Regulation 28 commentary
15 Jul, 2022

Regulation 28 commentary

Darryl Moodley, Head: Tailored Investments at Sanlam Corporate

We at Sanlam Corporate largely welcome the changes to the legislation that were gazetted last week. It is notable that the increased 45% offshore allowance, which was announced in February 2022, is a function of Exchange Control Circular No 10/2022, and therefore became effective immediately. Retirement funds could therefore have taken up to 45% of their assets offshore from 23 February 2022 onwards.

The offshore change is distinct from the gazetted amendments to Regulation 28, which take effect from 3 January 2023.

The broader definition of infrastructure (when compared to the first draft of the changes) is welcomed as it now includes investment in private infrastructure. There may however be an added uncertainty at an instrument level as many listed counters (such as MTN, Vodacom, Curro, Growthpoint and other property REITS) could, according to the Regulation’s strict definition, be classified as infrastructure. Depending on the classification approach taken, it may be the case that certain portfolios are inadvertently constrained by the 45% infrastructure limit, so this is something that needs to be monitored and clarified if necessary.

Funds are required to report on their top 20 infrastructure holdings, which will likely have a small cost impact on service providers and administrators.

This reporting requirement can also be viewed as a monitoring mechanism for National Treasury. The concern prior to the release of these regulations was around the possibility of prescribed assets, particularly as it pertains to infrastructure. Over time, should there not be a reasonably sufficient level of infrastructure investment by retirement funds, then this may re-introduce the possibility of prescribed assets in the future.

It is widely recognised that infrastructure investments have the potential to boost economic growth in SA. The respondents to the 2022 Sanlam Benchmark survey also appear to have agreed, signalling an increased intent to invest in infrastructure investments from an average of 4.7% in 2021 to 15.5% in 2022. While this is promising, the gazetted changes to the regulations places a duty on retirement funds trustees to educate themselves sufficiently on infrastructure investments to be able to adequately assess the merits of an investment. The obvious risk is of retirement funds’ piling into infrastructure projects with poor investment fundamentals or governance failures, to the detriment of members and wider society.

Despite the potential benefits of investing in cryptocurrencies and blockchain companies, we think that the prohibition on funds investing in crypto assets is a sensible decision, at least until the sector is formally regulated in SA. The regulation is however silent on investing in companies that have indirect exposure to crypto assets, such as Naspers, Tesla, Coinbase, Mastercard etc. These are large companies which are also included in many SA and global indices, and it is likely that the majority of retirement funds have some exposure to those companies. Until there is more clarity on indirect investment, funds will have to bear the compliance risk. A blanket ban on investments in these companies with indirect exposure could have severe implications for SA investors.

The wider exposure limits for private equity (from 10% to 15%), and decoupled limits for combined investments in private equity and hedge funds (from 15% in aggregate to individual limits of 15% and 10% respectively) offer increased flexibility to investors, although we don’t believe that the prevailing limits have constrained most investors. Therefore we expect this change to have a limited impact.



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