Regulation 28 is short-changing retirees – Magnus Heystek

Following the passing of legendary media stalwart Allan Greenblo, Magnus Heystek and Alec Hogg reflect on the impact Greenblo had on the South African financial journalism landscape. Greenblo was fiercely independent with no hidden agendas, which is a similar characteristic shared by the hard-hitting Brenthurst Wealth founder. The conversation is dominated by pension funds and similar types of products to which many South African savers have fallen victim over the past decade. Owing to draconian investment restrictions within Regulation 28, retirement funds have had large exposure to South African investment instruments, most of which have performed poorly over the better part of the decade. Heystek argues that many of the country’s largest financial services institutions are partly to blame as the poor investment performance returns seem to have been swept under the rug. – Justin Rowe-Roberts

Magnus Heystek on institutional pension funds underperformance over the last decade:

I spent some time last week going through the website of one of our largest financial insurance companies. I looked at its Regulation 28 funds and there were myriad of them – hundreds, all with different names. They are all the same and they are Regulation 28 funds, which means it is in line with pension funds. I battled to find any of the particular funds that have beaten the inflation rate over one, three, five and even up to eight years. That’s excluding the friction costs. The numbers are there but people are not talking about it. Just in the last few weeks, a couple of reports were released: 10X came out with its retirement survey, there was a Sanlam benchmark review and Alexander Forbes published its  survey. What was lacking from all of these reports is that they made no reference to the bad returns of pension funds over the last eight years. Not a single one referred to the investment returns. They said ‘Yes, people are not saving enough. People are cashing out their pension funds. People are doing this. People are doing that.’ I believe that’s true but only up to a point. 

On the reasons for sweeping bad investment returns under the rug: 

Well, it reflects very badly on themselves and on Regulation 28. Regulation 28 was changed exactly 10 years ago and we have this current formula. I think it was a major mistake. The timing was wrong. Up to then, with most retirement annuity funds, provident funds and preservation funds, an individual had the ability to choose his or her own risk profile, which included going 100% offshore. That was taken away 10 years ago. Now everybody has to drive the same car, same colour; as long as it’s black, you can have any car that you like. The result is that in the last 10 years, because of the strict regulation of the offshore component, in particular – it started with 20% offshore and went up to 30% – it has not been enough. Our stock market has not produced enough growth for retirement. I looked at a couple of pension funds in the United States where you have freedom to choose and there are countries like Austria, Sweden, Finland, Norway where you have 100% freedom to choose what you like, what you want to put in your pension fund. Well, they’ve made inflation plus 10%, plus 12%, plus 15%. South Africa, zero. In some cases, minus the inflation rate. It’s a problem that is being ignored from the financial services industry, in my view, fairly deliberately. 

On the irrational pension fund amendments: 

If you go back to 2010, in terms of historical performances, South Africa just came through a period of fantastic returns. The returns were good between 2002 to 2008, phenomenally so. It was all driven by the commodity cycle and China and we had a massive bull market. So the investment returns looking backwards were very, very good. I can’t prove there’s coercion between the Treasury and big investment companies, but at some point someone must blow the whistle and say ‘Guys, we need to talk about Regulation 28. We are not delivering the goods.’

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