ECONOMIC RISK ANALYSIS

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ECONOMIC RISK ANALYSIS
AFP RETIREMENT SEPARATION BENEFIT SYSTEM
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ECONOMIC RISK ANALYSIS
On The
AFP RETIREMENT SEPARATION BENEFIT SYSTEM
Cmdr. Modesto T. Kapuno, PN (Res) Medical Officer
V, City Health Office Deputy
Cmdr., Naval Res. Cmd. For Southern Luzon
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• SEQUENCE OF PRESENTATION
• Introduction
• Rationale
• Main Body
• Analytical Brief
• Conclusion
• Recommendation

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1. INTRODUCTION

1.1 The RSBS
1.1.1.  Creation
-created by PD No. 361 dtd 30 December
1973 Contribution of 4 of base and long
pay. Govt infusion of 200M pesos. -amended by
PD No. 1656 dtd 21 Dec. 1979 -further amended by
PD 1909 dtd 22 Mar 1984. Contribution of 5 of
base pay.
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Organization
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Findings of the Fact Finding Commission

• The RSBS never discharged its mandate.
• For 2003, fund requirement for AFP retirees is
  P10,482.122B.(J-6)
• The funding requirements of a true pension system
  escalate as the compensation of AFP military
  personnel is increased.
• The RSBS did not contribute anything at all
  towards reducing the burden on the national
  treasury of payment of AFP retirement benefits.
• The RSBS, in its present conception and
  structure, is fundamentally flawed.

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Recommendations of the Fact Finding Commission

• Liquidate present RSBS in an orderly manner.
• Return the Soldiers RSBS contributions.
• Initiate an AFP Service and Insurance System.
• Implement fully the recommendations of the
  Senate Blue Ribbon Committee

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2. RATIONALE

• Look into the viability of the fund to meet
  the financial needs of its soldier-members, the
  insolvency problem and evaluate the potential
  risk.

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2. RATIONALE
2.2 Methodology

• Employment of various techniques in data
  gathering.
• Interview with key officials of RSBS.

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3. MAIN BODY
3.1. Stakeholders Analysis
Stakeholder Role Concern
Members of the AFP Provide contribution To get their moneys worth.
Government Provide pension welfare to AFP retirees. National security
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Stakeholder Role Concern
The Secretary of the National Defense Overseer of AFPRSBS who approves whatever the Board of Trustees and other RSBS departments recommend. Responsible for whatever will happen to the system
The Chief of Staff AFP Chairman of the Board of Trustees
The RSBS Personnel Key players from top to bottom of the whole AFPRSBS Make RSBS profitable to make it self- sufficient to provide pension to AFP
The RSBS Borrowers Provide income Pay loans
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Stakeholder Role Concern
Investment Agencies Invest money of RSBS to earn income. Remit what is due to RSBS
SGV and Co. Examines accounting books of RSBS and evaluate the business feasibility, growth and accomplishment. Ascertains as to the correctness of accounts.
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3. MAIN BODY
3.1 Financial Risks

• Failure to ensure the ability to pay of
  borrowers
• Failure to take action on delinquent borrowers
• Low collection efficiency.
• Losses on investments in
• real estate
• 5. Inability to meet current obligations to
  creditors and members
• 6. Failure to pay loans

7. Additional losses due to penalty charges
for restructured loans 8. Possible loss of real
estate properties securing loans, if foreclosed
9. Losses in dacion en pago 10. Inability to
operate as a self-sustaining system 11. Possible
insolvency
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Security Risks

• Adverse effects on AFPs operations (lack of
  funds)
• Low morale of military personnel

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3. MAIN BODY
3.2. Risks Analysis
FINANCIAL RISK LEVEL OF RISK IMPACT
Failure to ensure the ability to pay of borrowers Failure to take action on delinquent borrowers Low collection efficiency. Losses on investments in real estate Inability to meet current obligations to creditors and members Failure to pay loans 5 5 5 5 5 4 I I I I I I,E
1-No Risk 2-Low Risk 3-Moderate Risk 4-High
Risk 5-Greatest Risk
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3. MAIN BODY
3.2. Risks Analysis
FINANCIAL RISK LEVEL OF RISK IMPACT
Additional losses due to penalty charges for restructured loans Possible loss of real estate properties securing loans, if foreclosed Losses in dacion en pago Inability to operate as a self-sustaining system Possible insolvency 4 4 1 5 4 I I I I,E I,E
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3. MAIN BODY
3.2. Risks Analysis
SECURITY RISK LEVEL OF RISK IMPACT
Adverse effects on AFPs operations (lack of funds) Low morale of military personnel 4 4 E E
1-No Risk 2-Low Risk 3-Moderate Risk 4-High
Risk 5-Greatest Risk
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Limitations of the Analysis
The facility of data gathering was not
attained. The originally intended bases and the
corresponding analytical processes for each risk
are as described.
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Risk 1. Failure to ensure that borrowers are
able to pay.
walk through of transactions documents not
available Analysis of related accounts in the
financial statement.
P967,580,223 - loans receivable 647,019459
(67) past due- defaulted for more than 180
days. 247,557,444 (28)
under litigation
Borrowers were not tested as to their capacity to
pay.
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Risk 2. Failure to take action on delinquent
borrowers.
The fact that the AFP-RSBS has allowed its
past due loans to reach 67 of its loan
receivables is evidence that it does not take
immediate actions against the delinquent
borrowers.
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Risk 3. Low collection efficiency
The accumulation of the loans receivable,
including non-collection even of the restructured
loans, are obvious signs of low collection
efficiency. Sale of Antipolo properties ,Inc
(P77M) have not been collected since its sale in
late 1990s
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Risk 4. Losses on investment in real estate.

