Industry News

[November 12, 2006]

A military pension system that never was

(Philippine Daily Inquirer Via Thomson Dialog NewsEdge) (First of four parts)

A MILITARY PENSION SYSTEM conceived with the best of intentions steadily built up a fortune that never went to its intended beneficiaries but to the managers who soon raided its coffers.

In the 33 years of its existence, the Armed Forces of the Philippines-Retirement and Separation Benefits System (AFP-RSBS) assumed various identitiesas a corporate venture, an investment company, a financial institution, a lending house, real estate developer, communications equipment maker and theme park owner.

However, it never functioned as a pension system for the armed services.

The irony of it is that the AFP-RSBS was created in 1973 under Presidential Decree No. 361 as a funding mechanism to guarantee continuous financial support to the military retirement system. It was supposed to take over from the government the payment of military retirement and separation benefits when it became self-sufficient.

From the monthly 5-percent deductions from the soldiers pay since 1976, the RSBS was able to amass assets and invest more than P1 billion in 1984. In its 20th year of existence in 1996, it had assets valued at P13.64 billion. But not once during those 20 years, or even in the next 10 years, did the RSBS pay out the pensions of military personnel.

By Dec. 31 this year, the RSBS will officially cease operations. It closes with P11.62 billion in assets, of which 67 percent or P7.82 billion is tied up in real estate. Of the landholdings, 24 percent (P1.9 billion) have questionable titles.

A financial study by the defense department in July concluded that it would be impossible for the AFP-RSBS to ever provide for the pension requirements of the AFP. The pensions of the soldiers will continue to be funded by the National Treasury, as it was when the military pension scheme was started in 1948.

What happened?

The RSBS management lost its direction and with the billions in funds staring at them, it became a free-for-all, Hector Inductivo, former Asian director for the International Social Security Association, said.

The RSBS story is scarred by sordid sellouts and dubious deals. Thus, it will surely go down in history as an institution that was run either by the most sophisticated swindlers or the most naive and willing swindling victims in the country, the Senate blue ribbon committee reported after its investigation of the RSBS in 1998.

The committee report also described the RSBS as a vestige of the martial law regime when the country was in the grip of an all-too-powerful Armed Forces.

Before the creation of the RSBS, there was the Armed Forces Retirement Act or Republic Act No. 340 of 1948. The law set the retirement benefit for AFP personnel at a lump sum of one months pay multiplied by the number of years in service, or a pension at 2.5 percent of annual pay multiplied by the number of years in the service.

The amount was appropriated from the national budget. The AFP personnel were not obliged to make monthly contributions from their salaries.

In early 1970, the first actuarial valuation was conducted to support an act to provide for the retirement and separation benefits for the AFP. That year, the AFP had 6,496 officers and 49,251 enlisted personnel. The declaration of martial law and the Mindanao secessionist war pushed the AFP to massive recruitment, swelling the ranks to 115,000 men in 1978.

PD 361 creates RSBS

In December, 1973, Marcos issued Presidential Decree No. 361 creating the RSBS, a military pension plan to be funded by government appropriations, membership contributions, donation and earnings of the fund and which was decreed tax free. The first actuarial valuation estimated the initial funding requirement at P712 million.

As seed money, the government released P200 million in a span of four years. The amount was released in four installmentsP38.1 million in July 1978, P50 million in 1977, P60.3 million in 1978, P50.4 million in 1979 and P1.2 million in 1980.

The RSBS also began collecting 4 percentlater increased to 5 percentas the contribution of its members. The RSBS governing board was also established with then AFP Chief of Staff Gen. Romeo Espino as chair of the board of trustees.

Under PD 361, the National Treasury would continue paying the pension of AFP personnel already retired in 1974. But the RSBS would be obliged to shoulder pension payments that would exceed the P100 million total cash requirements. This obligation was supposed to take effect in January 1978.


But PD 361 was vague on when it should take over from the government payment of pension benefits to retired or separated AFP personnel, as noted by the Feliciano Commission in 2003. The commission studied the state of the RSBS which was among the issues raised by rebel soldiers who occupied the Oakwood hotel in July that year.

The RSBS charter, however, inevitably gave rise to the nationwide expectation that the RSBS would, at some time in the future, take over from the National Treasury all, or at least part of, the burden of paying retirement benefits to retiring AFP personnel, said the Feliciano Commission.

PD 361 was clear on one thing, however. It stated that the system shall be administered by the Chief of Staff of the Armed Forces of the Philippines through an agency, group, committee or board, which may be created and organized by him and subject to such rules and regulations governing the same as he may, subject to the approval of the secretary of national defense, promulgate from time to time.


After Espino came a succession of generalsFabian C. Ver, Fidel V. Ramos, Renato de Villa, Rodolfo Biazon, Lisandro Abadia, Arturo Enrile, Arnulfo Acedera, Clemente Mariano, Joselin Nazareno, Angelo Reyes, Diomedio Villanueva, Roy Cimatu, Benjamin Defensor, Dionisio Santiago, Narciso Abaya, Efren Abu, Generoso Senga and Hermogenes Esperon.

Sen. Juan Ponce Enrile was defense minister from the time the RSBS was created in 1973 until he was replaced in November 1986. After him also came a succession of defense chiefs, namely, Rafael Ileto, Fidel V. Ramos, Renato de Villa, Fortunato Abat, Orlando Mercado, Angelo Reyes and Avelino Cruz. At least threeRamos, De Villa and Reyesare also former AFP chiefs of staff.

