I received so many messages from people who want to put money away for retirement but are hesitant to invest in the stock market for different reasons. Many simply don’t know how, while others are scared of the stock market’s volatility.
Luckily for us Filipinos, the government is implementing programs to help those who want to prepare for retirement. So far, we have the Personal Equity and Retirement Account or PERA, the SSS Flexi Fund for overseas Filipino workers, SSS PESO Fund for all SSS members, and Pag-IBIG MP2.
In this article, I will compare two of these government-backed investment instruments: Pag-IBIG MP2 and SSS funds (both Flexi and PESO funds).
If you’ve read my post What Retirement Looks Like for the Regular Filipino Professional which is an in-depth dive on how government-mandated pensions with SSS and GSIS would look like, you’ll realize how dangerous it is not to stow away additional money to prepare for our golden years.
I hope that this article will help you decide to finally invest for retirement (if you haven’t done it yet) and/or invest your money wisely by choosing the better option.
Before we proceed to the comparisons, let’s review each instrument first in case you’re not that familiar with them yet.
What is Pag-IBIG MP2?
Pag-IBIG MP2 is a voluntary savings program that allows Pag-IBIG members to contribute and get their money back in 5 years. To be qualified to invest in MP2, you need to be or have been, a Pag-IBIG 1 member first.
- You need to be an active Pag-IBIG 1 member first. Pag-IBIG 1 is the membership that is automatically deducted from your monthly salary, if you’re an employee; or
- You’re a former Pag-IBIG member or pensioner with at least 24 months contribution before retirement.
Basically, if you qualify, Pag-IBIG MP2 will allow you to invest at least Php500 every month for 5 years. There is no limit on the allowable maximum contribution.
Your money will earn dividends every year for 5 years. You can then withdraw your principal and all the dividends earned upon maturity, tax-free.
What is SSS Flexi Fund?
SSS Flexi Fund is one of the two SSS provident funds which allow members to contribute for their retirement on top of their regular contributions.
What separates the Flexi Fund from the PESO Fund is that the Flexi Fund is solely for SSS members who are OFWs or are permanent residents abroad.
You are eligible to contribute to SSS Flexi Fund if:
- You’re an active SSS member
- An OFW/permanent resident abroad
- Not over 60 years old
The SSS Flexi Fund invests in 91-day treasury bills and SSS short-term placement (they do not make clear what this is). All interests are tax-free but the entire fund is subject to 1% annual management fees.
What is SSS PESO Fund?
The SSS Peso Fund is another voluntary provident fund that allows ALL SSS members (both in the Philippines and abroad) to contribute additional funds for retirement on top of the regular member contributions.
To be eligible to invest in the PESO Fund, you have to be:
- An active member below 55 years old and
- Has not yet filed any final claim with SSS
The Peso Fund invests in 5-year government treasury bonds and 91-day treasury bills. Similar to Pag-IBIG MP2 and SSS Flexi Fund, the PESO Fund is tax-free and guaranteed by the Philippine government.
However, unlike the other 2 instruments, PESO Fund investors are only allowed to invest a maximum of Php100,000 annually .
The SSS PESO Fund has a convoluted design that I will not get into in this post. But to summarize its allocation plan, only 65% of your PESO Fund contribution will go to the retirement basket, which is invested in 5-year government treasury bonds. The rest are divided into medical (25%) and general purpose (10%) baskets.
Comparing Pag-IBIG MP2 and SSS Funds
I am comparing these instruments as investments. I am not including in these assessments other benefits that you may get, like, for example, higher loanable amount, etc.
1. Risks and Returns
Most of the time, when people ask if investing in SSS funds or MP2 is risky, they’re thinking about the possibility of losing their money.
But there are also other kinds of risk that we should assess when deciding between MP2 and SSS funds. For example, inflation, which I will explore later in this section.
One of the most important claims of both Pag-IBIG and SSS is that they are both backed by the Philippine government. According to their respective enabling laws:
- SSS Law of 2018, Section 21 – Government Guarantee
- Pag-IBIG Law of 2009, Section 20 – Government Guarantee
I’m not yet clear whether or not these sections of the laws guarantee that the government will be responsible for people’s investments in excess of their mandated contributions. Will the government really be responsible for at least, the principal investments? It’s clear that benefits will still be covered, but how about the extra investments?
How will the government guarantee look like, in practice?
I’m not a government lawyer nor an official from either of these agencies so I can’t really say for sure. If you or anybody you know can shed light into this matter, me and my lovely Katie Scarlett Needs Money readers would highly appreciate a more definitive answer.
I think clarification on this matter is important because the new law now allows SSS fund managers more leeway for diversification (Section 26 – Investment of Reserve Fund), and *implied* higher risk-taking.
For instance, it now allows higher allocation to foreign and domestic mutual funds and foreign currency denominated investments (among others. For the complete list, read the law linked above.) which are riskier than the current investments on t-bills, t-bonds, and corporate bonds. So there is a possibility in the future that value of SSS funds can dip.
