What Is Regulation 28?
In learning about investments or in discussion with your financial adviser, you have probably come across references to “Regulation 28”, or “Reg 28” as it is often shortened to. Here we delve into the regulation’s requirements, to which investments it applies, and the rationale behind it.
To give it its full title, Regulation 28 under the Pension Funds Act is one of about 40 regulations that give practical effect to the Act. Section 36 of the Act gives the Minister of Finance the power to issue regulations that, among other things, “limit the amount which and the extent to which a fund may invest in particular assets or categories of assets”.
To which investments does it apply?
The Act applies to retirement funds, which is a wider set than you may realise, embracing:
• Occupational pension funds;
• Occupational provident funds;
• Preservation funds (pension and provident);
• Retirement annuities (RAs); and
• In-fund life and living annuities
The Act does not apply to:
• Discretionary investments;
• Tax-free savings accounts;
• Endowment policies; and
• Out-of-fund life and living annuities
The distinction between in-fund and out-of-fund annuities that provide an income in retirement is important. On retirement you can choose to retain your savings within your fund and make use of the fund’s own annuity options or you can transfer your savings out of the fund and buy an annuity on the retail market. The former is subject to the Pension Funds Act, the latter is not.
What are the Reg 28 investment limits?
Regulation 28 places a fiduciary duty on retirement fund trustees to invest prudently and in the best interests of fund members, to perform due diligence on investments and providers, and to consider environmental, social and governmental (ESG) factors in the fund’s investment strategy. Here we focus on the limits it imposes on asset types, offshore exposure, and exposure to any single issuer or entity. The limits, as amended in 2022, may be summarised as follows:
• Cash: no limit – the fund can be 100% invested in cash instruments.
• Bonds and other debt instruments: 100% in SA government bonds, 75% in corporate or foreign-government instruments.
• Equities: 75% in company shares, with a maximum of 10% of the portfolio in the shares of unlisted (private) companies.
• Property: 25% of the portfolio can be in shares or units in property investment companies, real estate investment trusts (Reits) or property-focused collective investments.
• Private equity funds: 15%
• Commodities, such as gold: 10%
• Hedge funds: 10%
• Investment in the business of a participating employer: 5% or, under certain conditions, 10%.
• Other assets: 2.5%
• Cryptocurrencies: 0% – retirement funds are prohibited from investing in crypto.
• Offshore investments across asset classes: 45%
• Investment in any single entity or product: this ranges from 5% to 25% depending on asset type and size of issuer.
Why the limits?
The two limits most pertinent to retirement fund investors are those on equities (75%) and offshore assets (45%). Some investment experts have criticised these limits as being too restrictive on investment growth.
The regulation provides the rationale: funds must weigh reward against risk. The fund’s fiduciary duty “supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk-adjusted returns [for its members] … Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets.”
In a blog, “Regulation 28 and your investments”, written in 2022, shortly after Regulation 28 was amended to increase the offshore limit, Pieter Hugo, Chief Client and Distribution Officer at M&G Investments, said the equity and offshore limits aim to protect a wide spread of investors in both bull and bear equity markets.
“South African shares can and do take large knocks in the shorter term, and the required thresholds have certainly provided some value protection for individuals nearing retirement age. Global equities also experience significant volatility, so spreading funds across borders and asset classes is a responsible investment strategy and does provide good downside protection for your savings,” Hugo said.
Most balanced funds, which are multi-asset funds with a high equity component, are Regulation 28 compliant, which means they are suitable for RAs. While you may give up a little of the potential growth of a pure equity fund, you diversify your investment and lower your exposure to risk.
SOURCES:
https://www.glacierinsights.co.za/blog/articles/regulation-28-amendments
https://www.mandg.co.za/insights/articles/regulation-28-and-your-investments
