It’s been almost 3 years since the implementation of Personal Equity Retirement Account or PERA at the end of 2016. Up to this time, most Filipinos are still in the dark about what PERA means and what it can do for them in their retirement. Many of those who have heard of PERA opt to avoid putting their money in it due to a combination of lack of information regarding PERA investment instruments and confusion on how PERA fits in their financial plans.
Earlier this year, I wrote a primer on PERA and why all of us need it asap. I’m happy to say that it is one of my most popular posts and second most active in terms of reader engagement (thanks to all you *hennys* who asked questions!) Now, I’m going to slowly dive into the nitty-gritty of PERA with this guide to PERA investment instruments.
So before we proceed, please go back and read my primer to PERA first. Otherwise, you might be confused about what I’m going to say in this post.
To recap, PERA stands for Personal Equity Retirement Account. It is a scheme that allows Filipinos to voluntarily invest for their retirement. Among the benefits are: gains will not be taxed, getting an income tax credit equivalent to 5% of your annual investment, exemption of your PERA investments from insolvency or bankruptcy, among others. It’s a great way to invest for retirement slowly, especially for young workers who still have decades before they retire.
The Bangko Sentral ng Pilipinas (BSP) allows the following instruments to be PERA-qualified:
- Mutual Funds
- Annuity Contracts
- Insurance Pension Products
- Pre-need Pension Plans
- Publicly listed stocks or other securities in the Philippine Stock Exchange
- Exchange-traded bond
- Government securities and
- Other instruments that the BSP may allow after deliberation
So far, there is only a handful of UITFs that the BSP allows to be sold under the PERA scheme. As of August 2019, only two banks, Bank of the Philippines (BPI) and Banco de Oro (BDO) offer PERA-qualified UITFs. Land Bank will soon launch its own PERA UITFs, but there’s still no information on the launch date.
PERA Investment Instruments
If you are looking for an alternative PERA investment instrument, you’re out of luck. It seems that banks are focusing on UITFs at the moment and there’s no buzz on whether or not they will actually offer other investment instruments in the near future. Seeing the way that the BSP and other implementing government agencies fail to educate the public about the importance of PERA, I can’t really blame them. Why would financial institutions waste their time and resources on developing products that nobody will buy?
At this time, there are three (3) PERA-qualified money-market UITFs. BPI and BDO UITFs are already being sold. Land Bank’s will be launched soon. See the details of the respective UITFs on the table below. Please use the slider at the bottom of the table to see the information for Land Bank’s fund.
|BPI Money Market Fund||BDO PERA Short Term Fund||Land Bank PERA Money Market Fund|
|Strategy||Provide returns in excess of the return of the 91-day Philippine Treasury Bills||Capital preservation, income generation and liquidity||High liquidity and decent returns from short-term and flexible investments|
|Mgmt Fee||0.5% p.a.||0.50% p.a.||0.20% p.a|
|Other Fees||2.0840% - External Auditor Fees (Source: 28 June 2019 KIIDS)||To be updated one has access to additional KIIDS in the following months. BDO only has the latest and previous months available on their site.||Information not available but Declaration of Trust provides for fees for third parties under Article X. (Source: Declaration of Trust)|
|Launch Date||19 December 2016||27 June 2017||Launching soon|
|Underlying securities||More or less 90% of holdings are in Fixed Rate Treasury Notes – Government Debt ; 6% in Time deposits and the money market (Source: 28 June 2019 KIIDS)||More or less 80% in fixed rate government treasury bills (Source: 28 June 2019 KIIDS)||100% Special Deposits Account|
|Min Holding Period||None||30 calendar days||30 calendar days|
|Early Redemption Fee||None||0.50% of the original participation amount||25% of the net earnings of the redeemed principal but not less than Php 500|
|Initial Investment||Php 1,000||Php 1,000||Php 5,000|
|Minimum Investment||Php 1,000||Php 1,000||Php 1,000|
|Benchmark||91 Day Treasury Bills||91-Day Treasury Bills||Percentage change in Bloomberg Philippine Sovereign Bond Index Money Market or, in its absence, any relevant and industry accepted benchmark|
As you can see, out of the three money market UITFs, Land Bank’s offer is very different compared to the offers of other two banks (again, if you can’t see the Land Bank information, use the slider at the bottom of the table). Not only will Land Bank only have 0.20% in annual management fees, the underlying instrument will also be a special deposits account. Both BPI and BDO charge 0.50% in annual management fees and are invested in 91-day treasury-bills.
Now, I don’t know how the Land Bank fund will work since there is no information available yet about its special deposits account. Plus, I can’t find any information online about its prospective benchmark. But I think if for some reason you want to invest in a money market fund, Land Bank’s offering may be a great option. Given that returns on t-bills are usually low and don’t even match, let alone surpass, inflation, the .05% annual management fees PLUS other associated fees will eat up whatever little gain you will receive. Land Bank’s 0.20% fees (plus external fees) is so much more attractive.
