Carlos G. Dominguez
Secretary of Finance
Social Security System President and CEO Aurora Ignacio; Government Service Insurance System President and General Manager Rolando Macasaet; Finance Undersecretary Antonette Tionko; National Treasurer Rosalia de Leon; friends in media: Good afternoon.
Since 2016, it has been the Duterte administration’s firm resolve to instill financial discipline and transparency among our GOCCs or government-owned or -controlled corporations.
This is why as soon as I took office, I instructed the Department of Finance’s Corporate Affairs Group led by Undersecretary Antonette Tionko to conduct a thorough review of the financial accounting and reporting management of the various GOCCs. We wanted to ensure that these GOCCs fully comply with internationally accepted accounting principles. The review is consistent with the DOF’s policy of continuously instituting reforms to promote greater accountability and transparency among our GOCCs.
Through the technical assistance extended by the International Monetary Fund, a comprehensive review of the financial reporting and accounting practices of the GOCCs was undertaken in 2018. One of the key findings in the IMF study was that there were unbooked liabilities that the GOCCs should have reported in their financial statements. These GOCCs include our government social institutions such as the Social Security System, the Government Service Insurance System, and the Philippine Health Insurance Corporation.
The DOF, in collaboration with the Bureau of the Treasury, the Insurance Commission, the Commission on Audit, and SGV, conducted an independent review of the financial reporting and management of these government social institutions. Ultimately, we discovered that the SSS, the GSIS, and PhilHealth did not fully comply with the PFRS 4 or the Philippine Financial Reporting Standards.
PFRS 4 provides guidance to the proper financial accounting of insurance contracts, and all private insurance companies in the Philippines have been using it since 2005. The Insurance Commission, which is an attached agency of the DOF, has been vigilant in enforcing the international accounting treatment on private insurance companies.
Under PFRS 4, when a policyholder pays premiums to the insurance company, the company needs to set aside a reserve to cover the actual and future claims that will be made by its members.
In the case of our government social institutions, their members pay contributions since they expect to receive a pension and other benefits from these institutions in the future. Therefore, it is the responsibility of these institutions to book as liabilities the actual and future claims of their members based on actuarial computations. Collectively, these liabilities are called social benefit liabilities.
Unfortunately, this has not been the case for the past 15 years. It is only the Duterte administration that has acknowledged the issue, and we are determined to correct it once and for all to provide the stakeholders and policymakers with a more accurate financial situation of our government social institutions.
Before 2020, the SSS, the GSIS, and PhilHealth would record and report the contributions they receive from their members as income. It is only when their members file a claim for pension or other benefits that they would book a liability in their financial statements.
As a result, their incomes were overstated while their liabilities were understated for several years. Since this has been the practice of these government institutions for over 15 years, the accounting implication of not booking the required reserve for future liabilities has a significant impact on their 2020 financials. This is why I recommended to the Commission on Audit to mandate the government social institutions to adopt PFRS 4 starting 2020 to ensure that their financial reports reflect the correct financial position of these institutions.
Full compliance with the accounting standards allows the national government and the management of these social institutions to make wise and informed decisions based on facts.
With the government social institutions’ full compliance with the PFRS 4, their combined total liability increased to 9.94 trillion pesos in 2020 from 154 billion pesos in 2019. This is more than half the size of the country’s total GDP in 2020. The increase in liabilities is primarily due to the booking of the social benefit liabilities, as required under PFRS 4.
I wish to emphasize, however, that booking and reporting the social benefit liabilities do not affect the institutions’ cash flow and funding situations. The SSS, the GSIS, and PhilHealth can still meet their short- and long-term obligations to their members. The Filipino people will still receive their pension or other benefits from these social institutions.
The Philippines is not the only country that records and reports its social benefit liabilities in accordance with PFRS 4. Other countries with a defined benefit plan like the Philippines, follow the International Financial Reporting Standards or the equivalent of the PFRS 4. For instance, the United Kingdom and Denmark report their social benefit liabilities in their financial statements. Hence, there is no reason why our government social institutions should not book these liabilities, in line with international good practice.
With the audited 2020 financial reports of the SSS, the GSIS, and PhilHealth, we now have an accurate picture of the funding reality of these institutions. We have formulated several recommendations to improve the management of these funds.
One of which is to pool the funds of the three institutions and constitute them as a sovereign wealth fund. This will help us maximize returns on investments. Professional fund managers may be hired to manage these funds. This is the practice of many countries, including Singapore, Japan, and Indonesia.
We also have to maximize fund efficiency by improving contribution collection. Similar to the payroll tax in the United States, we are looking at the possibility of having one agency collect all the contributions instead of each institution doing its own. Like most countries imposing the payroll tax, we can have the Bureau of Internal Revenue, for instance, collect for these institutions.
Better management of our social security funds will be one of the lasting legacies of the Duterte administration. This administration has exercised fiscal prudence to ensure the long-term stability of our social insurance institutions.
Thank you.
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