When the elephants fight…
You know the rest. The grass gets trampled. In this case, the grass may well be your retirement savings.
At present, there is a regulatory battle royale underway with top financial institutions leading the charge on both sides of the fence.
The issues revolve around significant changes in exchange control and pension fund rules. It gets extremely complicated, but we will try to explain it as simply as we can.
To understand what is going on, you first need to understand Regulation 28, the framework that governs portfolio allocations for all retirement funds in South Africa, including Pension / Provident Funds and Retirement Annuities.
What is Regulation 28?
Regulation 28 of the Pension Funds Act is designed to stop asset managers from playing roulette with your money. There are a number of limits that apply according to the Prudential Guidelines:
- Maximum 75% exposure in equities (whether in SA or abroad)
- Maximum 25% exposure in local or international property
- Maximum 30% in offshore assets
These measures were imposed after the GFC (Global Financial Crisis) of 2007/8 and whilst these regulations are designed to protect investors, they can have negative consequences in many cases.
For example, it isn’t sensible for a young person to be forced to hold 25% exposure in lower risk asset classes, since the maximum equities exposure is 75%. With a long runway towards retirement, it makes more sense to be fully exposed towards equities and our view is always to maximise equities for longer term investments spanning 10 years or more.
The more topical issue currently is that the JSE has been a poor performer over the past decade, particularly when viewed against global stock performance. If you are wondering how bad, the return in USD is about ZERO for the last 10 years.
Had South African pensioners been able to tap into global markets with a larger percentage of their pension savings, they would be wealthier today.
The winds of change are blowing
Exchange control is in the process of being phased out. That’s a big step for South Africa. Included in these changes was an announcement by the SARB that reclassified inward listed instruments from foreign to domestic.
Without getting into technical details, this sent the market into a flurry. Suddenly, index tracking funds (like ETFs) and listed notes that reference global stocks and indices would be classified as domestic assets by the SARB for institutional investors.
According to the SARB circular, retirement investors could now invest as much as they want every year in a JSE-listed instrument that tracks global indices within their retirement funds.
Of course, market participants offering more innovative pension structures were very excited and quick to tell the market that this meant the doors had opened for pensions to be invested to a far greater extent offshore, via JSE-listed notes and ETFs that reference global assets.
Change of heart
In light of the immense confusion in the market, the SARB suspended the circular with immediate effect. It’s not a great situation when half the market is saying one thing and the other half believes the opposite.
As things stand currently, we are back to where we started, before the SARB changed the rules and chaos ensued. For now, the elephants are fighting in the background.
But what is Heritage Wealth Partners doing in the meantime?
We want to point out that the Unicorn Fund is the very instrument that the SARB has encouraged investors to use and Heritage Wealth clients have benefitted from this for 2 years already.
We firmly believe in the proposed changes and have worked tirelessly to ensure we are ready to maximise the opportunity once the Financial Sector Conduct Authority (FSCA) and SARB clarify the situation.
We have sat in consultations with our Asset Managers, Platform Providers and the relevant authorities. For now, we continue to be pro-active and are preparing for the changes that should come in 2021. Existing clients should look out for the emails which will start next week to ensure your retirement fund is ready for the changes.