Government is to tighten up and modernise prudential regulations that reduce the investment risk on your retirement savings.
Known as the Regulation 28 guidelines in terms of the Pension Funds Act, the measures limit the amounts that can be invested in particular asset classes and financial instruments. This ensures a proper spread of risk across asset classes and significantly reduces exposure to high-risk assets.
The regulations also prevent employers from plundering retirement funds. No more than five percent of a fund's assets may be invested in an employer (or 10 percent if permission is granted by the Registrar of Pension Funds). These limits remain.
The National Treasury has published a draft revised Regulation 28 in terms of the Pension Funds Act. The Treasury is asking for public input before April 16. Comment should be emailed to [email protected]
The main proposals are:
- Where a retirement fund member is given investment choice, the underlying investments in the member's portfolio must meet the requirements of Regulation 28. The old regulations did not take account of segregated individual portfolios and merely required the total portfolio of a fund, including a retirement annuity fund, to meet the regulation requirements.
- Retirement annuity funds that invest through a policy of assurance issued by a life assurance company will no longer be exempt from Regulation 28 limits.
- A look-through principle is to be applied to multi-layered investments, such as collective investment schemes and hedge funds, to prevent the masking of underlying exposures that would defeat the regulation's asset limits, particularly on derivatives and foreign assets.
- Assets in liquid form (mainly cash) and bonds will need to be credit rated, with three investment-grade credit rating bands to be applied. The credit ratings will have to be undertaken by "recognised" credit rating agencies, which will have to be accredited by the Registrar of Pension Funds. Funds are limited to investing certain maximum amounts with each bond issuer in each credit rating category.
For example, in the top credit-rated local band no more than 30 percent (foreign: 15 percent) of instruments held in the category may come from a single agency, while on the lowest band the limit is 20 percent (foreign: 10 percent).
- The 75-percent limit on investments in equities remains, but collective investment scheme prudential principles have been introduced. Retirement funds will be limited to investing a maximum of 15 percent of their assets in the shares of a company with a market capitalisation greater than R20 billion, or 10 percent in the shares of a company with a market capitalisation of less than R20 billion.
- The existing regulations do not provide for funds to invest in more modern investment instruments such as derivatives. The use of derivative instruments, under strict provisions and conditions, will allow fund managers to manage their portfolios efficiently and protect the value of the fund by hedging against investments it holds.
The Treasury says in an explanatory memorandum that the intention to relax regulations is not to allow for more risky investment but "to allow for more efficient and effective portfolio management and proper disclosure of investment vehicles" while "guarding against abusive practices like using derivatives to gear the portfolio".
Gearing (borrowing to invest) to multiply returns with the risk of multiplying losses will be banned. Any borrowing done by a retirement fund is strictly limited in terms and amounts to bridging loans to fund benefit payments.
- Foreign investments, which are currently limited to an automatic maximum of 15 percent of fund assets, with a 20-percent maximum being allowed on successful application to the Registrar of Pension Funds, will be brought into line with exchange control regulations. Funds will be permitted to invest 20 percent offshore and a further five percent in African assets.
- Special account is to be taken for the first time of money market and bond equivalent "Islamic liquidity management financial instruments" issued by the banks for the benefit of sharia-compliant retirement products. These products avoid investing in interest-paying instruments. The Treasury says that while an Islamic pension fund could still comply with the existing Regulation 28 by spreading investments across non-interest generating investments, the principle of diversifying investments to limit risk was reduced, possibly prejudicing members.