Pro­posed changes to Reg­u­la­tion 28

Weekend Argus (Saturday Edition) - - GOODWINES -

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.

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