New investment rules for retirement funds

The third and final version of the new prudential investment regulations, which govern how your retirement savings may be invested, was published in February 2011.

Known as Regulation 28 of the Pension Funds Act, the primary aim of the regulations is to reduce the risk taken by a retirement fund when it invests your retirement savings by stipulating the maximum percentage of its assets that the fund may invest in an asset class (and sub-class).

For example, a fund may not invest more than 75 percent in equities, whether inside or outside South Africa, and there is a further limit measured by the value of a company. So a fund may own no more than 15 percent of a company that is worth R20 billion or more.

A secondary objective is to channel investments in a way that they support economic development and growth.

The regulations come into effect on July 1. Funds that are out of kilter with the regulations and cannot readjust their holdings by July 1 must apply for an extension before May 31.

Individual retirement fund contracts bought before April 1 this year will be exempt from the new provisions.

The regulations have been the subject of months of negotiations between National Treasury and the retirement fund industry. The industry pushed for the rules to be relaxed, whereas the treasury sought to update the regulations to cover the ever-developing world of investments while ensuring that members are protected.

A major focus has been the inclusion of the foreign investment exposure of retirement funds.

For example, the treasury has insisted that the regulations be applied at member level and not at fund level. Currently, many funds, particularly retirement annuity and preservation funds, apply the regulations only at fund level, allowing individual members to side-step the regulations so they can, for example, be invested fully offshore. This, in turn, may mean that other members are denied access to foreign investments.

Other changes in the final version include the easing of restrictions on debt to allow more investment in corporate debt issued by listed companies and regulated entities where the government does not provide a guarantee on the debt.

The limits on alternative investments, such as private equity funds and hedge funds, have also been eased.

February 27 2011 at 12:15pm
Source: IOL/Bruce Cameron