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Pension funds allowed to invest heavily in infrastructure

Published Jul 5, 2022


Martin Hesse

National Treasury yesterday published final amendments to Regulation 28 under the Pension Funds Act, which apply to investments in infrastructure, hedge funds and private equity.

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The amendments are in line with changes announced by Finance Minister Enoch Godongwana in his Budget speech in February.

Regulation 28 governs the allocation of assets in retirement funds. It protects fund members’ savings by limiting the extent to which a fund may invest in a particular asset or asset class, thereby reducing concentration risk – excessive exposure to a single investment or type of investment.

On February 25, the South African Reserve Bank published the Exchange Control Circular No. 10/2022, which detailed changes to the prudential foreign investment limits for South African institutional investors.

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Pension funds and Regulation-28-compliant unit trust funds were able to increase their total offshore investment allocations from a maximum of 40 percent (30 percent globally and 10 percent in Africa outside South Africa) to 45 percent (globally – the Africa restriction fell away).

A statement released by Treasury says the amendments followed two rounds of public input last year. “The aim is to explicitly enable and reference longer-term infrastructure investment by retirement funds, by increasing maximum limits that funds may invest in,” Treasury said.

The amendments published yesterday apply mainly to investments in infrastructure, hedge funds and private equity.

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The affected investment types are:

  • Infrastructure: The amendments introduce a definition of infrastructure and set a limit of 45 percent for infrastructure investment. Until now, there has been no definition nor any specific allocation to investments in infrastructure projects. “Infrastructure” is defined as “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”.
  • Hedge funds and private equity: The limits pertaining to hedge funds and private equity, which were bundled together, have been split. There will be a 15 percent limit on allocation to private equity assets, increased from 10 percent. The allocation limit for hedge funds remains at 10 percent.
  • Crypto assets: Retirement funds will 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,” Treasury said.
  • Individual companies: “A limit of 25 percent has been imposed, across all asset classes, to limit exposure of retirement funds to any one entity (company), not just infrastructure,” Treasury says. Exceptions are debt instruments issued by the government and debts or loans guaranteed by the government.

Another amendment concerns housing loans to members of retirement funds, which are permitted under certain conditions and which vary from fund to fund.

Treasury said: “The asset allocation to housing loans granted to retirement fund members will be reduced from 95 percent to 65 percent in respect of new loans only. This is meant to curb abuse of the housing loan scheme by fund members. The National Treasury is mindful of the important role played by housing ownership in wealth creation and in retirement and will continuously monitor this area of investment.”

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The investment and retirement fund industry has largely welcomed the changes to Regulation 28, especially the increased offshore allocation.

Raazia Ganie, the head of investments at NMG Benefits, said investment managers now have greater flexibility in allocating assets, and the changes open a wealth of additional opportunities globally. However, things will move more slowly for retirement funds.

“The boards of trustees of retirement funds will have to ensure that the overall investment strategies of their funds remain focused on their mandate of helping their members reach their goals within the new regulatory limits,” Ganie said

The amendments published yesterday will take effect on January 3.


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