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The nuts and bolts of Regulation 28

13 April 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa’s retirement industry is governed by the Pension Funds Act, No 24 of 1956. In terms of Section 36(1) (bB) of this Act the Minister of Finance has sweeping powers to make regulations to limit the amount and extent to which pension funds may in

It is easy to lose sight of the good work done by the regulators in carving out guidelines for those managing our retirement funds. Treasury observes: “The aim of retirement fund investment regulation is to ensure that the savings South Africans contributed towards their retirement is invested in a prudent manner that not only protects the retirement fund member, but is channelled in ways that achieve economic development and growth.” This is not an opinion piece, but the author couldn’t help a “double take” when reading the final part of the sentence. The call by the regulator to apply our funds to “achieve economic development and growth” seems disconnect from the individual’s return and financial stability in retirement objectives.

Fine tuning the legislation for 2010

National Treasury embarked on a “revamp” of Regulation 28 when it issued a first draft of the proposed revision on 17 February 2010. After deliberating the comments in response to the first draft Treasury issued a second draft on 2 December. The final regulation was published by way of the Government Gazette on 4 March 2011 to include a number of important technical refinements and “last minute” issues. The issues addressed in the final regulation – as written in the abovementioned memorandum – include:

· The final regulation better recognises and promotes the responsibility of funds and boards of trustees toward sound retirement fund investments;

· The final regulation expands the allowance for debt issued by listed or regulated entities; and

· The final regulation better enables investments into unlisted and alternative assets to support economic development that may be funded through such capital raising channels.

Regulation 28 is effective from 1 July 2011. The time lapse between publication in the Government Gazette and implementation should give funds ample opportunity to rebalance within the new flexible limits. “Those funds that do not expect to meet the compliance deadline should approach the Registrar before 31 May 2011,” says Treasury. The Regulator will grant exemption provided funds adequately demonstrate their path toward compliance.

What this means for fund managers

The changes brought about by the new regulation are discussed under a number of asset class headings. Today’s article will take a look at some (but not all) of the provisions listed under the headings cash, equities, immovable property, commodities and other assets and alternative investments:

Cash: Money market investments were given a reprieve and incorporated back into the cash asset class after initially being stripped out in the December 2010 draft. Treasury says the category now comprises “instruments collectively used for liquidity management.” National Treasury warned, however, that further work was required to ensure “maturity transformation” in money market funds. The regulation of money market funds would be further improved to better protect investors, especially retirement funds.

Equities: Funds can invest a total of 75% of their assets in equities, which include only preference shares and ordinary shares in companies. The maximum investment per issuer is set at 5% for small companies, 10% for medium companies and 15% for large companies. The limit for unlisted equities is set at 15%.

Immovable Property: “An unlisted property may have significantly different risk management implications and risk profile from investing through a listed vehicle property,” begins Treasury. Their comments conjure up the dozens of Sharemax stories doing the rounds in the financial media today… To prevent too much pension fund money landing in such schemes the regulation stipulates a maximum 25% “cap” for listed property investments and 15% for unlisted investments. Listed property is further limited by sub-category, allowing for a maximum of 5% in small properties, 10% in medium properties and 15% in large properties.

Commodities: Under the new regulation a pension fund can invest in listed commodities up to a maximum of 10%. A fund can either apply the full allocation to gold, or across a number of commodity classes up to a maximum 5% per commodity.

Other assets and alternative investments: This asset class has hogged the lion’s share of Regulation 28 media coverage of late. Described by fund managers as “long overdue” the legislation now clearly defines private equity and hedge funds. It also prevents large institutions from “hiding” these investments in so-called linking structures such as debentures issued against private equity fund cash flows... The total allocation to hedge funds, private equity investments and any other investment not mentioned in the regulation is 15%. However – funds may not invest more than 10% in hedge funds or private equity – and the upper cap for “other” investments is 2.5%. The maximum allocation to a single hedge fund (or private equity investment) is further limited to 2.5% with a 5% maximum for fund of hedge funds (or fund of private equity funds).

Complete government gazette available from the FSB

Readers who enjoy trawling through pension fund legislation can download the Regulation 28 Government Gazette from the regulator’s website,

Editor’s thoughts: Hedge fund managers were extremely chuffed with the recognition Regulation 28 afforded them. And the financial services industry seems to agree the definition of private equity and hedge funds was long overdue. The big question is how much pension fund capital should be tucked away in such assets. Treasury has decided to allow up to 15%, with conditions. I would love to hear your thoughts on whether the increase in allowances for hedge fund and private equity investments are good for the retirement fund space? Add your comment below, or send it to

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