Regulation 28 is the section in the Pension’s Fund Act that sets out various limits for how the funds in any retirement product need to be invested. The purpose of these limits is to assist in limiting concentration risk to ensure that retirement investment, a very important investment pot, is not exposed to too high risk.
Many investors have, however, expressed concern over the restrictions of these limits as it might not be as beneficial for investment returns, especially over the longer term where inflation can eat away at the returns, causing reel returns to be low or even negative. For this reason, many investors chose to limit their retirement investments that would be exposed to these restrictions, despite the many tax incentives they can get by investing in such products.
Investors reason that the South African economy represents only 0.6% of the global economy and therefore being able to invest, as it was before the amendments, only 30% of retirement investments in global markets is not a fair allocation towards growth from broader markets. This has especially been the case for technology stocks that are by and large under-represented in the local market, but have more companies to invest in in global markets. By comparison, a 100% investment in the JSE ALSI would have delivered a negative return of 2% over 5 years, whereas the Technology Select Sector Index, for comparison, delivered 130% over 5 years.
Policy makers have however listened to investors’ concerns and have recently amended the maximum offshore exposure in retirement funds from the initial 30% to 45%. This will have a significant positive effect on retirement funds in the long-run as it can invest in a wider range of investments that can potentially increase returns. Furthermore, not only will it encourage more people to save in retirement products, but it will also provide these investments with increased flexibility.
Although the limit states that retirement investments can invest up to 45% in global markets, it is not a requirement, giving investment managers the freedom to be able to have conviction towards either local or global markets. This increased flexibility and investment freedom will also increase competitiveness amongst investment managers and investment houses as they have a wider universe of companies to invest in as well have the freedom to have different weightings allocated to different geographic markets.
Most retirement funds are classified according to the Association for Savings and Investments South Africa (ASISA) standards, which groups these investments in categories based on their risk exposure. Increasing the offshore exposure of all retirement funds may cause these various retirement category groupings to also have a slightly higher allowed exposure to risk than before the amendment. As an investor it is therefore important to understand how this may change how investment managers invest your retirement investments and whether or not you are comfortable with the adjusted risk and exposure to international markets.
It is of course important to understand that increased risk will be beneficial for your fund over the longer term, as it will in theory deliver enhanced returns above the rate of inflation. Considering inflation, and the effect it will have on your purchasing power, is especially important when considering long term retirement investments as it is a particular investment that will in time be used to maintain your lifestyle and physically to purchase goods and services, rather than just increasing your wealth.
One last thing to consider, given these amendments, many investment managers will start moving funds offshore, taking advantage of the additional exposure they can hold in these funds. This will cause the rand to weaken as demand for other foreign currencies will strengthen in comparison to the rand. It is important to be mindful of the effect this amendment will have on broader markets not only for retirement investments, but also for discretionary investments.
These changes should be embraced and it is likely to benefit most South Africans. Do however be mindful of the impact that these changes will have not only on your retirement savings, but also on the broader economy and industry at large.