• Land Land Improvements P4,423,273549
• Residential Subd 3,306,358,092
• Townhouses
• Member-related projects- 192,407,774
• Net of Depreciation
  _
• TOTAL
  P7,922,039,415

The AFP-RSBS has and continued to lose from the
investments in terms of cost of money and
reduction on the value of properties.
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Risk 5. Inability to meet current obligations.
Notes payable
P104,256,454 Accounts payable Accrued Exp
667,562,181 Members contribution payable
153,106,632 Restructured long term debt
84,166,971 Liability on earnings of
members contribution
51,451,978 TOTAL
P1,060,544,216
The amount exceeded current assets of
P779,911,379 by P281M. RSBS has liquidity
problem.
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Risk 6. Failure to Pay Debts
The debts of the AFP-RSBS which were related with
the real estate investments were categorized
into Current portion of restructured -
P84,166,971 Long term-debt restructured long
term-debt - 1,655,661,190
Since the loans have already been restructured,
it did come to a point when the AFP-RSBS could
not pay its loan obligation due to liquidity
problems.
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Risk 7. Additional losses due to penalty charges
for restructured loans.
It has become increasingly difficult for the
AFP-RSBS to meet its current obligation.
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Risk 8. Possible loss of real state properties
Data show that the AFP-RSBS has been able to
comply with conditions of the restructuring
agreement. Since the loan have already been
restructured, it came to a point when AFP-RSBS
could not pay its loan obligation.
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Risk 9. Losses in dacion en pago.
To prevent further losses, the system had to
forego their assets. P516M outstanding loans in
2002 were settled through this arrangement. The
arrangement did not incur losses, though.
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Risk 10. Inability to operate as a self
sustaining system.
The AFP-RSBS has not been able to pay the
retirement and separation benefits of military
personnel. At most it can only refund
contributions. To assume pension payment,
P94.989B is needed to bring fund level to
P100.707B and annual infusion P1.707B. From the
beginning, the AFP-RSBS never had the capability
to give the service expected from it.
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Risk 11. Possible Insolvency.
There are grave concerns raised by our
legislature about alleged bankruptcy and misuse
of funds and assets. The current liabilities have
reached crises proportions that presently it is
significantly bigger than its current assets.
The RSBS is incurring huge loans from other
financial institutions (P5B). It has been in
default for three times. this may undermine the
systems viability that may lead to insolvency if
there is no corrective or bold measures
undertaken
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Risk 12. Low morale of military personnel
All the respondents are concerned with whatever
happens with the AFP-RSBS being part-owners
of the system. 20 out of 21 respondents believe
that the system is being mismanaged and they feel
demoralized. 20 of 21 sympathize with issues
raised by Oakwood mutineers but averse against
violence. With majority of 120,000-strong AFP
personnel feeling this way, this could threaten
national security.
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Risk 13. Adverse effect on AFP operations.
The continued dependence of pension payments from
AFP appropriations, the AFP is unable to use the
fund for its operations. With annual pension
estimated at P8.5B, the amount is significant
which was bitten-off from the AFPs
operations. The AFPs capability to perform
better has been very much hampered.
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4. ANALYTICAL BRIEF
On the whole, the AFP-RSBS situation is quite
volatile and could lead to demoralization of the
armed forces which will further lead to militant
actions from agitated members.
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5. CONCLUSIONS
The system is not a viable self-sustaining source
of fund. AFP-RSBS is on the verge of insolvency.
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6. RECOMMENDATIONS
Create study group to work on the mathematics,
economics, and security aspects of RSBS.
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AFP BUDGET PROPOSED VS. APPROPRIATED
2001 2002 2003 2004
PS PROG APPROP MOE PROG APPROP CO PROG APPROP TOTAL PROG APPROP VARIANCE 38,006.164 31,570.247 14,491.166 7,635.163 4,160.983 1.928 56,658.313 39,207.338 17,450.975 37,455.756 37,214.592 14,226.288 8,813.899 2,056.195 208.535 53,738.239 46,237.026 7,501.213 40,527.761 41,124.605 13,664.977 9,187.163 1,829.651 5,164.840 56,022.389 55,476.6085 545.701 53,778.317 31,592.866 17,944.831 9,165.136 2,880.380 0.010 74,603.528 40,758.012 33,845.516
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2001 2002 2003 2004
AFP MOD PROG APPROP VARIANCE PAID BENEFITS 8,945.756 90.000 10,000.000 9,910.000 9,954.648 10,000.000 5,000.000 5,000.000 10,482.122 10,000.000 5,000.000 5,000.000 2,750.552
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Financial Risks
7. Additional losses due to penalty charges
for restructured loans 8. Possible loss of real
estate properties securing loans, if foreclosed
9. Losses in dacion en pago 10. Inability to
operate as a self-sustaining system 11. Possible
insolvency

• Failure to ensure the ability to pay of
  borrowers
• Failure to take action on delinquent borrowers
• Low collection efficiency.
• Losses on investments in
• real estate
• 5. Inability to meet current obligations to
  creditors and members
• 6. Failure to pay loans