Director of ETFSA
05 November 2020
3 min read
Over the past few months, there has been media coverage about prescribed assets being reintroduced in South Africa through an amendment to the Regulation 28 of the Pensions Fund Act. Some of the reports have indicated that the use of prescription assets will require retirement funds to invest a percentage in government bonds, which has given rise to debate whether this suggested amendment to Regulation 28 protects investors.
Industry and government have discussed that it’s unlikely prescribed assets will be used as a policy tool to uplift economic recovery through investment in state assets, given the challenges surrounding the suitability of infrastructure projects. However, there are some interesting changes to Regulation 28 being considered.
Regulation 28 limits the extent to which assets or asset classes are allocated in a retirement fund, with the goal of ensuring that retirement savings are invested in a diversified investment portfolio.
As it currently stands, Regulation 28 restricts retirement funds to invest a maximum of 75% of funds in equities, 30% offshore (plus another 10% in Africa outside South Africa) and 25% in listed property. Only up to 10% of total funds may be invested in each of hedge funds or private equity, with a limit of combined exposure to both of 15%. Retirement funds may also invest up to 10% of their assets directly into unlisted equities.
The anticipated amendment to Regulation 28 will give fund managers the ability to invest higher portions of retirement portfolios in unlisted assets
The anticipated amendment to Regulation 28 will give fund managers the ability to invest higher portions of retirement portfolios in unlisted assets. This creates new investment opportunities for asset managers and asset owners to invest more of their clients’ funds in infrastructure bonds, impact investing projects and other unlisted assets which may yield profitable returns.
Rather than forcing asset managers to invest in government bonds, asset managers will be able to explore the additional opportunities of impact investing, government infrastructure projects and social development and invest in those that offer the most attractive profile in terms of risk and return.
Investing in well-structured and viable projects may generate superior long-term returns, while helping to finance much-needed infrastructure and social development initiatives that drive wider economic growth in South Africa.
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