And knowing how regular people are, many investors would probably cash in or withdraw their money, even if they incur loses because they’re afraid of losing more money.
As to Pag-IBIG, remember that time when it was involved in a scam with Globe Asiatique costing members 7 billion pesos?
I remember that so well because at that time, I was a huge Preview Magazine fan and one of the executives of Globe Asiatique was always gracing the magazine’s covers together with her socialite friends. The audacity and shamelessness of it all!
I’ve no idea what happened to the money and how it affected people’s investments then, although Pag-IBIG has since set safeguards against housing investment scams in 2014. So I hope Pag-IBIG doesn’t fall into another scam again.
So far, both MP2 and SSS funds have posted positive growth and dividend distributions year after year because both invest in conservative investment vehicles that guarantee returns, even if in the case of SSS, the returns are relatively low. Also, neither Pag-IBIG nor SSS have been involved in scams in the years they have been operating their respective voluntary provident funds.
Still, thinking about alternative scenarios is a great thought experiment.
Risks and Returns of SSS funds
Let’s go to the two SSS funds and assess the risks.
The majority of the money of each of the SSS funds are invested in Philippine government debt instruments, which means that it is virtually risk-free. Or however risk-free you think it is to invest on the Philippine government.
But then again, as I’ve been saying all along, if the Philippine government loses its ability to pay its debt obligations, we may have bigger immediate problems than the lost value of our investments (I will try writing about how to mitigate this in future posts. I have so many ideas!).
So in terms of losing your money, the risk is small. But I think the bigger risk in investing on SSS funds is losing the value of your money over time.
Unlike Pag-IBIG MP2 that shows how to compute your dividend earnings, SSS does not reveal how it calculates the annual incentive benefit (AIB) you can receive from the Flexi Fund and the growth of the PESO Fund. Therefore, we’ll make approximations based on the interest rates on t-bills and t-bonds.
SSS Flexi Fund started distributing AIBs in 2012, and these are credited to the member’s accounts. I think SSS is more transparent (only relative to the PESO Fund) about reflecting the annual incentives for the Flexi Fund because members can already withdraw their money without penalty after 1 year.
On the other hand, the PESO Fund does not have regular information about distributions of its members’ earnings.
Since both the Flexi Fund and PESO Fund do not release information about how to compute their earnings, I will base the information below on the interest rates published by the Bangko Sentral ng Pilipinas (BSP).
If you look at the interest rate of 91-day t-bills and 5-year t-bonds published by the BSP website, and compare it to the country’s inflation rate below, you will notice that interest rates are barely enough to cover inflation in most years.
SSS FLEXI FUND*
SSS PESO FUND**
Yes, by around 1%
Yes, by around .5%
Yes, by around 2.1% to 2.5%
*Note: SSS Flexi Fund is invested in 91-day t-bills and SSS short-term placement (if I need to guess, I’m pretty sure this is a savings account) but the table only reflects the interest for t-bills.
** Note 2: SSS PESO Fund’s allocation is 65% for retirement fund, which they put in 5-year t-bonds. The other 35% earn even less. But for simplicity’s sake, I’m using the figure for 5-year t-bonds.
More than half the time, the SSS Funds were not able to beat inflation.
Buuuut…. the table above does not even factor in the 1% annual management fees charged by both the Flexi Fund and the PESO Fund.
So in the long run, your money will be eaten up by inflation and management fees.
Yes, in absolute terms, it will grow because you will keep adding into the funds. But the growth from its investments will not be enough to cover both inflation and the annual management fees.
For these alone, I will not invest in either of the SSS Funds.
Risks and Returns of Pag-IBIG MP2
According to the Pag-IBIG official website, MP2’s fund is invested 70% in housing finance and the rest is invested in government securities and corporate bonds, as stipulated in their Charter.
(Efforts to find a copy of this Charter has been unsuccessful so far. If anybody can point me where I can get a copy of the MP2 Charter, please message me!)
Unlike the SSS funds, the risk of your MP2 investments lies in the Philippine residential property market and the ability of borrowers to pay.
In the unlikely event that you’re unfamiliar with Pag-IBIG, its main business is providing housing loans to Filipinos at (supposedly) lower interest rates and less fuss compared to getting loans from banks.
In the past, most of the borrowers were those who bought low-cost housing. But in recent years, the maximum borrowing limit has been increased from Php 3 million to Php 6 million.
So those who are looking to buy higher-value residences (like condominium units, townhouses, etc.) are increasingly looking at Pag-IBIG as an alternative to banks.
Good news is, based on Pag-IBIG’s 2018 annual report (the latest available), the number of housing loans have been consistently growing. In fact, since 2016, growth had been at the double digits territory.
Yes, by 6.13%
Yes, by 5.21%
Yes, by 2.31%
If you look at the table above describing MP2’s annual dividend rate vis-a-vis inflation, you will see that in the almost 10 years of its operation, MP2 has always beaten inflation.
