Regulation 28: What does it mean for investors?

You may have seen that asset managers classify some of their multi-asset unit trust funds as being Regulation 28 compliant. This is an important distinction for investors who are saving towards retirement and want to ensure that their investment is not overly risky. Regulation 28 is part of the Pensions Fund Act and aims to ensure that individuals’ hard-earned savings are invested in a sensible way and protected from poorly diversified portfolios.  Retirement investing can be done via a retirement annuity (RA) investment vehicle (or “wrapper” as it is also known), or simply directly into the unit trust as part of an overall nest egg.  

The rule limits money managers’ allocation of retirement savings to certain asset classes including equities, property and foreign assets.  The overall objective is to protect consumers by restricting the allocation of investor funds to riskier assets on the one hand, but on the other hand to allow for the selection of more strategic and complex options. 

The most important element of Regulation 28 is the limit it imposes on money managers’ allocation of retirement savings to certain asset classes. This is achieved by ensuring that funds are diversified by defining acceptable asset classes, and by limiting the percentage of funds allocated to each asset. 

The underlying portfolios of RAs and Regulation 28-compliant unit trusts are limited to exposures of 75% in equities, whether in South Africa or abroad, 25% in local or international property, 25% in foreign investments, excluding Africa, and 5% in Africa (outside South Africa) of the total capital invested.  

Substantial changes have been made to this regulation over the years, but investment restrictions are nothing new as traditional pension funds have been subject to them since the sixties. It is only since 2011 that RAs have had to comply with the same set of rules. 

Previously, the limits enforced on more complex investments were very restrictive. Today up to 10% of total funds may be either be invested in hedge funds or private equity. Combined exposure to both asset classes is limited to 15% in total.

Retirement funds may also invest up to 10% of their assets directly into unlisted equities, rather than making the investment via a private equity fund.

There is now also a provision for investment in unlisted property, whether by holding properties directly or by investing in various pooled structures.

Commodities have also been recognised as a separate asset class; this is also subject to a 10% limit of total fund investments.  These allowances hold much potential for retirement funds and unit trusts as more index tracking and retail products around commodities and alternative investments are made available.

Of course, limiting funds to a 75% exposure to equity, an asset class that has outperformed all others over time, does add validity to the criticisms of the regulation, especially from young investors with large risk appetites and long-term horizons. The rule was, however, not introduced to simply force investors from one financial scenario into another - it aims to protect a wider spread of shareholders in both bull and bear markets.  

South African shares can and do take large knocks in the shorter term, and the required thresholds have certainly provided some value protection for individuals nearing retirement age. Furthermore, in our environment of local bond market rating downgrades, low offshore interest rates and volatile global equity markets, spreading funds across borders and asset classes is a responsible investment strategy and does provide the best downside protection for an individual’s hard-earned savings.

Over and above the benefits of prudent asset allocation encouraged by the regulation, RAs continue to offer tax-efficient and thus cost-effective alternative retirement savings solutions for the self-employed, the irregular earners and those wishing to supplement their standard retirement plans. Investors in Regulation 28-compliant unit trusts like the Prudential Balanced, Inflation Plus and Enhanced Income Funds can be assured of appropriate asset allocation strategies for their long-term retirement savings that are actively managed to achieve the best possible risk/return balance over time.

Are you interested in investing towards retirement? Speak to a financial adviser or find out more about Prudential’s Regulation 28-compliant funds by contacting our Client Services Team on 0860 105 775 or at query@prudential.co.za for more information.