Independent advisor Magnus Heystek on govt plans to use your pension to pay for SA infrastructure: Regulation 28 proposals

In the BizNews Power Hour, Brenthurst Wealth founder Magnus Heystek joined Jackie Cameron to discuss new draft amendments to Regulation 28 – which governs the way pension funds can allocate your assets. The proposal is the South African government’s ‘response to calls for retirement finds to help pay for national; infrastructure investment’, says Cameron. Magnus Heystek weighs in on how this all works, his thoughts on the proposal and the lack of proposal to allow greater access to offshore investments. – Jarryd Neves

Magnus Heystek on Regulation 28:

Regulation 28 determines how much of your money can or may be allocated to various asset classes, while your money is invested in a pension fund, provident fund and a retirement annuity fund. So essentially, most of your build up of your retirement capital has to follow these guidelines and it determines how much can be in shares, in property, onshore and offshore.

One of the criticisms – for a while – has been the limits of limitation of 30% offshore. By and large, this has been a substantial drag on investment performance for a very long time. There were all sorts of rumours flying around a while ago, that this might be increased and also that there be some prescribed assets, which is something something else. But in the end, we got a situation where government has decided not to introduce prescribed assets, which is very nice.

On government investing in infrastructure:

But it has come with a new classification of what pension funds may or may not invest in, in infrastructure. Now, that hasn’t been clearly defined yet, but it opens the door as to how much pension funds may invest in a new asset class called infrastructure. This is just broad comments that are now being expected. We need a bit more detail. So on the whole, I don’t think it’s such a bad development.

I think we do need expenditure into infrastructure and we already do – pension funds for a long time have  said ‘but we do invest in infrastructure’. But they said, ‘bring us bankable schemes that will make a return on investors money. So that’s the problem. So in general, I think it’s to be welcomed. I think it might open some gates and get infrastructure going.

It’s going to be very important, the role that the quality of these infrastructure schemes will play. Will they be monitored by the ratings agencies? What will the role of the trustees are going to be? Because ultimately, nobody will be forcing pension funds to invest in these things – and only on the basis that they are good investments. Will the trustees allow these investments to go ahead.

Not a bad development, no shocks about it. I think if it’s done responsibly and correctly, it will provide a much needed boost for South Africa’s infrastructure – which has been neglected for a very long time. The issue is how will investors make money and that is the crux of the matter.

On whether you can instruct your pension fund manager to not allocate your portion to this asset class:

For most people, you don’t have that choice. If you’re in a group scheme, you will go into the funds that are recommended by the trustees and you go in alongside with them. If you’re in schemes where you have individual choice, you may be able to say, ‘I don’t want to go into that fund because it’s investing in infrastructure. I want to invest it in something differently’.

By and large, you will have to go with the flow – but there might be exceptions – where you can specify whether you would like to go into funds that invest in infrastructure or not. You will at some point, with certain types of retirement funds like retirement annuities and with preservation funds where it’s an individual type of investment, can decide on your asset allocation within the funds.

You do have a bit more control over that. After the age of 55, things do improve for investors in these schemes, because you have some kind of control that you can exercise. You might decide to withdraw the funds or move it across to a living annuity – which will not have these Regulation 28 guidelines imposed on them. At the end of this all, will be that people need to take much more interest in where the pension money is invested and put pressure on their trustees to act in their best interest, as best they can. It is something of a new chapter for retirement funds in South Africa.

On the easing of exchange controls:

The whole industry was expecting something to be said in the budget, but I think that it will happen soon. I still think that there are negotiations behind the scenes, as to what exactly that circular was all about and how you interpret that circular – the infamous Circular 15/20 – which some people interpreted as no boundaries on the offshore exposure, which would have impacted greatly on certain pension funds. I still think that bun fight is happening as we speak and hopefully we will have some clarity in due course. Because it was promised, it was drawn by Treasury and the Reserve Bank and we expect some kind of indication very soon.

On people who don’t want the easing of exchange controls:

There are many vested interests in the big investment industry in South Africa. It can be the local fund managers with local funds versus offshore funds that – it depends where you control what the prices of these assets. A lot of the larger, insurance-type based pension funds in South Africa are sitting on very large amounts of money that they control and make a very good return on managing the money.

The margins in many cases are substantially higher than, for instance, on offshore funds that, by and large, are cheaper – and tend to be ETFs and index linked investments that are much cheaper. One can see that the local pension giants – if you can call them that – would not like to see the gates open, because that would expose them to much more foreign competition – in terms of pricing, performance and things like that. There are a lot of people who would like to see the status quo not change for obvious reasons.

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