Investors saving towards retirement, or anyone with a retirement annuity, will have seen and heard references to “Regulation 28.” This regulation is part of the Pension Funds Act. Its purpose is to protect individuals’ retirement savings through responsible fund management. These regulations aim to protect investors from poorly – or worse, recklessly – managed retirement fund portfolios.

 

Regulation 28 sets asset exposure limits and establishes investment principles. There have been changes to Regulation 28 since its introduction. The most recent being an upward change in the offshore investment limits, both in Africa (up from 5% to 10% limit) and the rest of the world (up to 30% from 25%).

 

Floris Slabbert, Director at Ecsponent Financial Services, a wholly-owned subsidiary of Ecsponent Limited, says Regulation 28 directly affects and shapes retirement investments. He says that it is vital for a fund member or investor to understand how their fund manager makes decisions and portfolio weightings.

 

What are some of the rules and limits?

The most important consequence of Regulation 28 is the limitations it places on managers’ allocation of retirement investments to certain asset classes. By defining so-called acceptable asset classes and limiting the percentage of investments in each asset, it becomes easier to diversify funds and find a balance between risk and reward.

 

Following a recent change, some of the basic underlying limits imposed on Regulation 28-compliant retirement investments are a maximum allocation of:

  • 75% in equities,
  • 25% in property either local or international,
  • 30% in foreign investments excluding Africa, and
  • 10% in Africa, not counting South Africa.

 

Pros and cons of Regulation 28

“Regulation 28 is meant to protect your retirement savings, but it is not immune from criticism. A qualified and experienced financial advisor will be able to walk you through the regulation and how a fund strategy aims to optimise your investments, no matter where you are in your working life,” says Slabbert.

 

The biggest criticism of these regulations has been that instead of protecting members, it forces government policy onto private investors. This, argue the critics, places the burden of instilling a savings culture, transformation and a host of other structural reforms on the shoulders of individuals. “The argument here is that a fund manager should have the best interest of their client at heart and not have the burden of pursuing government’s policy,” explains Slabbert.

 

“Another common criticism relates to the 75% limit imposed on equities. However, the point of the regulation is not to simply move money from one vehicle to another, its aim is to spread risk and exposure,” says Slabbert.

 

“South African equity markets do however experience short-term volatility. Hence a prudent set of rules and limits aimed at protecting the long-term integrity and returns on retirement investments is a potential safety net for millions of average members who do not understand market complexities. On the other hand, a young bullish investor may feel restricted and frustrated at the rules. Likewise, some risk is always necessary to mitigate inflation risk. Nevertheless, Regulation 28 is in place and retirement savings have to happen within its ambit.”

 

“The recent increase in exposure limits to global and African markets also won’t see an immediate change in portfolios. Managers now have greater flexibility and more options, but they still need to make judicious investment decisions against the principles of Regulation 28,” explains Slabbert.

 

Financial prudence and regulation

Until earlier this year, the Financial Services Board (FSB) was a single “super-regulator” in South Africa. With the implementation of the “Twin Peaks” model, on 1 April 2018, the Financial Sector Conduct Authority (FCSA) and its sister organisation the Prudential Authority, replaced the FSB.

 

Critics have long pointed out that market conduct and prudential regulation required two different approaches. Countries such as Australia, New Zealand, the UK and Netherlands have all moved successfully to the Twin Peaks model, and never looked back.

 

“What the average investor cares about comes down to two simple things. He or she wants their hard-earned money to be treated responsibly and ethically, and they want to extract the best value possible over the course of their investment life,” says Slabbert.

 

“Regulation 28, the entire Pension Funds Act, the FCSA and the Prudential Authority are all a necessary and real regulatory presence, and smart fund managers and financial advisers will communicate to investors the implications of these regulatory institutions and rules, and what recourse and rights both fund managers and private investors have.”

 

Slabbert said: “When it comes to working within the guidelines and regulations in South Africa, retirement fund managers need to have the skills, industry experience and know-how to make ongoing, smart decisions.”

 

It is important to note that the asset allocation limits for collective investment schemes are set separately through the Association for Savings and Investment South Africa (ASISA) fund classification standard.  South African portfolios – whether multi-asset or equity funds – must have at least 70% of their assets invested in South Africa, with a maximum of 5% in the rest of Africa and 25% in the rest of the world.

 

“This does create some conflict as many retirement products, particularly retirement annuities, make use of Regulation 28 compliant unit trusts. It therefore makes sense for these funds to have the same asset allocation allowance as pension funds” Slabbert adds.

 

But, as with all types of legislation and regulation, these things are fluid and evolve over time. Regulations are only as good as the industry’s leadership and accountability. With South Africa’s renewed commitment to structural reforms, investors have a sense that the long-term picture is certainly looking more positive.

 

“Reading about something in the news and understanding how it fundamentally affects the allocation of your own hard-earned money are two different things. Ecsponent, for example, has recorded impressive growth in some very trying conditions because our principles are based on sound financial intelligence and a sharp understanding of the markets and contexts where we operate.”