If external fees for all money market UITFs will be around the same percentage across the three banks, I don’t see any reason why anybody would want to put their retirement money in a money market UITF. Not unless their goal is to actually have less money compared to when they started. The 2.0840% external auditor fees charged against the BPI fund is absolutely ridiculous.
Currently, there are four (4) bond PERA offerings: 2 from BPI, and 1 each from BDO and Land Bank. BPI has separate offerings for Philippine corporate bonds and Philippine government bonds. BDO’s UITF is almost completely invested in Philippine government bonds while Land Bank does not have any specific information about its ratios yet.
Please use the slider at the bottom of the table to see the rest of the information.
|BPI PERA Government Bond Fund||BPI PERA Corporate Income Fund||BDO PERA Bond Index Fund||Land Bank PERA Bond Fund|
|Strategy/Goals||Capital appreciation and income from portfolio of long-term fixed income securities issued by the government of the Philippines||Provide returns in excess of the return of the BPI Philippine Corporate Bond Index||Track the total return of the Markit iBoxx ALBI Philippines 1-5 (Domestic) Index||Generate steady stream of income through investments in a diversified portfolio of peso-denominated fixed income securities|
|Management Fee||1.00% p.a.||1.25% p.a.||1.00% p.a.||1.00% p.a|
|Other Fees||1.1428% External Auditor Fees (Source: 28 June KIIDS)||1.28% (External Auditor Fees (Source: 31 July KIIDS)||To be updated one has access to additional KIIDS in the following months. BDO only has the latest and previous months available on their site.||Information not available but Declaration of Trust provides for fees for third parties under Article X. (Source: Declaration of Trust)|
|Launch Date||19 December 2016||16 December 2016||27 June 2017||Launching soon|
|Underlying securities||95% in Philippine government bonds.||Around 94% in Philippines corporate bonds||99.97% Philippine government securities||100% fixed income securities diversified into tradable Philippine government securities, corporate bonds, and bank deposits|
|Minimum Holding Period||None||None||30 calendar days||30 calendar days|
|Early Redemption Fee||None||None||1.00% of original participation amount||25% of the net earnings of the redeemed principal but not less than Php 500|
|Initial Investment||Php 1,000||Php 1,000||Php 1,000||Php 5,000|
|Minimum Investment||Php 1,000||Php 1,000||Php 1,000||Php 1,000|
|Benchmark||BPI Philippine Government Bond Index||BPI Philippine Corporate Bond Index||Markit iBoxx ALBI Philippines 1-5 (Domestic) Index||Percentage change in the Bloomberg Government Bond Index AI (All In), or, in its absence, any relevant and industry accepted benchmark|
Three of the funds: BPI PERA Government Bond Fund, BDO PERA Bond Index Fund, and Land Bank PERA Bond Fund charge 1.00% annual management fees plus external fees. The BPI PERA Corporate Income Fund charges 1.25% annual management fee plus external fees.
Much like the money market UITFs, I don’t see any reason why anybody would want to put their retirement money in bond UITFs, especially if their retirement horizon is 20-30 years from now. The gains are too small and will be eaten up by inflation. The only reason why you would want to put a portion of your money to a bond UITF is if (1) you are around 5 years away from your retirement or (2) you’re 5 years or so away from turning 55, which is the minimum age the BSP allows withdrawal without penalty, and you want to withdraw your entire investment by then.
Both BPI and BDO offer equity UITFs. BPI’s is actively managed while BDO is an index UITF.
|BPI PERA Equity Fund||BDO PERA Equity Index Fund|
|Strategy||Long term capital growth derived from portfolio of equities by Philippine domiciled companies. Provide returns in excess of the PSEi.||Track the performance of PSEi|
|Management Fee||1.50% p.a||1.00% p.a|
|Other Fees||1.59% External Auditor Fees (Source: 28 June KIIDS)||To be updated one has access to additional KIIDS in the following months. BDO only has the latest and previous months available on their site|
|Launch Date||16 December 2016||22 December 2016|
|Underlying securities||Holdings in 27 biggest companies in the PSE||PSEi|
|Minimum Holding Period||None||30 calendar days|
|Early Redemption Fee||None||1.00% of original participation amount|
|Initial Investment||Php 1,000||Php 1,000|
|Minimum Investment||Php 1,000||Php 1,000|
|Tracking error||Undisclosed||1.44% (self reported; since inception)|
Among all the available PERA investment instruments so far, I think this is the best in terms of returns. Although I personally have my PERA account with BPI (a huge mistake on my part which I can’t wait to undo), I would choose to put my retirement money in the BDO PERA Equity Index Fund. The annual management fee is lower at 1.00% AND it tracks the Philippine Stock Exchange index (PSEi) while BPI’s UITF is actively managed.
