Regulation 28 and the needs of retirement investors

Recent changes to Regulation 28 of the Pension Funds Act serve government policy and investment industry interests, but pay little heed to retirement investors. Although the changes claim to foster prudent investing, the reality falls worryingly short.

Revisions around asset limits, pension fund trustee education, and alignment with government policy is especially troubling according to Steven Nathan of 10X Investments.

Retirement investors have an obligation only to themselves and their dependants – not to address transformation, or boost funding for regional development banks, or correct capital market inefficiencies. These issues may well benefit from sound retirement investing, but they cannot be the aim.

The introduction of new asset limits is perhaps the most widely discussed revision, in particular the increased allocation to hedge funds, private equity and gold.

Regulation 28 changes came into effect on 1 July 2011. Commentary has been mainly positive, but also almost entirely generated by the investment industry. There is no collective voice for retirement investors.

Regulation 28 merely restricts the maximum allocation to each asset class, but ignores other important aspects, such as the investment time horizon, minimum limits and appropriate diversification. This discretion is left in the hands of trustees.

Yet the regulators are sceptical that pension fund trustees are up to the task. The Explanatory Memo to Regulation 28 readily admits that; ‘’In the context of … a general lack of investment expertise among trustees, the Regulation remains primarily rule-based.”

This is not helpful, if the rules do not lead to appropriate portfolios. It is just not prudent to hold one asset class over an indefinite time period; or to invest heavily in equities or offshore markets near retirement.

Trustees lacking skills are unlikely to interpret narrow rules to the benefit of fund members; they are also not likely to effectively oversee the delegation of tasks to external service providers - who have no fiduciary responsibility to fund members in any event.

Regulation 28 burdens the pension fund with the financial education of the board. Surely the knowledge and qualifications of trustees is a prerequisite, not a goal, of their appointment?

The third red flag is that Regulation 28 imposes government policy on private investors.

Regulation 28 explicitly aims to strengthen the corporate debt market, address banks’ structural funding mismatch, support economic development and investment into Africa, and further socially responsible investing and transformation.

These are worthwhile aims but is it appropriate for government to impose its agenda on privately owned money?

Nowhere is it discussed how these objectives will improve returns or lower risk for retirement investors.

Ironically, Regulation 28 does not apply to the Government Employees Pension Fund, the largest in South Africa.

If government is serious about regulating the retirement industry and addressing the looming pension shortfall, then it is investor needs and South Africa’s poor saving culture that must be regulated, not the asset allocation.

If retirement investors are not at the heart of retirement regulation and investing, the industry will continue to fail those it should be serving.

(For more information visit www.10X.co.za , call 0861 109 109 or contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it )