CAP expecting equity infusion
Troubled pre-need education market leader College Assurance Plan Philippines, Inc. (CAP) announced it's expecting a $100 million equity infusion from foreign investors by month end.
CAP had a P17 billion variance in its trust assets last year. It only had P8 billion in trust assets managed by trustee banks versus an actuarial reserve liability (ARL) of P25 billion.
That means CAP doesn't enough money set aside to service future needs of its planholders, such that when it's time their plans mature, the company won't have enough to pay the proceeds for the tuition fees of all the plans.
How did that happen? Well, CAP didn't do as good a job in projecting the growth in tuition costs, interest rates, and inflation. The other reason is the company got overexposed in poor real estate investments.
The SEC has approved CAP's asset-building program. And it's to our best interest -- the pre-need industry and the general public -- that CAP recovers.
Now, you know why pre-need companies now sell non-traditional educational plans. Before, they sold plans that paid the schools directly, such that you as a planholder is guaranteed your kid's tuition gets paid, no matter how much it is. There are restrictions of course as you had to make sure your child gets accepted in the school picked in the plan.
Nowadays, pre-need companies will pay you the planholder directly the proceeds from the plan. The good thing is that there are practically no restrictions. It doesn't matter which school your child attends. In fact, when the plan matures, and you decide to use the proceeds for something else, you're free to do so. On the downside, you have to project the tuition costs fairly accurately, or you end up having to cough up more money when it's time to enroll. Remember, you're not guaranteed full coverage of the actual tuition, unlike before. In other words, educational plans today are just savings programs packaged as educational plans.
So, are these educational plans still a good investment? Personally, I think so. Although I did a computation that showed you'll be slightly ahead with a mutual fund, there are advantages to a pre-need plan.
It's forced savings. It's like paying a bill. Can you diligently set aside funds by yourself? Doubtful. If you do have that discipline, you can consider that route.
It's guaranteed. That is, you'll get what you paid for. If you come up with your own savings program, the returns are not guaranteed. Plus, many educational plans have insurance attachments, such that whatever happens to you during the paying period, the proceeds will get paid. However, if you already have sufficient insurance coverage, this may not matter as much.
What's my problem with educational plans? They're expensive, particularly if you're paying for grade school plans. Why? Because they attach extras like graduation gifts and insurance riders. However, you can use the lumpsum graduation gift to pay for either the entire high school or the entire college tuition costs.
Whatever you decide, the CAP situation only stresses the fact that it's important which company you entrust your money to. Of course, who would have thought it can happen to CAP.
