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Regulation 28 will impact individual members too

29 April 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

From 1 July 2011 pension fund trustees, administrators and various retirement industry stakeholders will have to implement provisions as set out in the long-awaited update of the Pension Funds Act’s Regulation 28. Roland Gräbe, chief investment officer at

Regulation 28 sets out strict guidelines with respect to the asset classes a pension fund can invest in. If applied in its most basic form pension fund managers will have to limit total equity exposure to 75% of fund capital. And they can invest up to 25% in property provided the total equity plus property exposure is less than 90%... Gräbe reckons this would be an unlikely situation given the spread of assets retirement funds usually construct. Other maximum investment allowances include 5% investment in the sponsoring employer (if a listed company), 15% in a single large cap share, 10% in any single “other” stock, 20% offshore and up to 15% in hedge funds plus private equity!

Why retirement fund protections are necessary

“One of the reasons for regulating maximum levels of investment in specific asset classes is to avoid concentration risk,” says Gräbe. He referred to the widely publicised Enron collapse in the US to illustrate the point. At the time US pension fund regulation allowed funds to invest all of their capital in the sponsoring company. Employees earned their salaries from the company – and topped up their 401K retirement plans by buying shares in the same firm. Many employee retirement plans were 100% exposed to the group. And of course, when Enron went to the wall, these employees lost their income and pensions in one hit! The situation was so dire the courts ordered an amount of $321 million be set aside upon liquidation to top up the group’s pension fund – though this still left fund members deep out of pocket.

Local pensioners have suffered too… One example is the Tri-Linear Empowerment Trust, a union-based pension fund serving textile workers. These workers could collectively lose R90 million after the fund invested hugely in the failed Pinnacle Point property development faltered. A post-event assessment suggests the fund was invested outside the guidelines stipulated in the old Regulation 28! In 2003 a massive contravention of Regulation 28 caused damages in excess of R1.9 billion at the Joint Municipal Pension Fund. The fund suffered losses after the broker allegedly used fund assets to speculate on maize futures.

The new regulation strives to prevent similar situation from arising. It requires each fund to have an Investment Policy Statement and forbids them from using assets or legal structures to circumvent the legislation. “What is not allowed – and this has been done in the past – is the creation of a legal investment structure to try and circumvent the regulation,” says Gräbe. “In the past certain fund managers created debenture structures and life wrappers to try and hide the assets from a ‘look through’ assessment. Now that the ‘look through’ principle is applied it doesn’t matter what structure you put the investment in. What matters is what’s inside that structure!” Funds will also have to promote education, monitor compliance, promote BBBEE, ensure assets are appropriately matched to liabilities, perform due diligence on managers and understand the risk profile of assets invested in.

Individual savers take note – Regulation 28 applies down to member level!

A critical issue for retirement funds is that Regulation 28 now applies down to the member level. Gräbe explains: “Defined contribution funds that offer member choice are structured in such a way that each individual has his or her own savings account – and each of these accounts must now be Regulation 28 compliant!” This creates untold levels of complexity for large fund managers. Individual investors must also consider the Regulation 28 requirements for their non-employer sponsored retirement provisions held in preservation funds and retirement annuities. “Ordinary savers could be in a position where their RA’s and preservation funds are not compliant!” he says.

“It seems at this stage the Financial Services Board will allow you to remain non-compliant with Regulation 28 provided you don’t touch the affected investments,” says Gräbe. “But the moment you transact on the RA or Preservation fund that transaction will have to bring it into compliance!” As a result many savers might elect to leave existing RAs and Preservation fund structures untouched when making additional investments. These options should be discussed with your financial adviser.

Editor’s thoughts: Every regulatory intervention has positive and negative aspects to it. It seems the new Regulation 28 might force certain individual retirement fund members either to change investment track (by opening new RAs or Preservation Funds) or make radical changes to their existing investments. Are you aware of the requirements for individual member funds as legislated in Regulation 28? Add your comment below, or send it to


Added by Sanjith, 04 May 2011
This is all good intention for the member/consumer. Most trustees are not at a level to understand the implications of this change and how compliant their funds are. Again, unfortunately, they have to rely on the Insurers that administer their funds. With the deadline looming around the corner, not many insurers have been speaking to their funds or simply put do not have the capability in place to ensure at member level they are able to scrutinise the funds and report to their clients non compliancy and the action that they would need to take. Again legislation put in place without considering how it would be dealt with and monitored! Sad!
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Added by Lawrence, 29 Apr 2011
Thees are big changes and require fund trustees to be more diligent and exercise their fiduciary duties when deciding on investment vehicles to be used in investing retirement monies. Money is a sensitive matter and should be treated as such.
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