Amendments to Regulation 28

By Dean Kietzmann, Engagement Consultant, Adept Advisory

Regulation 28 of the Pension Funds Act, No 24 of 1956 (“Regulation 28”) sets out the guiding principles and stipulates the maximum exposure retirement funds (and member accounts) may have to different asset categories and issuers.

The current version of Regulation 28 has been in force since July 2011 and has provided for the efficient management of retirement fund assets in several ways.

The alignment of the foreign limit to that stipulated by Exchange Control has meant that as Exchange Controls have been relaxed, that the associated limit in Regulation 28 has been allowed to move automatically without requiring any change to Regulation 28.

Section 3(j) also expressly allows for limits contained within Regulation 28 to be exceeded for up to 12 months where such excess has been caused by involuntary actions such as market value movements, or corporate actions, and not as a result of discretionary trading by the fund or a fund’s asset managers.

This 12-month period is reasonable as funds (and fund members) should not be penalized for short-term volatility.

In July 2022, National Treasury announced amendments to Regulation 28 which come into effect on 3 January 2023.

Compliance Certificates

One significant deviation from the current version of Regulation 28 is the removal of Section 8(b). Section 8(b) permits certain exemptions and exclusions of Regulation 28 compliant assets when applying limits.

In particular, the aforementioned Section 8(b) of Regulation 28 (in the case of investments in a collective investment scheme) where a retirement fund obtains compliance certificates issued by a collective investment scheme manager, and the auditor of the scheme, or (in respect of linked policies issued by long-term insurers) obtained compliance certificates from the long-term insurer and auditor of the long- term insurer, confirming compliance with the limits of Regulation 28, these assets may be excluded when determining compliance of the aggregate fund with the limits of Regulation 28.

With this provision now removed the onus to perform Regulation 28 compliance on all fund assets shifts to each financial services provider. This is particularly pronounced for those multi-managers who may hold several underlying Regulation 28 compliant portfolios as part of a broader Regulation 28 compliant portfolio, or for retirement funds where members may hold different funds. Such funds, after 3 January 2023, will no longer be permitted to exclude assets specified within Section 8(b) of the current Regulation 28.

This creates a number of practical issues for these types of funds, as 3rd party fund data is highly unlikely to be available on a daily basis, and even if it was, would need to be in a standardized format that could be consumed quickly and easily so as to confirm the fund’s aggregate compliance with Regulation 28. The industry is understandably trying to get to grips with the implications of the deletion of Section 8(b) and how that aligns with the pragmatic nature of Regulation 28.

Infrastructure

A second change to Regulation 28 is the inclusion of a 45% limit on “Infrastructure” investments. Infrastructure is defined as “any asset that has or operates with a primary objective of developing, constructing and/or maintaining physical assets and technology structures and systems for the provision of utilities, services or facilities for the economy, businesses or the public.”

This final definition is a significant deviation from the initial drafts where infrastructure was defined to be public projects that form part of the government’s national infrastructure plan.

The change and widening of the definition may yet though prove unhelpful to the retirement fund industry. The final definition requires a higher degree of interpretation relative to the initial definition, which may lead to disagreements between industry participants, particularly if retirement funds make use of more than one asset manager for their portfolio(s). Furthermore, instruments that were not previously intended to be included as infrastructure per the original definition, may now find themselves included under the final definition. Depending on the interpretations taken, the 45% limit yet prove a hindrance rather than an aid.

Trustees of retirement funds will therefore need to ensure that they are suitable adept and knowledgeable to classify and evaluate infrastructure investments within funds.

It has also been interesting to note that some corners of the market have celebrated the addition of the 45% infrastructure limit – as some of the astute members of the retirement funds industry have pointed out, infrastructure investments are not prohibited under the current version of Regulation 28, and the new 45% limit is in essence decreasing the permissible investment limit.

Crypto Assets

One final amendment to Regulation 28 is the explicit prohibition on direct investment in crypto assets. Some may point to the historical volatility of such assets as rendering them unsuitable for retirement funds, the regulation regarding the crypto asset sector in South Africa still being in its infancy presents a stronger argument for excluding such assets, at least for now.

In summary, while the number of amendments may seem nominally small, the ramifications of removing the clause regarding compliance certificates and introduction of a wider definition on infrastructure will be far-reaching. Trustees, Asset Consultants, and Asset Managers best have their wits about them and ensure they are suitably ready for these changes come 3 January 2023.