During February’s budget speech, finance minister Enoch Gondwana announced several amendments to Regulation 28 – the Pension Funds Act directive that was created to protect investors’ retirement savings through diversification.
The most noteworthy amendment is the 15% increase in offshore allocation – with no distinction between Africa and the rest of the world. The previous offshore allocation was 30% with an additional 10% allocated to Africa. However, fund managers can now invest up to 45% of investors’ retirement savings in offshore equity, cash, and bonds. So effectively, investment in the US can go from 30% to 45%.
What hasn’t changed is a retirement product’s maximum exposure to equity, which still sits at 75%. This is still a major limitation for young investors, as shares outperform the other asset classes over the long term. However, the purpose of Regulation 28 is to manage risk for all investors – young and old.
So if one looks at the total allocation pie, fund managers can now, theoretically, allocate 45% to offshore equity, 30% to local equity, and 25% to more conservative assets (cash and bonds).
Feedback from the frontline
This update is applauded by most of the industry, although not without T&Cs. Some argue that from a risk and return perspective, the optimal offshore asset allocation would be less than 45%. The argument is that higher offshore allocations lead to higher rand volatility, which hinders the investment goal of preserving capital in Rands (as opposed to dollars).
However, Kyle Wales (Flagship Asset Management) argues that academic measures of risk and return focus unduly on market volatility. And as many investors would be in their wealth accumulation phase, they will have a longer-term time horizon to ride out any storms.
Wales also argues that it’s irresponsible to focus on the preservation of capital in Rands, as your average saver is already over-exposed to South Africa. He points out that if an investor’s job and primary residence is in South Africa, their local exposure could already be more than 90%. That number is definitely not beating the diversification drum.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.