Regulation 28

Regulation 28 of the Pension Funds Act (No. 24 of 1956) in South Africa sets out the investment limits and guidelines for retirement funds to ensure the prudent management of assets. The main objective of Regulation 28 is to protect the retirement savings of members by promoting diversification and limiting exposure to risky asset classes.

Specifically, the regulation must be adhered to by the following funds:

1. Retirement Annuities (RAs): These are individual retirement savings accounts that must comply with the asset allocation limits set by Regulation 28.
2. Pension Funds: These employer-sponsored retirement funds also fall under the purview of Regulation 28, ensuring that the investments made on behalf of employees are diversified and risk-managed.
3. Provident Funds: Similar to pension funds, provident funds must adhere to the asset allocation limits and other guidelines to protect members' retirement savings.
4. Preservation Funds: These funds, which hold retirement savings preserved when a member leaves a pension or provident fund before retirement age, must also comply with Regulation 28.

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Key Provisions of Regulation 28

1. Diversification Requirements

Regulation 28 mandates that retirement funds must diversify their investments to avoid excessive exposure to any single asset class, issuer, or sector. This is aimed at mitigating risk and ensuring the stability and growth of retirement savings.

2. Asset Class Limits

The regulation specifies the maximum percentage of a retirement fund’s portfolio that can be allocated to different asset classes. The main limits include:

·???????? Equities: A maximum of 75% of a retirement fund's portfolio can be invested in equities.

·???????? Property: Up to 25% can be allocated to property investments.

·???????? Foreign Investments: Funds can invest up to 30% offshore, with an additional 10% allowed for investments in other African countries, making a total possible foreign investment of 40%.

·???????? Commodities: Investment in commodities is capped at 10%, with a specific limit of 10% for gold.

·???????? Hedge Funds: Direct investment in hedge funds is limited to 10%.

3. Issuer Limits

To prevent over-concentration in any single issuer or group of related issuers, Regulation 28 sets out specific limits:

• Single Issuer: A maximum of 25% of the fund’s assets can be invested in the securities of any one entity.
• Group of Issuers: Up to 25% of the fund’s assets can be invested in entities within the same group.

4. Reporting and Compliance

Retirement funds are required to report on their compliance with Regulation 28 regularly. Trustees and fund managers must ensure that investments are continuously monitored and adjusted to remain within the prescribed limits. Non-compliance must be reported to the Financial Sector Conduct Authority (FSCA), and corrective action must be taken promptly.

5. Risk Management

Regulation 28 also emphasizes the importance of risk management practices. Trustees and fund managers must implement robust risk management strategies to safeguard the interests of members. This includes conducting regular assessments of investment risks and ensuring that investment decisions align with the fund’s risk tolerance and objectives.

Objectives and Benefits

The primary objectives of Regulation 28 are to:

• Protect Members' Savings: By limiting exposure to high-risk assets, Regulation 28 aims to protect the retirement savings of members.
• Promote Diversification: Ensuring that funds are spread across a variety of asset classes helps to mitigate risks and enhance the potential for stable, long-term growth.
• Encourage Responsible Investing: The regulation encourages retirement funds to adopt responsible investment practices, considering both financial returns and social, environmental, and governance factors.

Conclusion

Regulation 28 is a critical component of the South African retirement fund regulatory framework. It aims to ensure that retirement funds are managed prudently and responsibly, thereby safeguarding the retirement savings of millions of South Africans. By promoting diversification and limiting exposure to risky assets, Regulation 28 helps to create a more stable and secure retirement system.