Regulation 28: What has changed?

Overview

This introductory article provides an overview of the amendments to Regulation 28 of the Pension Funds Act, which will take effect in January 2023.

Regulation 28 of the Pension Funds Act

Regulation 28, issued in terms of section 36(1)(bB) of the Pension Funds Act, protects retirement fund member savings by limiting the extent to which funds may invest in a particular asset or in particular asset classes, and prevents excessive concentration risk. This regulation (also referred to as prudential investment guidelines) stipulates the maximum exposure that a fund can have to each type of investment asset class.

Amended Regulation 28 gazetted 1 July 2022, effective 3 January 2023

National Treasury on 1 July 2022 published the final amendments to Regulation 28 of the Pension Funds Act, as published in Notice No. 2230 in Government Gazette No. 46649 of 1 July 2022. The amendments take effect on 3 January 2023 to enable regulators, retirement funds and fund managers to comply with the new regulations. The amendments to Regulation 28 have been positioned by National Treasury to encourage infrastructure investment by retirement funds.

The amendments follow two public comment periods on the proposed Regulation 28 changes during 2021. The aim of the amendment is to explicitly enable and reference longer-term infrastructure investment by retirement funds, by increasing maximum limits that funds may invest in. To this extent, the amendments introduce a definition of infrastructure, and sets a limit of 45% for investment in infrastructure investments. Regulation 28 also requires reporting by retirement funds on their top 20 infrastructure investments.

Infrastructure defined in amended Regulation 28

Regulation 28 introduces a definition for investing in infrastructure, specifically “any asset that has or operates with a primary objective of developing, constructing and/or maintaining physical assets and technology structures and systems for the provision of utilities, services or facilities for the economy, businesses, or the public.”

Limit of 25% to all asset classes

A limit of 25% has been imposed across all asset classes to limit exposure of retirement funds to any one entity (company), not just infrastructure. However, one exception to the per entity limit is debt instruments issued by, and loans to, the government and any debt or loan guaranteed by the government.

Increased allocation to private equity

To further facilitate the investment in infrastructure and economic development, the limit between hedge funds and private equity has been split in the amended Regulation 28. There is now a separate and higher allocation to private equity assets, which has been increased by 5% to 15%.

PREVIOUS REG.28 LIMIT VS NEW REG.28 LIMIT FOR INVESTING IN PRIVATE EQUITY PREVIOUS

Collective limit of private equity and hedge funds Private equity limit = 10%

NEW

Private equity limit = 15%

(INCREASED - with limit of 10% per fund of private equity funds, and a limit of 5% per private equity fund.)

Crypto assets

Retirement funds continue to be prohibited from investing in crypto assets. The excessive volatility and unregulated nature of crypto assets require a prudent approach, as recent market volatility in such assets demonstrates.

Crypto assets defined in amended Regulation 28

Regulation 28 introduces a definition for crypto assets, specifically “means a digital representation of value that is not issued by a central bank, but is capable of being traded, transferred or stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility; applies cryptographic techniques and uses distributed ledger technology.”

Housing loans

The asset allocation to housing loans granted to retirement fund members has been reduced by 30%, from 95% to 65%, in respect of new housing loans only. This is intended by National Treasury to curb the potential for abuse of the housing loan scheme offered by some retirement funds. The National Treasury in its communication on this housing loan change stated that it is mindful of the important role played by home ownership in wealth creation and in retirement and will continuously monitor this area of investment offered to fund members.

Hedge fund limit of 10% remains, only CISCA-approved hedge funds permitted

As part of National Treasury’s approach to aligning various regulatory approaches and achieving consistency, amended Regulation 28 only permits investments in Collective Investment Schemes Control Act 45 of 2002 (CISCA)-approved hedge funds. Similarly, the reporting exclusion on look-through of Collective Investment Scheme (CIS) and insurance policies has been removed to enable the regulators to collect important statistics on underlying exposures, as part of understanding and monitoring linkages in the financial system and for proactive supervision.

LOOK-THROUGH PRINCIPLES

“The look-through principle in this context could be explained as the requirement to assess and include for reporting purposes, the composition of underlying investment instruments used in a particular investment structure or investment portfolio. Regulation 28 explains the look-through principle as a rule that states an investor may not circumvent the exposure limits by ignoring the make-up of an underlying asset and must include and disclose the exposure to which the underlying assets relate.

With the amendments, the look-through principle now applies to collective investment schemes (CISs) and insurance policies, for example, in all circumstances, even if an audit certificate was issued. This addition will strengthen the understanding of the authorities around underlying exposure to enable proactive supervision.”

SOURCE: Glacier by Sanlam

Available online: https://tinyurl.com/yw93jmyx

Regulation 28 and increased foreign portfolio (offshore) limits

On 23 February 2022, following the 2022 Budget announcement by the Minister of Finance, the South African Reserve Bank (SARB) issued Exchange Control Circular No. 10/2022, indicating that the foreign investment limits have been revised upward.

Regulation28(3)(i) states that the aggregate exposure to foreign assets must not exceed the maximum allowable amount that a fund may invest in foreign assets as determined by the SARB, or such other amount as may be prescribed. Based on the SARB’s Exchange Control Circular No.10/2022, retirement funds may therefore now acquire foreign exposure up to the revised single limit of 45% in respect of foreign portfolio – or offshore – investments.

Boards of trustees and Regulation 28

While the amended Regulation 28 widens the scope of potential investments for retirement funds, it is important to note that Regulation 28 and its prudential guidelines continue to leave the final decision on any investment to the trustees of each fund, who determine the investment policy for any fund.

REFERENCES

• Understanding South African Financial Markets, Sixth Edition. (2019) Van Wyk, K., Botha, Z., Goodspeed, I.

• National Treasury Draft Amendments to Regulation 28. Available online: https://tinyurl.com/2ty8x6ak

• National Treasury, Gazetted Amendments to Regulation 28. Available online: https://tinyurl.com/3fvv8hxy

• FSCA Communication 8 of 2022, Available online: https://tinyurl.com/25kdczwb

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