Regulation 28 of the Pension Funds Act of 1956 - which places
limits on retirement fund investments - is finally under review,
consultancy Novare Investments said on Thursday.
Regulation 28 had been "left behind by modern investment product
development and an altered exchange control regime", Novare said in
The regulation was now under review by the National Treasury and
the Financial Services Board (FSB).
"Regulation 28 limits the amount and extent to which retirement
funds can invest in particular assets or categories of assets," Leo
Vermeulen, head of operations at Novare, said.
"It was promulgated in 1962 and last amended in 1998."
Vermeulen said industry developments since then necessitated
a comprehensive review.
"Recent years have seen a proliferation of new, more complex
investment options, including derivatives, hedge funds and
"These have become available to pension funds and there is a
need to explicitly accommodate them in Regulation 28."
According to a National Treasury memorandum, proposed amendments
were not intended to relax restrictions and facilitate more risky
"Instead the idea is to allow for more efficient portfolio
management and to guard against 'abusive' practices, for example,
using derivatives to gear portfolios," Vermeulen said.
"The treasury makes the point that the global financial
crisis has exposed funds to greater risk, and hence the need to
update the investment channels that prudent pension funds can
In terms of the proposed amendments, new categories and limits
were, where possible, aligned with legislation governing collective
investments, but whether these were appropriate for pension funds
as prudential entities remained open for discussion.
Vermeulen said one of the objectives of the proposed amendments
was protection for funds against irresponsible borrowing,
especially in terms of their exposure to liquidity risk.
"Proposals relating to foreign investments seek to align with
exchange controls that allow retirement funds to invest up to 20% of their assets outside of the country, with an additional
5% for investments in Africa."
In the interests of generating an income for funds and to
promote market liquidity, it was proposed that retirement funds be
permitted to engage in securities lending, subject to limits and
Derivatives not allowed
Derivatives are similarly accommodated on the basis that they
can contribute to efficient portfolio management and hedging
against an investment held by the fund.
"Derivatives will not be allowed for gearing or leverage,"
He said where derivatives and foreign exposures were concerned,
the proposals envisaged application of the "look-through principle"
for calculating and reporting purposes.
"This means that asset managers will not be able to circumvent
prudential limits by investing in layers to mask underlying
Vermeulen said that regulation 28 in its current form allowed
insurers to offer retirement annuity policies which incorporated a
guarantee and that enabled funds to exceed the prescribed limits,
effectively allowing for the prudential limits to be by-passed.
"This exemption has been removed from the new draft," he added.