Industry officials largely welcome the update to regulations over investment practices but the move to comply comes with some challenges, as Christine Senior reports
Long-awaited changes to rules around retirement savings worth R1.1trn ($160bn) are set to take effect this month in South Africa. Regulation 28 will be updated to take account of the evolution in the investment landscape since the rules were revised in the 1990s. While the regulation is broadly welcomed as reflecting the needs of retirement funds in the 21st century, its implementation could cause some difficulty.
Regulation 28 governs the investment of retirement savings in South Africa, with the aim of ensuring they are invested in a prudent manner, through a diversified mix of assets. This should both protect pension scheme members and channel investments in ways that benefit South African economic development. Regulation 28 has been updated several times since it was first issued in 1989, but much has changed since the last revision in 1998, notably the range of investments available to trustees, and the increase in DC pensions.
Industry insiders are in general positive about the way the National Treasury has made the changes, which included wide consultation with interested parties and a process involving two drafts before the final version was announced. NT has certainly listened to industry concerns. For instance, when the first draft made no mention of principles-based regulation, feedback from the pensions industry forced the NT to reconsider, resulting in a second draft which included both rules based and for the first time principles-based.
Many of the rules on investment limits will remain much as they are now, with some clarification where necessary. The overall limit of 75% in equities remains, but with restrictions on small caps of 5%, medium caps 10% and large caps 15%. Debt limits have changed to reflect the increased importance of corporate debt as an asset class. Now pension funds can have exposure of up to 75% of bank issued debt and up to 50% in other corporate issued debt.
In broad terms the average asset allocation of South African pension funds is around 70% in equities, mostly domestic because of exchange controls, and the rest in fixed income and other assets. But it’s difficult to be precise, as pensions in South Africa are predominantly DC, so there is a range of strategies, and hence asset allocations, driven by members’ risk appetite.
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