Regulation 28: The new rules

The revised Regulation 28 is considered rigorous, flexible and fair, attempting to promote transparency, but also allowing for innovative financial strategies and instruments where appropriate.

The Pension Funds Act, No 24 of 1956, empowers the Minister of Finance to make regulations limiting the amount and the extent to which a pension fund may invest in particular assets. Regulation 28 under the Act prescribes maxima for various types of investment that may be made by a retirement fund and was recently amended with effect from 1 July 2011.

Asset limits

In terms of Regulation 28, a fund must only hold assets and categories of assets referred to in the regulations and must comply with the limits set out in the regulation. Involuntary breaches that fall beyond the control of the Board, for example breaches resulting from market movements, are provided for.

In making investment decisions, a retirement fund must be guided by what is best for the fund and its members. Asset limits imposed should not prevent a fund from achieving its optimal investment allocation. Where funds begin to meet the limits and think it prudent to exceed them, the Board should engage the Registrar on a possible exemption.

Retirement products should be compliant at fund level, but also at member level to provide for individual member protection. Exceptions are made for certain existing individual contractual arrangements, to include retirement annuity, pension preservation and provident preservation funds that are in place before 1 April 2011 – these products will be allowed to remain outside of Regulation 28 limits until such time that any material contractual provisions related to that arrangement are changed.

Look-through

The look-through principle provides that a fund cannot use an asset structure to circumvent the asset limits, and must “look-through” the linking structure to disclose the underlying assets. An exception is made for private equity funds and hedge funds, where these vehicles themselves are seen in terms of Regulation 28 as the “final” asset.

To alleviate extensive disclosure requirements, a de minimis rule is applied. In terms of this rule, if an asset comprises less than 5% of the aggregate fair value of the assets of the fund, the fund need only disclose the categories of underlying assets making up the investment, and not each underlying asset.

Borrowing

Regulation 28 does not allow funds to borrow for the purposes of investing. A retirement fund should be allowed to borrow when it runs into liquidity issues and needs cash to distribute to members leaving the fund. Even then, this borrowing should be limited in value, time constrained, and stay away from exploitative and/or inappropriate loan covenants.

Exclusions and exemptions

Certain investments need not be included in the calculation of the percentage limits. Investments may be excluded if those investments in itself comply with the Regulation. Collective investment schemes, linked insurance policies, and guaranteed long-term insurance policies are excluded on this basis. Funds may apply to the Registrar for exemption from certain provisions of the Regulation for a certain time and with regards to certain limits.