What I just can’t understand with BDO’s PERA index UITF is why is its tracking error so high? If you’ve read my guide to Philippine Index Funds, the lower the tracking error, the better the fund is able to track its index. This is just so surprising to me because BDO has a non-PERA index UITF and it seems to be tracking the PSEi way more accurately. I just hope for the sake of its PERA investors that the managers of the BDO’s PERA index UITFs get their shit together. It’s not as if they need to think of some brilliant strategy to copy the PSEi. It can be even be automated!
Still, compared to the BPI PERA Equity Fund, BDO’s returns are still comparatively higher.
So far, there’s only 1 dollar-denominated PERA UITF and it’s yet to be launched.
|Land Bank PERA Global Fund|
|Strategy||Generate relatively higher income through investments in Dollar-denominated fixed income securities issued by the Philippine national government and by local companies|
|Management Fee||1.00% p.a.|
|Other Fees||Information not available|
|Launch Date||Launching soon|
|Early Redemption Fee||25% of the net earnings of the redeemed principal but not less than USD 10.00|
|Minimum Holding Period||30 calendar days|
|Initial Investment||USD 200.00|
|Minimum Investment||USD 100.00|
|Benchmark||JP Morgan Asia Credit Index (JACI), or in its absence, any available relevant or similar benchmark|
At first glance, this UITF is exciting because it’s a dollar-denominated instrument. Nope. It’s going to invest in US dollar-denominated bonds and fixed income securities issued by the Philippine government and local companies. So compare it to the bond UITFs I discussed above, only in dollars.
Prepare for Retirement Now
Despite the lack of options, I think all of us should be investing in a PERA account right now. I personally think the best way for young people to invest for retirement is by putting their money in a low-cost index fund.
I’ve heard of some people saying that they will wait until more financial institutions offer PERA investment instruments or until the Bureau of Internal Revenue (BIR) give the go-signal for the issuance of the income tax credit. Both concerns are valid. But, knowing how slowly the implementation of laws happen and how slowly Philippine financial institutions offer more options for PERA investment instruments or better options in general (see: extortion-level high annual management fees charged by mutual funds and UITFs), I don’t think both are going to happen in the next 5 or maybe even 10 years.
Remember how long it took for the BSP to finalize the PERA implementing guidelines? The PERA Law or Republic Act 9505 was passed in 2008 and it was only implemented at the end of 2016. That’s 8 years. Basically, people were only able to invest in PERA in 2017. If we wait until the government and the financial markets are all lined up before investing for retirement, we would lose around 10-ish more years.
To illustrate the differences in gains, I’m using this table I generated from a compounding interest calculator online. Excuse the US$ since I got this from a US site. The underlying calculations should be the same.
So say you invest the maximum amount every year, which is Php 100,000 (for those based in the Philippines; Filipinos based abroad can invest up to Php 200,000). We will assume that the PERA equity index fund of your choice has an average annual return of 10%, which is achievable for PSEi.
If you invest regularly for 30 years, your money would have grown to Php 19.839 million from your total contribution of Php 3 million. But if you invested for only 20 years (because you were waiting for the perfect time before getting in), you only get Php 6.972 million in your retirement, from your total contribution of Php 2 million. This is even worse if you were only invested for 10 years. From your total contribution of Php 1 million, you only get Php 2.012 million.
So if you’re in your 30s or 40s now, it’s not in your best interest to delay investing in PERA.
You might be thinking that this is not applicable to you since you’re still in your 20s and you have more than 40 years to invest. I know I have readers who are in their early 20s or in their teens. Well, actually, if you invest longer and leave your money to compound for 40 years, you get Php 53.211 million from your total contribution of Php 4 million. That’s so much higher than what you can expect to get from SSS (Social Security System) or GSIS (Government Service Insurance System).
Remember, in investing, time is your best friend.
How to achieve FI through PERA
For those of us who want to achieve FIRE or financial independence and early retirement, PERA is one of the most important parts of our investment portfolio. Even if we were not able to retire early due to various reasons, we can rely on PERA to help us achieve financial independence at retirement.
Using the calculations above, if we invest in a PERA index fund for 30 years, we can withdraw Php 793,571 annually at the safe withdrawal rate of 4%. If we own your home and car and if the kids have already moved out, we would have a comfortable retirement. Certainly more comfortable than those who invested late or those who didn’t invest at all.
Those who invested for 20 years will only be able to safely withdraw Php 278,919 annually. Otherwise, they risk drying up their investments and may resort to selling off assets or asking assistance from their children.
Again, despite its faults and shortcomings, I think those of us who are able should be investing in PERA and maxing it out as soon as possible.
I hope this post helped you in making your decision about investing for retirement in general and PERA in particular. If you already invest for retirement in other instruments like non-PERA index mutual funds, I would still advise you to invest a portion of it to PERA.
What do you think about investing in PERA? Please let me know in the comments.
No time to read now? Then pin me for later!