Through the years, the RSBS board of trustees was also dominated by military men, led by the chief of staff who is the chair and a president who is either an active or retired military officer. The nine-man trusteeship included the chiefs of the Philippine Army, Philippine Air Force and Philippine Navy; the deputy chiefs of staff for personnel and comptrollership, the sergeant major and one retired military officer.

The provision empowering the AFP chief of staff to run the RSBS gave it a chop-suey identity, according to retired Brig. Gen. Jose Comendador.

It was being run like it was one of the AFP units. It became an extension of GHQ. All the bad habits there were brought to the RSBS, Comendador said.

Management got confused

Besides, Comendador said, the management got confused. They could not decidewas RSBS a corporate venture or a military unit? They got messed up with their objectives, he said.

According to him, the military units main objective is to fulfill a mission as against a corporations goal which is to make profit.

But the RSBS is not, strictly speaking, a corporation because it is not organized as a regular corporation registered with the Securities and Exchange Commission.

While it was actively investing soldiers contributions, the RSBS was not also covered by Bangko Sentral ng Pilipinas rules and regulations on investments.

Investment company

The Feliciano Commission said the RSBS became an investment company in 1979 when PD 361 was amended to the effect that the funds automatically deducted from AFP personnel shall be allowed to grow to be able to provide perpetually the cash requirement covering the retirement and separation benefits payments to military members of the Armed Forces of the Philippines on a self-sustaining basis.

The decree also stated that until the RSBS attained perpetual self-sufficiency, the retirement and separation benefits of AFP personnel shall be included in and funded out of the annual appropriation of the AFP.

Lump sum

The amended decree also stated that an AFP member, who is separated or retired from the service, shall be refunded in one lump sum all his contributions to the system. It did not mention the interest accrued at all. In fact, the RSBS only granted a 4-percent interest per annum on members contributions in 1992. A board resolution increased the interest to 6 percent in 1996.

Inductivo, who is an expert on social security, said there was nothing wrong with investing the soldiers contribution.

A pension system, whether private or government, is always an investor. You cannot put billions in the current account. You cannot avoid being an investor because of the billions it has accumulated. It has to invest, but where you invest it is another thing, he said.

Provident fund

But the RSBS ceased to be a pension plan when it began refunding the soldiers for their contributions. It became a simple provident fund, a simple scheme where one collects contributions and returned to the employee upon retirement or separation, he said.

Contributions made by members of the Social Security System and the Government Service Insurance System are never returned to them when they retire, noted Inductivo. That contribution will fund the pension, which is a lifetime payment, he said.

He also pointed out that SSS and GSIS pension plans entailed a counterpart contribution by the employer, which is a standard practice in social security systems across the globe.

No employer counterpart

Government employees contribute 9 percent of their monthly income to the GSIS, and the employer contributes 12 percent as counterpart. In the private sector, workers shell out 4.3 percent of their monthly salaries to the SSS, and their employers pay 5 percent. The RSBS collects 5 percent from their soldiers salary, but no counterpart whatsoever from the employer.

Inductivo said the RSBS management was also confused about its role. In the late 1990s, he said he was invited by a group from the RSBS to explain the nature of pension systems. They were not aware of the principles and theories of social security, he said. By then, the RSBS was already mired in investment problems, bleeding from interest payments on short-term loans.

The mandate of the RSBS was to eventually turn into a pension system. The RSBS is supposed to be a transition from the government pension system to its own pension system (similar to the SSS and GSIS). The objective was to make the RSBS self-sufficient so that it can supplant the government pension system, Inductivo said.

Liquidity problems

But there was no pressure to convert RSBS into a pension system because the soldiers who retired got their pensions from the National Treasury and their refund from the RSBS, he said. So everybody was happy, nobody rocked the board. The agitation started only when the refunds were delayed, when the RSBS had liquidity problems.

Now, everybody is confusing the RSBS with the government pension system. These are two different systems, Inductivo said.

Cecilio Lorenzo, defense undersecretary for finance, acknowledged major flaws in the RSBS law and structure. Refunding the contribution and the lack of a government counterpart in the contributions weakened the capital base, according to him.

Lorenzo said indexationor the law that elevates an officer to the next rank upon retirementalso requires a higher pension payment. He said the law that granted pensioners prorated increase whenever those in active soldiers were given salary hikes further burdened the government, which had to allocate the amount from the annual budget.

Irresponsible legislation

Inductivo called it irresponsible legislation.

Some politicians think they look good and they earn good points with the military by passing bills on salary increases of soldiers and policemen. They did not even bother to look at the implications on the pension and other benefits. Where would you get the money? he said.

As of 2005, the General Appropriations Act allocated P10.6 billion for military pension. An RSBS estimate projected that the budget for pension and salaries for the active military will equalize by 2013, when all those recruited in the 1970s will reach retirement age.

Untangling the RSBS mess will take a long time, Inductivo said. Eventually, the RSBS will end because the members will retire. They will get their refund and their pension from the national government, and they die. Ultimately death will solve the problem, Inductivo said. (To be continued tomorrow)

Copyright 2006 Philippine Daily Inquirer. Source : Financial Times Information Limited (Trademark)

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