Major weaknesses of $$ system

The Stock Mar-ket: Low Market Confidence: Low market confidence is a major problem that is limiting the ability of the capital market in Trinidad and Tobago to mobilise and allocate funds in an efficient manner. Investors do not have access to an abundance of quality information to make investment decisions. The low confidence stems from the lack of transparency in dealings, weaknesses in mechanisms for take-over bids and in the pricing of securities.

Information Architecture: The information architecture of the capital market is poorly developed. The disclosure, reporting and dissemination of information are extremely inadequate for investors to make appropriate and timely investment decisions. Some of the gaps relate to:
1. the absence of appropriate structured disclosure standards for continuous reporting by public companies;
2. inadequate reporting and dissemination of post-trade transactions from respective capital markets;
3. the absence of any commercial vendors of information that could assist in the production and dissemination of information; and
4. inadequate coverage and reporting of announcements of public companies and daily trading activities from major capital markets.

Low Market Liquid-ity:  Liquidity in the stock market in Trinidad and Tobago is generally quite low because of the following factors:
1. the inability of the TTSE to attract new listings due, in part to:
(i) the reluctance of family-owned businesses to disclosure information;
(ii) a bias in the fiscal system that discriminates against equity financing (A Staking 2001)*; and
(iii) lack of confidence in the TTSE.
2. the high concentration of stockholdings in the hands of institutional investors;
3. the inefficient clearance and settlement systems, which have contributed to the high “round tripping,” roughly a minimum of 6 weeks to a maximum of 12 weeks, for the listing of a stock on the TTSE;
4. the off-the-floor trading in listed securities of the TTSE, which has resulted in the fragmentation of the order flow of the market; and
5. the absence of an enforceable take-over code, which allows companies to buy a large number of shares in companies without making a formal take-over bid.

Bond market: Lack of Appropriate Pricing Method for Bonds:  A fundamental problem inhibiting the growth and development of the bond market in Trinidad and Tobago is the issue surrounding the pricing of bonds. The absence of appropriate yield curves has limited efficient pricing of bonds in Trinidad and Tobago. Lack of Credit Rating Agencies: In Trinidad and Tobago, there exist no independent credit rating agencies providing credit rating services. Market players (borrowers, as well as investors) do not generally seek the services of international credit rating agencies. Of some note is the fact that issuers of bonds in Trinidad and Tobago are not required to have compulsory credit ratings or capital adequacy requirements. Further-more, there is no minimum credit rating requirement for the issuance of bonds.

Major Weaknesses of the Pension System: Limited geographical diversification of pension instruments: The Insurance Act of Trinidad and Tobago has prescribed certain limits for the investment of pension funds registered in Trinidad and Tobago. A minimum of 80 percent of the assets of pension funds must be invested in Trinidad and Tobago. This legal stipulation or quantitative restriction on the geographical investment opportunities has led to a significant concentration of pension fund investments in the local economy. The legal restriction laws limited the ability of pension funds to mitigate local market risks through international diversification.

Limited Investment Opp-ortunities: The range of investment opportunities available to pension funds in the domestic market is relatively limited in relation to the quantum of assets available for investment. Investments are confined in large measure to equities, real estate, fixed deposits and mortgages. Some of these investment vehicles are also subject to stipulated limits imposed by the Insurance Act. For example, the Insurance Act of 1980 places limits on equities (40 percent or less of pension fund assets); real estate (20 percent or less of pension fund assets) and mortgages (no single mortgage may exceed 10 percent of the value of the fund).

Fragmented Nature of Legislation for Pension Funds: Pension funds in Trinidad and Tobago are regulated by various pieces of legislation and there does not exist any single or common legislation which applies to the various pension schemes. The Insurance Act of 1980 sets out provisions for the registration of pension funds and deals essentially with the form, structure, authorised investments and operational controls. The Trustee Act regulates the activities of the trustees while the Financial Institutions Act regulates the establishment and operations of the trust companies that manage the pension funds. The OAP and NIS are regulated by additional pieces of legislation. The fragmentation of the legislative arrangements has made it very difficult to  manage and supervise in a uniform manner both public and private pension funds.

Public Disclosure of Information re: the performance and management of pension plans: One of the major complaints made against the occupational pension system relates to the lack of timely disclosure by pension fund managers and the Supervisor of Insurance of information related to the performance of registered pension plans in Trinidad and Tobago. The reports produced by the Supervisor of Insurance lag in terms of timely disclosure by about two years, on average, which makes it impossible for the general public to assess the performance of occupational pension plans.

Lack of Appropriate Indexation: Due to the lack of appropriate indexation, there has been a substantial deterioration in the contribution base of the NIS. The current legislative framework does not provide for increases in the rate of inflation as well as in the cost of medical care. A recent IMF report on the NIS system suggests that the lack of adjustment for changes in wages or inflation would eventually erode the contribution base, placing the average pension benefit that accrues to pensioners further below the poverty line. Decline in the Contributor Base of the National Insurance Scheme: The combination of an aging population, the high rates of non-compliance and the exclusion of the self-employed from the base of contributors is expected to lead to a fall in contributions relative to payments over the next two decades. This is expected to drive up expenditures in the public sector and place additional burden on the recurrent expenditure.

Ownership of Surpluses: There has been much conflict as to whether the ownership of the surpluses should fall to the sponsor of the plan or whether it should be distributed to the members of the plan, especially when a local company was being wound up or sold to foreign interests. There are no laws in Trinidad and Tobago relating to the ownership of pension fund surpluses, although the distribution of surpluses is dealt with by the Trust Deed and the Rules of the Pension Scheme.

Weaknesses of the Mutual Fund Sector: Taxation regime:  The UTC is treated as a special case in terms of the taxation regime. Its exemption from corporation tax gives it an artificial advantage over its competitors. This is clearly a problem given its dominant position in the market.

Major weaknesses of Credit Union sector:  Slow growth in membership and share capital. The dependence on the growth of shares in shares is problematic and some credit unions have resorted to lending from reserves in order to meet demand.

Poor Asset Quality: Loans are the major assets in any institution, comprising 75 percent of total assets. The quality of this asset is affected by delinquency rates estimated to be as high as 20 percent in some instances. This situation has arisen and is compounded by the lack of reliable mechanisms for assessing credit worthiness and risks, as well as the absence of a strong supervisory authority.