Investors need to take urgent note of impending Regulation 28 changes
19 April 2011 | Investments | General | SYm|mETRY Multi-Manager
The changes, says Gräbe, are set to come into effect from 1 July this year and have not been well communicated to individuals. However, they will have an effect not only on pension funds, but also on existing retirement annuities and preservation funds. In fact, all forms of retirement savings are affected. Regulation 28 sets out strict limits that govern the investment exposure of retirement funds. *
“There are many proposed changes, but perhaps the most important that needs to be highlighted is that the restrictions on asset class investing will now be applied down to fund member level, and to private retirement savings vehicles like RA's. This means that within a company pension fund, individual members will need to ensure their contributions are invested according to the limits. Previously, they could exceed the limits as long as the fund as a whole was compliant, so certain members could, for example, have higher allocations to equity or property where they wished (as long as this was offset by other members holding lower holdings).
“On top of this,” adds Gräbe, “individuals will have to make sure their extra savings in new RA’s and preservation funds created after 1 July do comply. Previously, an investor using an RA could put his cash in whatever assets he preferred, such as 100% equities or 100% offshore, as long as the investment vehicle complied at the top level.”
Importantly, Gräbe says the industry will not expect these existing RA’s to comply with the new regulations, as long as they remain unchanged. However, should an investor opt to make even one change or transaction on an existing investment (such as altering a contribution amount, withdrawing funds or changing exposure) the fund would then also have to comply with the new limits.
“Obviously, these limits might not be ideal for a younger individual who has a long-term investment horizon and wants to take on some extra risk through higher equity exposure, or someone who believes offshore is the place to be,” he observes. “This is why we are advising investors with RA’s and other retirement savings vehicles to consult their service providers or financial advisers right away to determine the impact of the new regulations on their own investments. They may want to ‘ring fence’ their existing holdings to ensure no changes are possible, or create new non-compliant RA’s ahead of the 1 July deadline. Whatever the solution, it’s best that investors are aware of what the impact will be on their savings.”
Another important change in the Regulation 28 asset allocation limits according to Gräbe will be to raise the allowed allocations to alternative investments like hedge funds and private equity from 2.5% to 10%. “As a multi-manager, we at Symmetry have conducted extensive research on the many different hedge funds and private equity funds available in South Africa, and believe this change will be beneficial for investors. Although more education is needed for pension fund trustees around these types of investments, they can provide more diversification benefits for pension fund portfolios and their members. Where used appropriately, they can either boost returns for the same amount of risk, or help lower risk for the same return.
“These changes will also bring South Africa much more in line with the rest of the world on the treatment of these investments, although a lot of progress is still required in this area.”
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