The Department of Finance (DOF) has expressed its full support for the congressional proposal to further deepen the domestic capital markets by building a sustainable corporate pension system that will help secure the future of Filipino workers and their families, while making available massive volumes of capital in the financial sector to help fuel the economy’s strong and sustainable growth.

Finance Secretary Carlos Dominguez III said overhauling the country’s underdeveloped corporate pension system will be “a win-win for all” against the backdrop of the protracted Covid-19 pandemic, given these positive outcomes expected from this proposed reform.

Corporate pension reform will not only expand and diversify the investor base of the capital markets, but will also be a major step forward in accomplishing President Duterte’s goals of financial inclusion and comfortable lives for all Filipinos, he said.

The bill centers on the establishment of an Employee Pension and Retirement Income Account (EPRIA), which is similar to the portable, employee-managed 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.

“The move to reform our corporate pension system, which has been underdeveloped for far too long, presents us with a wealth of benefits that go beyond increasing the efficiency of our capital markets. This creates a vast opportunity for ordinary Filipinos to take part in the development of our financial sector and our economy,” said Dominguez during Monday afternoon’s hearing of the House committee on banks and financial intermediaries.

Chaired by Quirino Rep. Junie Cua, the committee held a hearing to discuss his proposed measure—House Bill (HB) No. 8938—which aims to deepen the capital markets by developing a robust institutional investor base and strengthening the regulatory environment.

Dominguez told lawmakers during the virtual panel hearing that corporate pension reform “will democratize wealth by opening access for thousands of small investors to grow their hard-earned savings through investments in the capital markets.”

“The reform is a big step forward to achieving President Rodrigo Duterte’s goal of financial inclusion and a comfortable life for all Filipinos while they are working and while they are in retirement,” he added.

Dominguez said that in other countries, pension systems are active participants in the capital markets and help increase contractual savings that would aid in funding productive long-term investments of the national government and the private sector as well.

“Now is the time to expand the investor base in our capital markets while securing the future of our workers and their families,” Dominguez said. “This is a historic reform that will benefit succeeding generations. It will provide a truly inclusive and sustainable economy for Filipinos invested in their own future.”

Dominguez said reforming the corporate pension system has now become even more urgent as the country transitions to a knowledge-based economy and nears its demographic “sweet spot,” or the period when an optimal number of its population are of young working age with few dependents.

The primary beneficiaries of corporate pension reform, particularly its portability feature, are the Millennials and Generation Z workers aged 18 to 35 years old who are inclined to switch jobs and, on the average, hold about 12 jobs in their working lifetime, Dominguez said.

This reform will also benefit the Generation X (those born between 1965 and 1980) and many Baby Boomers (those born from 1946 to 1964) who are nearing retirement age and would require an adequate amount of savings to be able to live comfortably past their working years.

Employers will also benefit from this reform because they will be incentivized to participate actively as a means to encourage employee retention and engagement, Dominguez added.

“With the proposed reform, the workforce is encouraged to potentially increase productivity, knowing that they will have sufficient allocated savings. This would ultimately contribute to economic growth,” Dominguez said.

“Looking at the big picture, this reform will increase the supply of capital in the financial system, encourage more investments, and promote stock and bond market development. All these will help turbo-boost the competitiveness of the Philippine capital markets,” he added.

The reform will also reinforce the regulatory regime of capital markets to bolster investor protection, Dominguez noted.

“The roadmap to a vibrant domestic capital market through a fully funded and portable private pension system includes a change in legislation; a strategic engagement with relevant stakeholders; and increasing awareness among the workforce about the benefits of a pension reform,” he added.

Dominguez said an Asian Development Bank (ADB) study done by Dr. Renato Reside of the University of the Philippines (UP) School of Economics found that a 1-percent increase in the share of pension assets in the economy corresponds to a 1-percent growth in real gross domestic product (GDP) per capita, which translates into improved standards of living for Filipinos.

“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 long-term growth,” he said.

The weaknesses of the current pension system is rooted in the deficiencies of Republic Act (RA) No. 7641, or the Retirement Pay Law that was enacted 28 years ago.

Under this law’s pay-as-you-go structure, more than 90 percent of employers pay their workers out-of-pocket, resulting to 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 workforce, as employees can only start benefiting from their retirement funds at the age of 60, and only their respective final employers contributes to their pensions.

The law also provides that employees be entitled to receive at least one-half of their monthly salary for every year of service, which, on the average, means their pensions will only last for three years even after they have worked for 40 years in a single company.

International studies such as the 2020 Melbourne Mercer Global Pension Index confirm these weaknesses in the corporate pension system, as this Index ranks 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’ overall index value of 43, with 82.6 being the highest.

Because of these glaring 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.

“The average ratio among developing economies is 36 percent—or more than double ours,” Dominguez said.

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