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Regulation 28, 29, 30: The nth Amendment

16 November 2021 Gareth Stokes

Local retirement fund members are breathing a collective sigh of relief as prescribed asset sabre-rattling is dropped in favour of a more sensible, voluntary infrastructure investment policy. National Treasury is spearheading changes to Regulation 28 of the Pension Funds Act to encourage allocators of capital to invest more in domestic infrastructure assets.

A machine-gun salvo of retirement regulation

The latest regulatory intervention started with the publication of draft amendments to Regulation 28, in February this year. Stakeholders in the asset management and pension funds industry were quick to respond, with no fewer than 39 detailed submissions made during the ensuing public comment window. “Most submissions welcomed the proposed amendment of the regulation; but several comments drew attention to shortcomings in the ‘infrastructure’ definition it contained,” writes National Treasury, to accompany the launch of the second draft of the amendments. Financial advisers and planners will be quite familiar with the definition wrangle, given how long it has taken to finalise adviser categorisation through the Retail Distribution Review (RDR) process. 

Quibbling over definitions should be expected because the devil, as it is so frequently said, is in the detail. Treasury noted that the first amendments offered a narrow definition of infrastructure as “installations, structures, facilities, systems, services or processes relating to the matters specified in Schedule 1 of the Infrastructure Development Act of 2014”. In addition, infrastructure had to be part of the national infrastructure plan, which explicitly excluded private sector infrastructure and infrastructure in the rest of Africa or abroad! It is always interesting to watch the regulatory to-and-fro take place, starting with government policymakers’ often extreme positions, until finally legislated under a ‘compromise’ wording. 

Over the past few years the industry has been subject to widespread rumblings about prescribed assets being foisted on pension funds. Prescribed assets did not make it into regulation; but the infrastructure proposal contained in the first draft of amendments to Regulation 28 were certainly prescriptive insofar what infrastructure investments would be allowed. After much kicking-and-screaming, the second amendment replaced the narrow “invest in government projects only” with a softer definition, allowing allocators of capital a much wider infrastructure investment universe. 

The consumers’ lament

PS: It remains fascinating to this writer how legislation aimed at protecting consumers, in this case retirement savers, is conjured up first to meet government interests, and second to placate the giant financial services providers that invest and manage these assets. The individual retiree is third in line, if at all. As an aside, we are particularly concerned about the applause and celebrations from business and government officials following announcements of COP26-inspired international funding to South Africa’s energy sector. One hopes our enthusiasm to play a part in reducing global carbon emissions does not leave taxpayers with countless one-sided, long-term, dollar-based finance and loan structures, which capital will inevitably be misspent. But I digress. 

Redefining infrastructure investments

Treasury has used the second draft of regulation 28 amendments to redefine infrastructure. In the retirement funds context, the word now refers to “any asset class that entails physical assets constructed for the provision of social and economic utilities or benefit for the public”. And that, dear reader, is very broad indeed. According to Treasury, the revised definition ties in with United Nations’ Principles for Responsible Investment (UNPRI) as well as being better-aligned to emerging impact and sustainable investing trends. “The social aspect of the definition will accommodate impact investing by retirement funds,” they write. 

The 39 submissions to the first draft offered divergent views with respect to the infrastructure limits as well as raising concerns over the requirement to assess projects based on the regulator’s proposed ‘infrastructure columns’. National Treasury writes: “The revised draft removes the infrastructure columns; however, the overall investment in infrastructure across all asset categories will be kept at 45% in respect of domestic exposure with an additional limit of 10% in respect of the rest of Africa”. The second draft also eased the infrastructure investment reporting requirements; retirement funds will only (sic) have to include their top 20 infrastructure investments in the annual report. 

Bad news for those crypto asset bulls!

The regulators have clearly been keeping a close eye on developments in the crypto asset universe. They will be aware that individual investors are pouring savings into these assets and bringing pressure to bear on asset managers to do the same. Their appetite is driven by ridiculous price action from assets in this space. In fact, in the weeks since the second amendments, Bitcoin and Ethereum have been on a bit of a tear… Bitcoin charged past R1 million per coin as it set a new all-time high at around US$69000. It is only a matter of time, we reckon, before retirement fund trustees join individual fund members in yearning for crypto class returns. 

National Treasury has therefore introduced a new clause in Regulation 28, to restrict retirement funds’ investment in crypto assets “because they are seen to be of very high risk”. This restriction is reportedly in line with the Intergovernmental Fintech Working Group (IFWG) policy proposal of not allowing collective investment schemes and pension funds to have exposure to crypto assets. And the IFWG policy is likely to remain in place for some time. 

Incidentally, we support the regulator’s view on keeping risky assets out of the retirement funding realm. The industry now has until 16 November to make comments on the updated definition, applicability of the proposed infrastructure limit across all asset classes, reporting requirements and proposed limits in the format provided on the National Treasury website. 

Writer’s thoughts:
There have been ongoing arguments about the appropriateness of the asset class limits imposed on retirement fund savers by Regulation 28. Many financial commentators take issue with the relatively small exposures allowed offshore, with some even arguing that the 70% equity cap is off the mark. Is Regulation 28 something that keeps you and your clients awake at night; or do you simply implement a discretionary investment workaround? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts


Added by hannelie, 24 Feb 2022
It shoots young people in the foot. Long term should be able to invest more aggressive.
It is taking the punch out of the investment.
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Added by CHARL NAUDE, 15 Feb 2022
Added by Gareth Stokes, 17 Nov 2021
Thanks for the comment @Craig. I am sure many share this view... But what about someone who as 10 years to go, or 15, or 20? It is so difficult to compare scenarios given the tax & return implications of RA versus discretionary!
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Added by Craig A, 17 Nov 2021
I cannot advise a young investor to invest in a RA! If they have 35 years to go until retirement, they are going to lose millions by investing in money markets. All this regulation to help the client, but there are unintended consequences.
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