The last amendments to Regulation 28 under the Pension Funds Act were published by the National Treasury yesterday. These amendments pertain to investments in infrastructure, hedge funds, and private equity. The amendments are consistent with the adjustments that were announced by the Minister of Finance Enoch Godongwana during his speech on the Budget in February.
The distribution of assets among various retirement funds is governed by Regulation 28. It does this by putting a cap on the proportion of a fund’s total assets that can be invested in a single asset or asset class. This lowers the fund’s concentration risk, which is an excessive level of exposure to a single investment. This, in turn, safeguards the cash reserves of the fund’s members.
The South African Reserve Bank announced on February 25 modifications to the regulatory foreign investment limits for South African institutional investors through the publication of Exchange Control Circular No. 10/2022 on February 25. This circular provided details regarding these changes.
Pension schemes and Regulation 28-compliant unit trust funds were able to raise their overall offshore investment distributions to a maximum of 45 percent, up from the previous limit of 40 percent, which was 30 percent worldwide and 10 percent in Africa outside of South Africa.
According to a statement that was published by the Treasury, the amendments were the result of two rounds of community consultation in the previous year. “The goal is to consciously empower and reference longer-term infrastructure investment by retirement funds,” the Treasury Department said, adding that they plan to do this by raising the maximum limits on what funds can invest in.
The changes that were announced and released recently primarily affect investments in infrastructure, hedge funds, and private equity.
The Following Categories of Investments Are Impacted
The amendments provide a description of infrastructure and limit investment in infrastructure to no more than 45 percent of total government spending. Up until this point, neither a definition nor a particular allotment of funds has been assigned to investments in infrastructure-related projects. According to one definition, “infrastructure” refers to “any investment that has or works with the main purpose of building, constructing, and/or maintaining physical assets and technology systems and structures for the allocation of utilities, services, or amenities for the economy, companies, or the general public.”
Hedge Funds and Private Equity
The restrictions that were previously bundled together and applicable to hedge funds and private equity have been separated into their categories. The previous limit of 10 percent on distribution to private equity investments will be increased to 15 percent beginning next year. The maximum amount of capital that can be invested in hedge funds has not changed from 10 percent.
Investing in cryptocurrency assets will not be allowed for retirement funds under the current rules and regulations. Recent market uncertainty in such assets demonstrates the need for a cautious approach, according to the Treasury, which stated that “the increased uncertainty and unrestricted existence of crypto assets involve a prudent approach.”
Companies on Their Own
“A limit of 25 percent has been imposed, across all asset classes,” the Treasury Department says, “to reduce exposure of retirement funds to any one entity (company), and this limit does not just apply to infrastructure.” The only exceptions to this rule are debt instruments that were released by the government and any loans or debts that were backed by the government.
Another amendment addresses the provision of home mortgages to individuals with retirement funds, which is currently allowed as long as certain requirements are met. These conditions vary from fund to fund.
Treasury stated that the asset allocation to home loans that were given to retirement fund members would be decreased from 95 percent to 65 percent, with the change only applying to new loans. The purpose of this is to prevent members of the fund from abusing the housing loan scheme. The United Kingdom’s National Treasury is aware of the significant role that homeownership plays in the accumulation of wealth and in preparing for retirement, and it has committed to maintaining close oversight of this area of investment. The retirement and investment fund industries have, for the most part, voiced their approval of the modifications to Regulation 28, particularly the rising offshore allocation.
The head of investments at NMG Benefits, Raazia Ganie, stated that asset managers now have additional flexibility in assigning assets and that the modifications allow access to a wealth of additional options across the globe. But things will move at a more glacial pace regarding retirement funds.
“The trustee boards of retirement funds will need to ensure that the entire investment strategies of their financing concentrate on their mission of assisting their members to achieve their objectives within the new regulatory limits,” Ganie said. “This will be a challenge for the retirement fund industry.”