Revised Regulation 28 reporting challenges not insurmountable
The first period of reporting on the revised Regulation 28 of the Pension Funds Act has now passed and retirement funds and service providers have proved equal to the challenges, according to Wilma Mokupo, Head of Pensions – Prudential at the Financial Se
Mokupo says the revisions to ‘Reg 28’ were broadly welcomed by the industry because a purely rules-based approach was no longer adequate. “New financial instruments and more sophisticated markets also needed factoring in to modernise the Regulation through the inclusion of principles,” says Mokupo.
A full 99% of submissions have been successfully loaded on the FSB’s system, which one can largely attribute to the feedback received from the FSB workshops held last year, which proved instructive in terms of ensuring consisting application through prescribed reporting.
Highlighting some of the challenges
“Regulation 28 has been changed quite substantially in terms of continuous compliance, the look-through principle and member-level compliance, for example,” says Mokupo.
Adri Messerschmidt, who is a senior policy adviser at ASISA, says that Regulation 28 is no longer generally a table with limits applicable to instrument types. The principles introduced by the new regulation must be taken into account first and foremost. Substance over form is what counts in categorising investments according to economic exposure.
She says due diligence has to be done on an investment beforehand, as well as an assessment of the changing risk profile of an instrument – if you have an instrument that will give you exposure to equity, you add it to equity allocation, but if it also created a credit or counter-party risk that should also be taken into account.
“It could be that there are differences of interpretation of the same thing within different companies, depending on how they view the relevant risks,” she says.
Breaches
Non-discretionary breaches are those beyond one’s control – such as corporate actions, market movements, or a change in the nature of an instrument, for example. Discretionary breaches come about according to decisions that investment managers make and they are avoidable. The latter must obviously be fixed as soon as possible, for example out-of-mandate trades, wrong switches and so on.
By contrast, non-discretionary breaches must be fixed but do not have to be fixed immediately (within 12 months). Rectification of non-discretionary breaches should be done in a cost-effective, efficient manner, says Mokupo.
Member-level compliance
Compliance with Regulation 28 is required at member level – this is obviously a significant change as it was previously only applicable at fund level, which is possibly why member-level compliance has proved to be one of the sticking points. Systems have generally not been aligned to accommodate this.
But Mokupo feels that funds have shown commitment in implementing the right reporting and this is clear in the revision of investment policy statements (IPs), administration agreements and alignment of mandates with the revised Regulation 28.
Trustees, who are ultimately responsible for fund investment decisions and governance, are also actively engaging the asset managers on reporting requirements in terms of revised service level agreements.
“At fund level, compliance hasn’t been a particularly big adjustment, except for immovable property, because Treasury has had some liquidity concerns. But member-level compliance has proved a bit trickier,” she says. “The other challenges have occurred with regard to funds that offer individuals investment choice.” Trustees need to ensure that the fund offerings to members take into account the nine principles contained in Regulation 28.
Concerns about delays in receiving sufficient information with regard to foreign assets in their portfolios have been noted and Mokupo says she would like to see these funds being able to fully disclose their assets on the look-through basis in subsequent quarterly submissions.
“Out-of-mandate trades have been flagged,” she says.
Editor’s thoughts:
How have asset managers experienced the implementation of Reg 28? What current concerns or issues are still proving problematic? Comment below or email [email protected].
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