October 6, 2003, The Manila Times,
GSIS 'headed for a crash', by Arnold S. Tenorio, Senior Reporter,
COA warns of Enron-style failure,
The Commission on Audit warned that an Enron-style failure could grip the Government Service Insurance System if it fails to recognize its actuarial deficits in its books.
Enron, an American energy corporation, was the world’s biggest energy trader until it filed for bankruptcy in late 2001. An inquiry found that the company’s accountants had been using complex bookkeeping tricks to make it appear Enron wasn’t losing money.
In its latest annual audit on the pension fund, the commission noted that GSIS’s actual reserves in the last 12 years were below of what had been required. Worse, the pension fund failed to reflect the actuarial deficit in its books.
“This practice is a departure from the generally accepted accounting practice in the insurance industry, which requires that the actuarial deficit noted be booked by debiting losses account and crediting the deferred liability account,” the COA report read.
The audit body explained that actuarial reserves ensure that funds are available to meet future liabilities.
“In the case of GSIS, which is a social security institution, and considering its current programs, it is certain that at least one of the contingencies covered will occur in the indeterminate future,” the COA report said.
Arriving at the amount of actuarial reserves required entails finding out the likelihood of future events—be they disability or sickness—occurring, the commission said.
The assessment also involves predicting how soon some future events—be they old age, separation, retirement, or death—would arise, it said.
Furthermore, such an assessment, the commission said, would require determining how expensive or cheap would be the funds required should the contingencies happen.
“Since the actuarial reserve requirements are estimates of future liabilities, these should have been backed up by assets,” the report read.
On February 27, COA Chair Guillermo Carague warned an audience that included GSIS officials of the dangers of not recognizing actuarial deficits.
“The [chair] informed the body that the collapse of Enron is mainly due to the failure of management to book their actuarial deficit which is a real accounting loss and that the real liability was not recognized. Even [Arthur] Andersen auditing firm failed to realize that they should book it,” the report read.
Since the GSIS management was responsible for its own assumptions on when its liabilities would fall due, the pension fund should therefore “believe in their assumptions,” the COA said.
“Hence, in case there is an actuarial deficit, it should be recognized as real accounting loss and that the deferred liability be recognized and that even though the loss were not yet incurred, it was a real liability,” the report noted.
In the same report, the GSIS countered that its actuarial deficiency was not as huge as COA had believed.
In its defense, the GSIS management cited that much of its assets in real estate “are still booked at purchase or acquisition cost,” and not at present market values, which it believes is higher.
The pension fund noted that it would be revaluing its properties to reflect market prices, as well as “sell its big-ticket property holdings to strengthen the reserves farther.”
Besides its planned revaluation and sale of its real-estate assets, the GSIS said it has been charging interest on premium payments that government agencies have yet to remit.
Winston F. Garcia, GSIS president and general manager, has said that state agencies owe the pension fund an estimated P30 billion in employer’s share of payments.
The GSIS noted that it would soon be carrying out a “premium-based service record, where periods of employment without premium payments will not be included in the computation of creditable service.”
This is meant to correct a provision in its charter that adds on the years of service covered by the pension fund.
A review of the pension fund’’s charter is under way to identify a possible amendment, according to the GSIS.
In its report, the COA questioned the propriety of GSIS’s investment policy, citing in particular the buying last year of three rare paintings by two Filipino artists.
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