The government is determined to keep restraints on how South Africa's R1.5 trillion in retirement savings is invested to protect you against poverty in retirement.
Its determination is evident in the release of a new set of documents this week based on industry comment received to its initial proposed changes made in February this year to Regulation 28 of the Pension Funds Act, which governs how your retirement savings may be invested.
The main thrust of the regulations is to limit how much may be invested in different assets.
In providing comment, the financial services industry sought to ease some of the restraints to give it far more discretion in how to invest your money.
In a statement attached to the second draft proposals, the government says its broad aims are:
- Protecting vulnerable pensioners.
The National Treasury says unsophisticated pension fund members and trustees may be vulnerable to exploitation by |private asset managers, with asset managers looking for loopholes to bypass requirements and limits.
- Closing loopholes.
A number of loopholes exist, which mask the actual underlying asset allocation through |successive layers of diverse investment vehicles and instruments.
- Reducing systemic risk.
Systemic risk, which is the risk that the collapse of a particular investment will become contagious, may originate more easily in relatively unregulated areas such as unlisted derivatives, private equity and hedge funds. Treasury says these markets are characterised by low transparency and low disclosure, relatively high leverage, concentration risk and short-selling. Pension funds should, to some extent, be insulated from these risks.
Treasury points out that it is wary of an industry with a track record of seeking to side-step the law, rather than supporting both its letter and spirit.
In the main, Treasury has stuck to the main principles on which it based its first set of proposals.
Treasury says while "not all views provided by the industry have been agreed with and therefore adopted, all responses were comprehensively read and evaluated against the policy maker's concerns".
The second draft of Regulation 28 has again been released for public comment, but this time only issues of a technical nature will be considered, although submissions relating to broader principles are not disallowed.
Comments should be submitted by email ( [email protected]) or fax (012 315 5206) before January 28, 2011. The draft regulations and supporting documents can be viewed on www.treasury.gov.za
Next week, Treasury, with the Financial Services Board (FSB), will host public forums for stakeholder engagement in Pretoria and Cape Town to ensure that feedback given to Treasury is relevant and mindful of what the regulation is trying to achieve and why.
Treasury says that many retirement funds may find themselves outside the limits and restrictions in the new Regulation 28 but says it and the FSB will make appropriate transition arrangements so that the funds and their members are protected as far as possible.
Treasury says that by appropriately regulating retirement fund investments, the government can protect the elderly against poverty and provide mechanisms for unlocking savings to stimulate economic growth, thereby creating a virtuous cycle ensuring that pensioners are provided for in retirement.
PROPOSED CHANGES TO REGULATION 28
The main objective of Regulation 28 is to limit how much a retirement fund may invest in any asset class and the underlying assets, and to regulate the investment vehicles used to make investments.
The aim is to reduce risk for retirment fund members. The existing regulations are out-dated and do not deal effectively with issues ranging from the use of derivative products to investments in commodities.
The review has resulted in the financial services industry making a number of recommendations, some of which have been accepted and some rejected by the National Treasury. The main issues include:
- Limits on assets.
The asset categories, which are subject to different limit levels, are: cash, equities, debt (bonds), property, commodities (such as |gold) and alternative investments (such as hedge funds and private equity funds). Lower limits are set for how much a retirement fund may invest in unlisted or unregulated instruments.
Treasury has agreed to ease limits on various investments where these have been exceeded because of market movements and other passive breaches, such as corporate actions affecting values.
The industry wants looser limits on |things such as equities (currently 75 percent of fund assets) and foreign investments (20 percent), but generally Treasury is holding its ground. Treasury has upped the limits for alternative investments from 2.5 percent to 15 percent and done things such as expand investments in gold from the current limit to Krugerrands.
- Retention of rules-based regulation.
Some respondents want the government to move to principles-based regulation where broader behaviour is controlled rather than a list of specific activities.
Treasury says the rules-based approach to pension fund regulation is considered appropriate at least for the short to medium term, with some broad principles implemented through retirement fund investment policy statements.
Treasury has proposed that the principles, to be incorporated in Regulation 28, should include the training of fund trustees, who should promote broad-based economic empowerment, ensure that a fund's assets are appropriate for its liabilities, ensure reasonable due diligence before making an investment decision, using various tools such as rating agencies, and consider factors that may materially affect the sustainable long-term performance of any investment, including those of an environmental, social and governance character.
- Greater transparency.
Treasury wants retirement fund trustees to be able to see all the way down when investments are cascaded through different products - to prevent asset managers camouflaging |high-cost, high-risk products that may defeat the objectives of Regulation 28. The industry says this may be "time-consuming, expensive and impractical".
Take for example, an investment in a hedge fund through a debenture or long-term insurance policy. The hedge fund asset must be reported and comply with stated limits and derivative requirements, but there is currently no need to declare the holdings of the hedge fund itself.
- Stopping abuse.
The current exemption from Regulation 28 of all retirement fund assets invested through life assurance policies is to be made |more restrictive.
The only automatic exemption will be for life assurance policies where members receive a full guarantee on their accumulated savings. These policies will be subject to the Long-Term Insurance Act.
Assets held through a market-linked insurance policy or collective investment scheme may be excluded from the regulations if an auditor issues a statement |to a fund saying the assets comply with the regulations.
- Restrictions at member level.
Currently, with funds that allow broad investment choice, restrictions on how much may be invested in any particular asset class or underlying asset are often applied at fund level and not on individual members.
Treasury wants the regulation applied at member level, but the industry says this may be costly and impractical.
Treasury says the requirement is essential to investor protection. It says that currently members may be overly exposed to a high-risk asset, and they may be prevented from investing in appropriate assets because the asset allocation for the fund is already filled due to other members having taken up the full allocation.
AMENDMENTS ARE CERTAIN TO BENEFIT YOU, SAYS ASISA
The Association for Savings & Investment SA (Asisa) has welcomed the release of the second draft of amendments to Regulation 28 of the Pension Funds Act.
The latest draft regulations for the appropriate investment of retirement fund savings are, at first glance, a set of nicely tied together principles and rules, Leon Campher, the chief executive of Asisa, says.
Campher says the draft amendments to Regulation 28 are the product of a very open and consultative process followed by the National Treasury and the Financial Services Board.
He says Asisa will need some time to study the second draft. Once we have worked through the second draft and have discussed it with the Asisa Working Group appointed to deal with Regulation 28, we will be able to comment in detail.
Asisa actively engaged with both on the amendments to Regulation 28 and we are confident that the final outcome will be to the benefit of consumers, Campher says.