Is Regulation 28 limiting the growth of my RA?
We find ourselves in the middle of February, a time to which many refer as ‘ RA season’. Even today, whenever I mention the words retirement annuity (RA) to my clients, an overwhelming majority believe that this is still a very ‘dangerous’ product. Why? Well first off, the costs involved in the old-generation RAs weren’t cheap. These products have certainly become a lot more attractive cost-wise in the last 10 to 15 years. The regulation concerning RAs was yet another factor that caused some concern.
In 2001, when the rand weakened to a level of over R12/$1, f inancial advisers and investors could have, for example, simply allocated 100% of an RA’s funds to foreign investments, only to find that your retirement capital lost 50% of its value five years down the line. This meant that the National Treasurer, the driving force behind the regulation changes in RAs, decided to change these regulations after 31 December 2011 to such an extent that RAs, too, would have to comply with Regulation 28 of the Pension Funds Act.
The Act itself is certainly nothing new to investors as it has been in operation in our pension funds since 1962.
Portfolio Manager at PSG Wealth Si mply put , Reg u l at i on 2 8 was implemented to reduce risk by forcing investors, to a degree, to diversify their RAs. Regulation 28 effectively outlines the maximum percentage limits that may be used in the different asset classes (see table).
This caused a major debate because it limited RA investors to a maximum of 75% exposure to shares, among other reasons. The reason for the debate in this case was simply that shares outperformed the other asset classes over the long term. When looking at the local stock market over the last 25 years, you will see that local shares provided their investors with CPI+8% returns, despite three major corrections during this period.
Regulation 28 was implemented in RAs to benefit the wide spectrum of investors in good, as well as bad, market environments.
When we take a closer look at this statement by applying it to the last 25 years, I think everyone will agree that shares did well during this time. If you invested 75% in the FTSE/JSE All Share Index and 25% in the FTSE All World Index 25 years ago, you would have earned 14.9% in annual returns. If you invested within the Regulation 28 boundaries and had to adjust your weights to 50% local shares, 25% foreign shares and 25% SA Bonds, your annual returns would have been 14.5% – still good growth and with the added benefit of much less volatility (risk). It is precisely when the markets become tricky that Regulation 28 should offer you extra investment protection.
The key to managing a successful RA doesn’t lie in packing it away until you need it for retirement. Start your RA with greater exposure to shares while you are young and manage these weights more actively as you move closer to your retirement date.