That means not only is your money able to retain its purchasing power, it’s also actually growing.
Both Pag-IBIG and SSS are, by law, exempt from taxes. The exemption include benefit payments to members.
Any taxes assessed to either Pag-IBIG or SSS are null and void.
3. Management Fees
As I keep on harping all over this post, the SSS funds both charge 1% annual management fees.
For investing your money in low-growth t-bills and t-bonds, SSS charges investors 1% of the total fund value.
I can’t wrap my head around how crazy that is. The audacity is making me laugh!
You have to remember that there are equity index funds who charge lower annual management fees than SSS. First Metro ETF (FMETF), the index equity fund with the lowest fees, only charge .50%.
For MP2, Section 21 of the Pag-IBIG Law sets the limit for administration costs at 2%. But there’s no way to verify this so far. MP2’s lack of transparency in this regard is largely ignored because if its high dividend payments.
Between the two, Pag-IBIG MP2 is much more flexible in terms of customizing based on needs.
Most Pag-IBIG MP2 investors prefer to leave their dividends invested in the fund and withdraw everything – all the dividends that have compounded, together with the entire principal – after 5 years.
However, this is not the only option for you. There are ways to hack Pag-IBIG MP2 so that it will fit your needs better and can serve as your retirement investment.
Instead of just withdrawing your MP2 investments and then putting it on a savings account while waiting for retirement, you can do an MP2 rollover.
An MP2 Rollover is where after your first five years of investing, you withdraw your principal and dividends and then reinvest everything into another MP2 account. Then after the second 5-year period is up, you do it again, and again, until you retire.
You have no such flexibility for SSS funds. SSS Flexi Fund can be withdrawn without penalty after 1 year, which is a better deal that what you get with SSS PESO Fund.
SSS PESO Fund will only allow investors to withdraw from the medical and general-purpose baskets, which together only make up 35% of your allocation. And this is only possible after 5 years.
So which is better investment?
Based on the above, I think we can make a clear assessment of which investment is better. It’s clearly Pag-IBIG MP2.
When it comes to choosing between SSS funds or MP2, I don’t buy what others say that “it depends on your goal”. I don’t know what your specific goal is, but I’m 99.9% sure that it’s not to have less money than when you started.
SSS Flexi Fund
SSS PESO Fund
Regularly beats Inflation
91-day treasury bills
SSS “short-term placements”
5-year treasury bonds – 65%
354-days t-bills – 35%
Housing financing – 70%
Government and corporate bonds
1% of total fund value
1% of total fund value
Minimum holding period without penalty
Can only withdraw from 35% of the fund after 5 years.
Customizability / flexibility
No. Only 1 way to invest.
No. Only 1 way to invest.
Yes. Can be customized based on your needs.
I don’t care how convenient SSS makes it to invest in their funds. It’s a hard pass for me if they will continue charging 1% annual managements fees while consistently earning way less than the inflation rate. Thanks but no thanks.
In their brochures, SSS funds compare themselves to savings account, which they obviously outperform. They also point out that interest from savings account are taxed. Fair enough. But banks don’t charge 1% annual management fees against the entire deposit amount.
So over all, I think that MP2 outperforms and outclasses SSS funds in every way. I recommend that if you need to choose between the two, go with Pag-IBIG MP2.
Problem with both - lack of transparency
One thing that both Pag-IBIG and SSS suck at: transparency.
There are no reports dedicated solely on the funds they manage. How do we know that Pag-IBIG and SSS are doing what they’re saying they’re doing unless they issue official reports that investors can access and review?
Don’t you think investors are entitled to these information? After all, regular people contributed billions of pesos to these funds.
We can only hope and trust that SSS and Pag-IBIG are doing what they promised to do, *cross their fingers and hope to die* on their brochures. It’s a great disservice that the rightful owners of the funds do not have access to easy-to-understand (but not dumbed-down) information about their investments.
Is it just me, but it looks like they want our money but can’t be bothered to let us know where they put it. If you think we won’t be able to understand these hard financial reports, educate us instead of ignoring us. We need to know where our money are at! Show us instead of just telling us.
This kind of opacity is very unfair to investors, especially when we read news such as this report by Commission on Audit (COA) flagging illegal wage increases of Pag-IBIG employees in 2018.
Although you can access SSS annual reports from 2008 to 2018 and Pag-IBIG’s reports from 2007 to 2019 on their respective websites, it’s hard to find information dedicated to the funds alone. Most of the information available in the reports do not desegregate information from the main SSS and Pag-IBIG funds, so it’s hard to know for sure what’s going on.
I hope this changes soon. We deserve to know what’s going on with our money.
I hope that this comparative guide is helpful to you. I expressed some very strong opinions on this post because I like to always spill the hot tea, henny. Please let me know your thoughts, reactions, opinions by writing them on the comments.