Honorable Representative Junie Cua, Chairperson of the Committee on Banks and Financial Intermediaries; Honorable Representatives present here today; Secretary Ramon Lopez of the Department of Trade and Industry; Secretary Silvestre Bello of the Department of Labor and Employment; fellow workers in government; distinguished representatives of the private sector group: Good afternoon.
We are honored to express our support for the proposal to further deepen our domestic capital markets through building a sustainable corporate pension system.
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.
It has been proven that the design of a country’s pension system has a significant relationship with capital market development and economic growth. An Asian Development Bank study by Dr. Renato Reside of the UP School of Economics found outthat a 1 percent increase in the share of pension assets in our economy corresponds to a 1 percent growth in our real GDP per capita. This translates to improved standards of living for our people.
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.
The measure being proposed by Congressman Cua intends to enhance the depth and liquidity of our capital markets. The participation of large investors, such as pension funds, will help expand and diversify the investor base of our capital markets. This will mobilize a long-term supply of capital that can fund countless investment opportunities. At the same time, growing the pension fund system through prudent investments in the capital markets will ensure that our workers get to receive adequate benefits for them to be able to live comfortably once they retire.
The reform that is being pushed is a win-win for all. Strengthening our domestic capital markets is crucial to ensure the strong and sustainable growth of our economy as we recover from the pandemic. The legislation will also reinforce the regulatory regime of capital markets to bolster investor protection.
Meanwhile, 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. This 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.
The weaknesses in our pension system are rooted in the deficiencies in the Retirement Pay Law, which was enacted in 1993. This law features a pay-as-you-go structure resulting in a pension system that is underfunded, lacks portability, and inadequate to provide enough income to support old-age retirement in the country.
No one is truly happy with the outcomes of that deficient piece of legislation. Under the current scheme, more than 90 percent of employers pay their workers out-of-pocket resulting in underfunded pensions and a lack of an investable pool of assets.
Moreover, our current corporate pension system does not work for our highly mobile workforce. Employees can only start benefiting from their retirement funds at the age of 60, and only the final employer contributes to their pensions.
In addition, once employees retire, most of them are only entitled to receive one-half of their monthly salaries for every year of service. On the average, their pension is expected to last for only 3 years even after they have worked for 40 years in a single company.
International studies confirm these weaknesses in our corporate pension system. The 2020 Melbourne Mercer Global Pension Index ranks the Philippines 36th out of 39 retirement systems around the world. The study measures pension systems in terms of sustainability, adequacy, and integrity. Our country garnered an 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. The ideal and sustainable ratio is 100 percent of GDP. The average ratio among developing economies is 36 percent—or more than double ours.
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.
The proposed bill centers on the establishment of an Employee Pension and Retirement Income Account. This is similar to the portable, employee-managed retirement accounts in the most developed economies. The account addresses the problems I have mentioned earlier by requiring both the employers and employees to pre-fund or contribute to the account. This will effectively increase the portability of accounts from one employer to another and ensure high replacement rates of benefits upon retirement.
As we near our demographic sweet spot and transition to a knowledge-based economy, this modernization measure becomes more urgent.
The most important segment of the Philippine workforce is composed mainly of Millennial and Gen Z workers aged 18 to 35 years old. This generation is characterized to have a job-hopping behavior and, on the average, will hold 12 jobs in their working lifetime. They will be vulnerable to the weaknesses of our current corporate pension system.
The reform would also benefit Gen X, Boomers, and Retirees as they are the population nearing retirement age. Hence, they would require an adequate amount of savings to live comfortably in retirement.
On the employers’ side, they would be incentivized to participate actively in this reform as a means to encourage employee retention and engagement.
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.
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.
Now is the time to expand the investor base in our capital markets while securing the future of our workers and their families.
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.
Thank you.
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