Unlocking your team’s retirement funds’ potential post Regulation 28

By Sanan Pillay, Portfolio Manager at Sanlam Investments Multi-Manager

Retirement fund members need more information if they are to unlock the advantages of recent amendments to Regulation 28

In July 2022, the National Treasury unveiled pivotal amendments to Regulation 28, revolutionising the investment framework for South African retirement funds. Despite the regulatory endorsement for retirement funds to invest in private markets and other asset classes, investors have hesitated to pursue these opportunities.

Sanlam Investments Multi-Manager’s deep local market understanding and commitment to responsible investing allows it to help investors navigate these changes. By understanding how these amendments protect members’ retirement savings, corporate South Africa can play a central role in helping to ensure employees’ portfolios are optimised to ensure long-term positive outcomes.

Understanding Regulation 28

Regulation 28 effectively limits asset managers’ allocations of retirement savings to specific asset classes, including offshore assets. Here are the changes in a nutshell:

• Retirement fund members can now invest up to 45% of their portfolio in offshore assets, fostering greater portfolio diversification opportunities.
• Up to 75% can be invested in equities (local and foreign), 25% in property, 15% in private equity, 10% in commodities, 10% in hedge funds and 2.5% in other excluded assets.
• A member cannot invest over 25% across all asset classes in one company or entity.
• Members can enjoy tax advantages on retirement savings of up to 27.5% of their taxable income per annum (capped at R350 000). Retirement annuities are also exempt from capital gains tax on investment growth, and tax on dividends and interest.
• 55% of the portfolio must be invested in local assets.

The valuation and liquidity concerns behind investors’ reluctance

The new regulations, effective January 2023, distinguish hedge funds from private markets, raise the investment ceiling for private markets, and introduce a new limit for infrastructure investments. However, despite the regulatory green light, investors’ reluctance stems from concerns over illiquidity, pricing uncertainty and greenwashing, particularly in South Africa.

Performance and economic headwinds
In addition to these concerns, the private market space in South Africa has been limited because the local private equity industry has not delivered the same stellar returns that attracted the interest of investors in recent years. Research from RisCura and the South African Venture Capital Association (SAVCA) shows that, for private equity funds launched since 2005, the pooled internal rate of return did not exceed 10% up to the end of 2022.

The decline in South Africa’s economic strength over that period has contributed to the lack of interest. From a peak of 5.6% in 2006, nominal GDP growth has steadily declined, with the World Bank’s current forecasts for 2024 and 2025 at 1.3% and 1.5%, respectively. This has put steady downward pressure on the valuations of South African assets, making it difficult for private equity firms to exit investments at higher valuations than they entered.

Although this spells that hard times lie ahead for the country, it may indicate a turning point in the cycle for private equity funds. When prices reach lows at the bottom of the economic cycle, it widens the opportunity set for private equity funds to find attractive entry points into companies demonstrating strong fundamentals and defensive strategies. Local private companies will be in dire need of funding as well as business interventions that will help them to survive this challenging economic environment, paving the way for private equity funds to create value for investors as well as SMEs.

Unlocking the rewards of investing post Regulation 28

Recognising the obstacles and issues in the industry is crucial, but equally essential is acknowledging the inherent benefits they offer investors, as volatility- and inflation-protected investments can deliver attractive returns. As the market evolves, retirement funds may find these avenues increasingly attractive, balancing caution with opportunity.

Regulation 28 amendments will allow local retirement funds to increase their exposure to hedge funds and private equity and up their total infrastructure allocation to 45% of assets under management domestically, and 55% when including the rest of Africa. This change will make it easier for retirement fund trustees to approve investments into infrastructure projects that deliver economic and social impact without compromising returns.

Concerns about greenwashing can also be addressed through strict evaluation frameworks for private equity funds and their impact-related goals, such as that applied by Sanlam Investments Multi- Manager. These frameworks aim to objectively quantify the direct social impact that private equity funds have on the companies in which they invest as well as scrutinise the underlying activities of fund managers to ensure that dealings are above board and that the information provided is a fair reflection of what is happening on the ground.

The new regulations limit how much investors can invest in assets or asset classes. However, their primary purpose is to protect members’ retirement provision from the effects of poorly diversified investment portfolios. The regulation limits the maximum exposure for risky asset classes, ensuring investors do not take unnecessary risks with their retirement money.

The risks which can make investors reluctant to invest in these asset classes, such as illiquidity and pricing uncertainty, also come with commensurate opportunity for reward. Through advice and guidance from a trusted partner, the risks posed by unfamiliar asset classes can be navigated in a way that opens up alternative sources of returns for retirement funds.

CIS disclosure

Sanlam Multi Manager International (Pty) Ltd is approved as a Discretionary Financial Service Provider in terms of the Financial Advisory and Intermediary Services Act, 2002.
Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.
The information in this article does not constitute financial advice. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.