LISPs simplify compliance with new retirement fund regulations
By providing access to a range of different unit trust funds on one platform, most LISPs offer investors more than sufficient choice to comply with the new requirements of Regulation 28 of the Pension Funds Act.
LISPs offer a range of funds that can include both solution and building block funds. When choosing solution funds investors usually select unit trusts based on their personal objectives and risk profile, but the asset allocation is delegated to the unit trust investment manager. Many of these funds are already fully Regulation 28 compliant. Building block funds typically invest in a single asset class such as equities, bonds, property or cash. Investors can use a combination of these as ‘building blocks’ to create their own portfolios.
“Whether you choose to simplify compliance with the legislation by investing in an asset allocation fund that is already Regulation 28 compliant, or build your own compliant portfolio, most LISPs offer you all the choice you need,” says Christo Terblanche, head of product development at Allan Gray.
Regulation 28 sets out the maximum exposures that retirement funds can have to various asset classes. Under the previous version of the regulation, compliance was required at retirement fund level only. “This meant that, provided a fund’s total holdings complied with the regulation, the underlying individual investors could invest such that their individual asset class exposures exceeded the regulatory limits. So, for example, if they wanted to invest their entire retirement savings into an equity fund they could,” says Terblanche.
But under the new regulations, this is no longer the case, and investors now have to comply with the asset class limits of Regulation 28 at an individual level with effect from 1st April 2011.
All new retirement annuity (RA), pension preservation fund, or provident preservation fund accounts have to comply with the regulation. But if you have an account that predates April 1st, you don’t need to comply – provided you didn’t transact after that date, and don’t transact in the future. “Your investments can stay as they are, even if they don’t comply,” says Terblanche.
Nor do you have to change your existing debit orders into your RA account. But the minute you do, you’ll need to ensure your selection of funds – and your entire account - complies with the new regulation. This includes setting up a debit order if you didn’t have one, or increasing or decreasing the amount of your existing debit order. The exception is your annual escalation – this can continue as is, without triggering the need to make your account compliant. Nor will you have to make your account compliant if you cancel an existing debit order.
But if you want to switch out of your existing underlying unit trust investments into other unit trusts, or make any additional contributions, you’ll have to make your account compliant. However, an existing phase-in arrangement, whereby you’re phasing an investment into a fund over a period of time, isn’t considered a transaction and so won’t trigger the need to comply.
If you transacted after April 1st, and your account doesn’t comply with Regulation 28, you’ll need to switch into a combination of unit trusts that is compliant. And if you transacted and have an existing debit order, that too will need to change in order to comply with the regulation. This must be done by the 31st of December this year.
“Many investors make additional contributions to their accounts at the end of the tax year in February to maximise the tax benefits of their RA. Under the new regulations, this is also regarded as a transaction and will trigger the need to re-balance your selection of underlying funds so that your portfolio complies.”
There are, however, some options. If, for example, you have an existing account fully invested in equities, and you want to keep it that way, but want to make additional contributions to your account from time to time, you can open a new account. This will have to comply with Regulation 28, and all future contributions will need to be invested into a combination of unit trusts that is compliant.
