |
1,668,105,719 |
1,136,228,426 |
1,387,474,473 |
1,869,784,834 |
1,633,061,257 |
1,456,820,796 |
1,449,689,854 |
1,487,613,882 |
|
Cost |
1,777,833,699 |
1,767,073,581 |
1,760,815,295 |
1,936,402,536 |
1,285,328,159 |
1,256,000,665 |
1,266,408,332 |
1,098,371,365 |
|
( Excess of Cost) of Market Value |
-109,727,980 |
-630,845,155 |
-373,340,822 |
-66,617,702 |
347,733,098 |
200,820,131 |
183,281,522 |
389,242,517 |
|
Major telecom company |
750,152,410 |
209,255,310 |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
Related
companies |
140,351,690 |
140,351,690 |
122,152,000 |
131,252,000 |
138,565,194 |
138,565,194 |
7,313,194 |
84,313,194 |
|
Accum.
Equity in net earnings, revaluation |
|
|
|
|
|
|
|
|
|
increment,
& unrealized gains on NCMS |
148,424,087 |
121,168,757 |
53,920,399 |
54,064,937 |
49,249,813 |
36,107,739 |
144,549,800 |
38,403,368 |
|
Other
investments |
37,213,569 |
41,070,000 |
41,070,000 |
41,070,000 |
41,070,000 |
41,070,000 |
41,070,000 |
41,070,000 |
|
Appraisal
increment |
125,785,019 |
134,440,000 |
0 |
0 |
0 |
0 |
0 |
0 |
|
Investments
in Preferred Stocks |
|
|
0 |
55,400,000 |
192,260,000 |
210,670,000 |
134,370,000 |
166,960,048 |
|
TOTAL TRUST
FUNDS INVESTMENTS IN EQUITY |
2,119,880,084 |
1,573,258,873 |
1,604,616,872 |
2,151,571,771 |
1,706,473,166 |
1,682,413,598 |
1,593,711,326 |
1,429,117,975 |
% OF EQUITY INVESTMENT TO TOTAL
TRUST ASSETS (Average
– 32%) 14%
12% 28%
38% 34% 38% 43% 48%
|
%
DISTRIBUTION OF INVESTMENTS IN STOCK |
|
|
|
|
|
|
|
|
|
|
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
1997 |
1996 |
|
Non-current
mktable securities(NCMS) |
78.69% |
72.22% |
86.47% |
86.90% |
75.32% |
74.65% |
79.46% |
76.86% |
|
Related
companies |
6.62% |
8.92% |
7.61% |
6.10% |
8.12% |
8.24% |
0.46% |
5.90% |
|
Accum.
Equity in net earnings, revaluation |
|
|
|
|
|
|
|
|
|
increment,
& unrealized gains on NCMS |
7.00% |
7.70% |
3.36% |
2.51% |
2.89% |
2.15% |
9.07% |
2.69% |
|
Other
investments |
1.76% |
2.61% |
2.56% |
1.91% |
2.41% |
2.44% |
2.58% |
2.87% |
|
Appraisal
increment |
5.93% |
8.55% |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
0.00% |
|
Investments
in Preferred Stocks |
0.00% |
0.00% |
0.00% |
2.57% |
11.27% |
12.52% |
8.43% |
11.68% |
|
TOTAL TRUST
FUNDS INVFESTMENTS IN EQUITY |
100% |
100% |
100% |
100% |
100% |
100% |
100% |
100% |
§
As
revealed above, the trust funds were heavily invested in losing stocks, which
in 2002 suffered a book loss of P631 Million, which constituted 45% of the book
value of the non-current marketable securities in the trust fund portfolio, at
that time.
§
In
addition, more than P140 Million were invested in related companies.
§
Also,
trust funds were lent to unnamed borrowers, which in 1999 grew to P1.1 Billion
with P77 Million provided as allowance for bad debts. In 2003, the loans went down to P173 Million,
but 24% was carried as allowance for doubtful accounts.
§
At
that time that PPI was supposed to be in financial difficulties, it nearly
tripled its compensation and fringe benefits from P62 Million in 1996 to P179
Million in 2003.
HOW MUCH DID THE
YGC GROUP GET FROM PPI?
Before we
answer the question “How Much Did the YGC Group Get From PPI?” let us first
determine “How Much Did the YGC Group
Actually Invest in PPI?” to keep things in perspective.
