Is Reg­u­la­tion 28 lim­it­ing the growth of my RA?

Finweek English Edition - - MONEY - BY SCHALK LOUW

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.

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