Jan 2007 Financial News

New pension fund guidelines coming

Jan 16, 2007

Cabinet is expected to approve in five weeks time new guidelines regulating the extent of investments pension funds are allowed to make in the stock market.

A draft of the new regulations was recently completed by the Central Bank and is being studied by Minister in the Ministry of Finance Conrad Enill. He told the Guardian that he will present the document to Cabinet within two weeks. However, he said that because it is a technical issue it may have to be referred to the Cabinet’s Finance and General Purposes committee. As a result, it is likely that approval will take an additional three weeks.

The law currently restricts pension funds to investing no more than 50 per cent of their total assets in equities, a limit that was widely ignored during the stock market bull run of the last several years. However, in 2004 the Central Bank took over responsibility for regulating insurance companies and pension funds and moved to enforce the limit. A survey by the bank discovered that 42 out of 204 active pension plans had exceeded the limit and had an average of 58 percent of their assets invested in stocks. Those efforts were blamed for a decline in the market in the last two years.

In an address to the Caribbean Investor conference hosted by Business Insight on December 1, 2006, Central Bank Governor Ewart Williams said the proposed solution which seemed to have the greatest support would require pension fund administrators to define a funding threshold of 150 per cent of pension liabilities to which the 50 per cent equity limit would be applicable. He said “All plans with a surplus of less than 50 per cent of pension liabilities will remain subject to the equity limit of 50 per cent. Plans with a funding ratio in excess of 50 per cent will be allowed to invest in equities beyond the 50 per cent limit. Put another way, trustees will be able to make additional equity investments with any surplus in excess of 50 per cent of pension liabilities (up to a maximum level, to be determined).”

However, Williams told the Guardian that under the proposed new rules, pension funds wishing to make use of this facility will have to have a written investment policy prepared in accordance with the bank’s guidelines on Prudent Person Approach to Investment and Lending issued in May 2005 and submit quarterly reports to the bank. According to reports, none of the funds currently have written investment policies because these are not required by the law at present.

The plan will also require pension funds to submit an estimate of their actuarial liabilities every year whereas such valuations are now done once every three years. Williams acknowledged that this will be a major hurdle since actuarial valuations are expensive exercises. However, he said he will meet with the actuaries in the next few weeks to seek their blessings on the plan.

Williams said these interim arrangements are only expected to be in force for 18 months until new pension legislation can be finalised and put into effect.

Although he said he has no “fundamental difficulty” with the proposal, Enill said he is considering it as part of a wider look at the whole issue of trading on the stock exchange. He said the stock market is supposed to be about the buying and selling of shares but some financial institutions buy and “park” stocks so that the mechanism does not work. He said that they put only a small percentage of their holdings up for sale. Therefore, he said, increasing the ability of these institutions to buy more stock will not solve the problem. He added that the real issue is how to get companies to shift from debt financing to equity financing.

Verne Bernett
Page 17
The Trinidad Guardian
http://www.guardian.co.tt/business2.html
Tuesday, January 16, 2007.