At the end
of 2003, Grepalife’s paid-in capital in PPI was registered at P210.1 Million. Of this amount, Grepalife contributed only
P40 Million from 1996 to 1998[30]. It made additional cash infusion of P125
Million in 1999. The rest was funded
by stock dividends declared in 1996, 1997, 1998 and 1999. Moreover, as late as 2000 and 2001, in the
midst of its financial crisis, PPI declared cash dividends totaling P21.01
Million.
The equity
investment of Grepalife in PPI, excluding stock dividends, stood at only P165
Million.
In return,
based on PPI’s auditors’ definition of related party transactions and other
identifiable arrangements, the YGC Group got more than P1.74 Billion in just
8 years from 1996 to 2003. This excludes, other collateral businesses
generated by the YGC from PPI’s investments e.g. insurance, broker’s
commissions possibly earned from stock investments, real estate transactions
and others, which are estimated to be very substantial. All of these during
a period in PPI’s existence already considered as financially problematic. The amount represents an obscene return of
1,055% on its investment of only P165 Million.
On the other
hand, the planholders had to contend with only a measly 8.6% return on their
trust assets of P15 Billion, for which they had to pay ½% trust advisory
fees to RCBC. An effort praised by PPI
President Garcia as having tried everything to help their planholders. Details
are presented below.
2003 2002
2001 2000 1999 1998 1997 1996
|
ESTIMATED
EXPENSES/DIVIDEND |
|
|
|
|
|
|
|
|
Total |
|
PAYMENTS
TO THE YGC GROUP |
|
|
|
|
|
|
|
|
|
|
Commissions & bonuses |
586,950,616 |
908,692,085 |
741,105,866 |
519,062,227 |
490,148,366 |
465,002,053 |
414,938,096 |
350,253,664 |
4,476,152,973 |
|
Insurance Premiums |
163,493,065 |
118,142,442 |
127,448,019 |
117,204,917 |
94,369,243 |
78,684,798 |
70,547,297 |
54,947,204 |
824,836,985 |
|
Rental Expenses |
66,852,949 |
83,809,622 |
67,878,197 |
65,517,478 |
54,670,915 |
46,902,683 |
40,467,396 |
34,090,099 |
460,189,339 |
|
EDP Expenses |
10,313,938 |
21,191,984 |
24,426,135 |
23,342,795 |
22,313,116 |
18,878,993 |
18,027,195 |
15,151,239 |
153,645,395 |
|
Trust Advisory Fees(assumed at 1/2% of TF) |
56,362,630 |
43,083,144 |
28,971,328 |
28,213,906 |
24,778,383 |
21,996,878 |
18,353,065 |
14,812,754 |
236,572,089 |
|
Stock & Cash Dividends |
0 |
0 |
10,505,000 |
10,505,000 |
19,100,000 |
6,000,000 |
10,000,000 |
10,000,000 |
66,110,000 |
|
TOTAL
RECEIVED BY YGC |
883,973,198 |
1,174,919,277 |
1,000,334,545 |
763,846,323 |
705,380,023 |
637,465,405 |
572,333,049 |
479,254,960 |
1,741,353,808 |
|
ACTUAL
CASH EQUITY OF YGC IN PPI |
165,000,000 |
165,000,000 |
165,000,000 |
165,000,000 |
165,000,000 |
40,000,000 |
40,000,000 |
40,000,000 |
165,000,000 |
|
RETURN
OF YGC-ACTUAL INVESTMENTS |
536% |
712% |
606% |
463% |
428% |
1,594% |
1,431% |
1,198% |
1,055% |
Note:
Notes to the audited Financial
Statements of PPI defined related party transactions as transactions with the
parent company and affiliates, which “consisted mainly of short-term cash
placements and payments for various expenses such as commissions, rentals,
insurance and management fees”.
Were the Planholders Funds Prudently and Efficiently Managed?
As
previously mentioned, under the cardinal principle common to all fiduciary
relationships, PPI, RCBC, et al are not only expected but obligated to
scrupulous care, safely and prudently manage the planholders funds entrusted to
them, adhere and conform with the terms of the instrument or contract; and
maintain absolute separation of property free from any intrusion of conflict
of interest.
If the above
presented data are accurate and correct, it would appear that PPI, RCBC, et
al grossly violated their trust obligations and gravely abused the fiduciary
relationships for the following reasons:
§
Planholders’
funds were neither scrupulously cared for nor were they safely and prudently
managed as indicated by the investment portfolio of the trust funds as
administered by RCBC.
