Changes to Regulation 28 of the Pension Fund Act, and particularly the rise within the proportion of a retirement fund that asset managers can make investments offshore, have been mentioned since 2019, when National Treasury first talked about that it was time to replace laws. These adjustments to laws had been gazetted this week.
Read: Treasury listens to trade on Regulation 28
Treasury reiterated that the particular subsections of the regulation, generally known as Reg 28, goals to guard retirement fund members by imposing limits on investments in a specific asset or particularly asset lessons to forestall extreme focus danger.
In brief, the laws pressure pension funds to scale back danger to retirement funds by diversifying investments.
Although Reg 28 enforced diversification, asset managers have complained that sure of the bounds restricted prudent fund administration ideas, particularly the earlier requirement {that a} retirement fund can make investments a most of 30% of its belongings offshore, in addition to one other 10% in African international locations.
Offshore requirement
The offshore requirement is without doubt one of the most important adjustments of Reg 28.
The 30% worldwide and 10% African allowance have been changed with a single offshore restrict of 45%.
Read: Pension funds could now make investments as much as 45% of their capital offshore
In addition, pension funds shall be allowed to extend their investments in infrastructure initiatives as the brand new laws recognise infrastructure as a separate asset class.
Limits for the share a fund could put money into non-public fairness funds and hedge funds have additionally been elevated.
“The regulations widen the scope of potential investments for retirement funds, but continues to leave the final decision on any investment to the trustees of each fund, who determine the investment policy for any fund,” says National Treasury in a brief explanatory word to the gazetted adjustments.
Implementation
The impact of accelerating the restrict for offshore funding from 30% to 45% has led to hypothesis that billions price of funding funds can go away SA. However, the newest Alexforbes Manager Watch survey of retirement funds discovered that the majority funding managers had been already on or very near the earlier offshore allocation of 30%, whereas some have truly elevated their publicity to home equities, as native corporations had been seen to supply higher worth than worldwide shares.
The Alexforbes Manager Watch, analysing investments on the finish of 2021, discovered that “most managers nonetheless stay near the bounds of 30% for funding in worldwide belongings allowed by Regulation 28 of the Pension Funds Act.
Of the 36 managers, solely 8 had been decrease than the restrict of 30% by greater than 5%.
“Nedgroup [Balanced] was the lowest at 18.9% followed by ClucasGray on 19.3%. Oasis had the highest exposure to international assets at 38.5%, which we infer includes some exposure to Africa equities,” says Alexforbes.
It famous that whereas most managers stored their home asset allocation comparatively steady, some elevated their allocation to home equities over their positions in December 2020.
Referring to Finance Minister Enoch Godongwana’s announcement within the February 2022 funds speech of the rise within the overseas funding allowance for pension funds, Alexforbes mentioned: “It will be interesting to monitor how asset managers respond to this decision. Future iterations of the Alexforbes Manager Watch will include such detail.”
Glacier by Sanlam welcomed the rise in offshore investments from an efficient 40% (30% world and 10% Africa) to 45%, with no distinction made between Africa and the remainder of the world.
“This is welcome news as it allows retirement fund members to further diversify their investments. However, a credible argument can be made that it hasn’t gone far enough,” says Sanlam.
“Savers are pressured to have 55% publicity to home belongings inside their retirement portfolios when South Africa’s contribution to world GDP is a mere 0.6%.
“This 55% exposure also needs to be considered within the context of the typical saver’s entire exposure to South Africa which may be north of 90% when one considers that their jobs are based here, as well as their primary residences. They also face a dwindling number of investment opportunities as a result of companies delisting from JSE,” provides Sanlam.
It additionally famous that it’s “irresponsible” to give attention to the preservation of capital in rand phrases, because the rand continues to say no towards different currencies.
The most up-to-date decline within the worth of the rand to above R16 per greenback – seemingly heading to R17 – proves this argument.
Infrastructure
Treasury says that the ultimate amendments printed within the Government Gazette intention to explicitly allow and reference longer-term infrastructure funding by retirement funds, by rising the utmost limits for investments in infrastructure.
“To this extent, the amendments introduce a definition of infrastructure and sets a limit of 45% for exposure in infrastructure investment.”
“To further facilitate the investment in infrastructure and economic development, the limit between hedge funds and private equity has been split. There will now be a separate and higher allocation to private equity assets, which is 15% (increased from 10%),” it notes.
Read: Proposed adjustments to Reg 28 provide alternatives to revive the economic system
“A limit of 25% has been imposed, across all asset classes, to limit exposure of retirement funds to any one entity (company),” says Treasury.
Enabling laws
Futuregrowth Asset Management says that whereas the adjustments in limits had been largely pushed by National Treasury’s intention to create a extra enabling laws for retirement funds to put money into infrastructure and associated belongings, the actual fact is that funds may beforehand put money into these alternatives off the again of Reg 28’s unlisted asset allowance of 35%.
“In the context of infrastructure, Futuregrowth supports the drive to make retirement funds more aware of alpha-adding opportunities in this space – and thus the real role that the retirement fund industry can play in assisting economic growth through such investments, while earning risk-adjusted returns,” it says.
“We are, however, still of the view that the final definition of infrastructure as now defined within Regulation 28 remains broad and, as a result, could have unintended consequences,” it notes.
Read:
Just altering Regulation 28 isn’t sufficient
How Regulation 28 modification adjustments the sport
“Listed devices [both equity and debt] could possibly be thought of as infrastructure [MTN, Vodacom, Netcare, etc], which is particularly problematic provided that National Treasury has positioned an general 45% cap on infrastructure investments.
“It is therefore likely that many retirement funds will bump into these limits very quickly without the release of any guiding principles from National Treasury on what is considered infrastructure,” provides Futuregrowth.
It additionally notes that SA has an enormous shortfall to fund the event of infrastructure over the subsequent 20 years, in that round R1.8 trillion shall be wanted. Pension funds can play a significant position on this regard as many haven’t made a lot funding on this sector as a consequence of lack of expertise and/or concern.
“We congratulate those pension funds that have already made meaningful investments in infrastructure and related investments, and we know that they are willing to invest further,” says Futuregrowth.
Cryptocurrencies
National Treasury remains to be cautious of cryptocurrencies.
“Retirement funds will continue to be prohibited from investing in crypto assets,” it says.
“The excessive volatility and unregulated nature of crypto assets require a prudent approach, as recent market volatility in such assets demonstrates,” it provides.
Read:
SA’s plan to control cryptocurrency
Sarb urges engagement on blockchain
Government is placing crypto underneath the magnifying glass
Headlines of failing cryptocurrencies and buying and selling platforms, in addition to buying and selling scams and lacking thousands and thousands, recommend that this ban is prone to stay in place for a very long time.
Treasury reiterated that retirement funds have a fiduciary obligation to behave in the perfect curiosity of its members whose advantages rely on the accountable administration of fund belongings.
“This obligation helps the adoption of a accountable funding method to deploying capital into markets that can earn satisfactory danger adjusted returns appropriate for the fund’s particular member profile, liquidity wants and liabilities.
“Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment,” it says.
