The recent amendment to Regulation 28, which sets certain limits for retirement funds on how to invest, has far-reaching effects on investors. The main change was an increase in the maximum offshore exposure from 30% to 45%. This can impact their retirement savings for the better.
1. Added flexibility and investment choice
Regulation 28 is applicable to all “retirement” vehicles such as pension, provident, preservation funds and retirement annuities. These funds used to be limited to a maximum of 30% offshore exposure, which has now been increased to 45%. Another major limitation, which has not changed, is that an investor’s overall equity exposure (shares) cannot exceed 75%. Theoretically, you can allocate 25% to cash and bonds (conservative assets) – most fund managers opt for local cash and bonds (given superior yields compared to offshore cash and bonds). The balance can be allocated to equity (growth assets), you could theoretically allocate 45% to offshore equity and the balance of 30% to local equity. This is a much more diversified and global approach, giving the investor more options on offshore markets. Each fund manager can choose if they want to go up to 45% or stay lower, but the fact that they have the option gives them more flexibility and should result in higher returns over time
2. The best “balanced funds” will become even better
Most of the multi-asset funds in SA are balanced funds, all of which are Regulation 28 compliant. This is to be able to have access to retirement savings, which is big business and part of a massive savings pool in SA. But all balance funds are not the same, one can only look at their medium- and long-term growth to see the divergence. If I look at all the nuances, I can pick up that they differ in many ways
- Some are more focused on local “SA Inc” stocks such as Remgro, Foschini and Shoprite. Others focus on rand hedge stocks such as BATS, Richemont and Naspers.
- Some focus on resources such as Glencore, Sasol, Billiton and Anglo (in effect also global companies or having dollar-based earnings).
- Some prefer to move in and out of markets and adapt quickly to changing dynamics, others form a “buy and hold” strategy.
- Some have indicated they will stay below 30%, whilst others have indicated they will increase the offshore exposure over time.
The point is that they differ significantly. Listening to different fund managers makes it clear that they don’t all agree on the amount of offshore allocation they prefer. Certain balanced fund managers are better than others because they use the different elements to their benefit. The fact that offshore allocation can be increased is another lever that a fund manager can pull, and in my opinion, this will be beneficial to those who use it effectively.
3. General equity funds (discretionary assets) enter the fray
Taking a closer look at unit trusts within the “general equity” classification, which can invest up to 100% in equity and are mostly fully invested, there is one significant difference to be noted.
Most of these funds have historically only invested in local shares, but over the past couple of years, some of them have changed their mandate to include up to 30% of their fund in offshore markets. Examples are Allan Gray Equity and 36One Equity. These funds are not Regulation 28 compliant, but others follow the “trend” of maximum offshore allowance within Regulation 28. Some of them might follow suit and change their mandate to go up to 45% – in my view, this is no longer a “local equity” fund.
Certain general equity funds have not included offshore exposure in their mandates, examples include Coronation Top 20 and Counterpoint Value.
My point is not that the one is right or wrong, but rather that investors should be cognizant of the change and understand what they invest in.
4. Fundamental shift in government thinking, and how this benefits SA
Without a doubt, big institutional fund managers have lobbied the government to increase the Regulation 28 offshore allowance. Their rationale was that SA investors might stop using retirement structures if they are not allowed decent exposure to offshore markets. If we don’t have a healthy savings pool in SA, it prevents the proper functioning of the financial system. People invest in RAs, which go into unit trusts, the fund manager then “buys” equities or bonds – effectively lending companies and government money to expand or continue with operations. Investors want a return for their investment, but they also want the option to invest offshore to get returns and diversification. Government and local companies need investors to give them a financing mechanism. Fund managers also need the savings as this is a core part of their business. In the end, it’s a healthy ecosystem, but one that needs constant new inflows. I want to applaud the government for allowing the change, as it benefits all parties. Instead of trying to “keep the SA pension pot local”, they have given investors more options and an incentive to continue using retirement products. The long-term impact of allowing SA residents to grow their retirement pot with more investment opportunities will put more money into the consumers’ hands, increasing spending on goods and services.
Sars gives us a healthy incentive to use pension funds and retirement annuities if you fall in a high marginal tax bracket and save part of your gross income (up to 27.5% capped at R350 000 per annum) you get a tax deduction for the amount you save. This is a guaranteed indirect return of that marginal tax bracket. The Regulation 28 limit used to be a negating factor for many investments, but with the new limit of 45%, the offer looks much more attractive. Retirement funds are only partly accessible after age 55. One should therefore consider using retirement investments in combination with discretionary investments (ZAR and/or USD), to allow for enough liquidity.
Saving for retirement remains a key focus of individuals’ investment strategies. As there are several factors to consider, it is advisable to navigate this with the guidance of a qualified, experienced advisor.