§
Instead,
they were invested in losing stocks, non-performing loans and other poor
earning investment instruments.
§
Revenues
generated from these investments were greatly inferior to those yields given by
other investment options available at that time, some of which were non-risk in
nature like the T-bills and T-bonds, among others.
§
There
may also have been serious intrusion of conflict of interest in investment
decisions and directions, e.g. PLDT, where previous newspaper reports and/or
columns reported that substantial collateral insurance business was one of the
considerations, and where Ms. Dee now seats as Director. Ms. Dee was the Chairman of PPI Investment
Committee when purchases of PLDT shares started in 2003. The trust arrangement
with RCBC was reportedly directional in nature, starting in 1994, meaning
investment directions were dictated by PPI’s Investment Committee.[31]
§
The
almost obscene and staggering discrepancy between the return on the
planholders’ assets and the revenues and collateral businesses generated by the
YGC Group from PPI.
COMPARATIVE
PERFORMANCE AGAINST PRUDENTIALIFE PLANS[32]
PPI
President Garcia asserted during an interview that “There was no way that
Pacific Plans, or any company for that matter, could earn enough to
cover those steady annual increases”. By
lumping the other pre-need companies with PPI, Mr. Garcia did a disservice by
fanning the rumors of instability in the pre-need industry. Certainly, not all pre-need companies are
like Pacific Plans.
According to
an article in the Business Section of the Philippine Star dated May 1, 2005,
the President of Prudentialife Plans, Inc., Mr. Jose Alberto Alba had to assure
the public that “the rumors are totally unfounded and that all (their)
obligations will be met”. The article
claimed that this was due to the prudent management of the money of its
planholders. For this reason, the
Prudentialife President pointed out that enough assets to cover their
obligations to planholders, including those holding open-ended educational
plans.
The
comparative statistics of PPI and Prudentialife based on the said article are
as follows:
Trust Investments Prudentialife Pacific Plans
1. Real
estate (average) 7% 1%
(SEC rule requires only
a maximum of
25% of the trust fund portfolio)
2. Shares
of stocks (average) 18% 32%
(SEC rule mandates only
25% of trust
fund portfolio)
3. Government
securities (average) 60% 24%[33]
4. Trustee
bank 8% 1%
5. Average
growth of trust funds 49% 22%
IS THE COMPROMISE
OFFERED FAIR?
PPI
Offered Return Value
According to
the letter of PPI to its planholders dated
§
Roughly
7% annual return up to 2010 backed up by government bonds,
§
Payment
will be made by
§
Transferable
and can be sold to other parties anytime before July 2010.
Under the
proposed arrangement, the letter continued, planholders would be able to cash
in their new fixed value plans only in July 2010, approximating the maturity of
government bonds which represent the bulk of PPI’s trust funds. No funds would be released until then. But these plans can be sold to any interested
party at any time, as is the practice now.
The
valuation proposed by PPI is illustrated[34]
as follows:
1) Details on EXISTING Plan
School Level 4
YEAR COLLEGE
School
Classification EXCLUSIVE
Pre-need
Price
(Total plan
payments made by the planholder)
Date of Full
Payment
No. of Years
from Date of Full Payment to End Year 2004
Resulting Value in 2004 that will be used
as full payment for
The
new fixed value plan P
(New
Pre-Need Contract Price)
2) Details on the NEW FIXE
VALUE Plan
New Pre-Need
Contract Price in 2004 P
Maturity Value on
“Actual”
Present Value of Plan
School Level 4
YEAR COLLEGE
School
Classification EXCLUSIVE
Pre-need
Price P
(Total plan
payments made by the planholder)
Date of Full
Payment
No. of Years
from Date of Full Payment to End Year 2004
Resulting Value in 2004 that will be used
as full payment for
The
new fixed value plan P
(New
Pre-Need Contract Price)
Is
Difference Between Proposed Return &
“Actual” Value Fair?
The offered
return value of PPI is absolutely NOT fair for the following reasons:
§
In
the first place, the total plan payments made by the planholder is not only the
pre-need price, but also includes the handling charges, which total about 9% of
the total pre-need price.
§
Secondly,
the “actual” or real value of the plan is not the total amount paid by the
planholder plus 7% interest from date of full payment to end of year 2004
(resulting value in 2004 of PPI that will be used as full payment for the new
fixed value plan). The real and fair
value of the plan as of a certain reckoning date is the amount of tuition fee
plus standard fees for the current school year times the number of availments
still remaining.
