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 The existing regulations are outdated and do not deal effectively with issues ranging from the use of derivative products to investments in commodities.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:
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. 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 longterm performance of any investment, including those of an environmental, social and governance character.
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.
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. 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 highrisk 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.