§
Assuming
for the sake of argument that the planholder agrees to a compromise settlement
based on the amount paid plus interest over number of years, the basis should
be –
- Total payments plus handling charges.
- Interest
payment should commence on the date of quarterly payments, not only on the date
of full payment.
- The
interest rate should not be 7% per annum but on the yield given by T-Bills or
T-Bonds or other government-guaranteed debt instruments, which are considered
non-risk in nature, with maturity approximate to the number of years it
remained unavailed. (7% is even lower than the average rate of return of the
trust assets, which we consider already very poor, compared with the other
yields for other investment instruments offered during that period)
OTHER ISSUES
1. PPI’s Atty. Tecson in an interview said
that PPI had foreseen the present trouble in the early 1990s. That was why, she added, it stopped selling
the “problem plans way back in 1992”.
If,
in fact, PPI had recognized the problem in the early 1990s, why did it continue
to sell open-ended plans as late as December 1992?[35]
2. In its letter dated
The planholders would be hard put to
believe these commitments of PPI given the circumstances, including the fact
that it had as early as the last quarter of 2000 already refused to honor the
transferability provisions of the Education Plan Agreement (EPA). Under cover of a legal opinion issued by
Romulo, Mabanta, Buenaventura, Sayoc & de los Angeles, Attorneys-at-law, on
December 14, 2000, it insisted that “PPI may permit transfers only where the
beneficiary has died, been disqualified due to disability or has migrated to
another country, provided in the PEP-TRAD contract”. Against this legal position of PPI in the
past, how can the planholders sell the plans to any interested party at anytime,
as is the practice, when its own legal counsel has said that this is in
violation of the law. Does this mean
that the legal position of PPI at that time was only meant to mislead the
planholders wishing to transfer their plans?[36]
CONCLUSIONS
.
Obligation of Pacific is to provide a future
need in consideration for earlier payments. The responsibility is fiduciary in
nature with the clear indication of support from the YGC Group (The Strengths
of Many, Power of One).
.
Pacific’s obligations demand a higher degree
of accountability because of interlocking ownership, management and investment
committee structures with RCBC as trustee of the planholders’ funds.
.
Pacific and RCBC is required to scrupulously
care, safely and prudently manage the entrusted funds of the planholders and to
main absolute separation of asset free from any intrusion of conflict of
interest.
.
Pacific and RCBC grossly violated and
ignored their mandated fiduciary duties.
.
They have (1) consciously misled and
premeditatedly reneged on their contracted obligations, (2) severely mismanaged
and abused the planholders’ funds entrusted to them, and (3) blatantly misused
the planholders’ funds to promote the interests of the Yuchengco Group of
Companies at the expense of the planholders, instead of maintaining absolute
separation of their assets free from any intrusion of conflict of interest
.
By their action or inaction, they have lost
billions of pesos of the planholders’ money, and sacrificed the future of the
planholders children, whose assured education is now being withdrawn in such
insensitive and cavalier fashion.
RECOMMENDATIONS
.
Oppose the rehabilitation plan as
represented and demand for the full implementation of the terms of the EPA, or
at the very least, the settlement of the outstanding plans based on its present
value equivalent to the prevailing tuition and standard fees.
.
Require the YGC Group and its stockholders
to put additional equity to enable them to fully comply with their fiduciary
obligations under the contract. This
would be merely putting back a portion of what they have taken from the company
and the planholders.
.
If not accepted by Pacific and the YGC
Group, file criminal and/or administrative cases against those responsible for
the abuse of the trust funds in such a grand scale.
.
Prevent the further deterioration of the
trust assets and other assets of PPI[37],
including deposits and placements, by removing them from the control of RCBC
and the YGC Group.
.
Ask the SEC/Court for a (1) thorough review
and accounting of the transactions of the planholders’ funds entrusted with
Pacific and RCBC and all of PPI’s financial dealings since 1986, (2) assignment
of a receiver and comptroller in Pacific Plans and RCBC Trust.
.
Demand that the YGC Group shoulder the
professional/legal fees and other expenses related to the rehabilitation case
instead of Pacific.
.
Ask that PPI share of the revenues generated
by the YGC Group from their collateral businesses derived from the use or
deployment of PPI and planholders’ funds.
.
The planholders should endeavor to have the
truth out there, including senate and congressional inquiries, and organize
themselves and form a secretariat to monitor and coordinate activities, a media
bureau, a legal panel, and a technical support group.