South Africa Publishes Draft Pension Regulations

by Lorys Charalambous, Tax-News.com, Cyprus

06 December 2010

South Africa’s National Treasury has published the second draft of proposed amendments to Regulation 28 of the Pensions Fund Act for further and final public comment, as was indicated in the Medium-Term Budget Policy Statement in October this year.

Of the ZAR5.2 trillion (USD760bn) total household savings in South Africa, Regulation 28 applies to all private pension funds which constitute about ZAR1.1 trillion. The regulation limits the amount and extent to which retirement funds can invest in particular assets or categories of assets. As it was last amended in 1998, pension industry developments since then have necessitated a comprehensive review.

For example, investment channels available to pension funds have significantly changed with the incorporation of derivatives, structured products and new types of investment funds. These are not explicitly accommodated in the current Regulation 28, and the pension funds may be exposed to overly risky investment as certain conduct, like gearing, is not expressly prevented.

Following the release of the first draft of the revised regulation with the 2010 Budget in February 2010, there was considerable coordinated engagement between the National Treasury, the Financial Services Board (FSB) and industry stakeholders, which have informed the revised second draft of Regulation 28.

The second draft still aims to ensure that the retirement savings of South Africans are invested in a prudent manner that protects the pension fund member and, in addition, promotes economic development and growth. The latest draft also acknowledges the role played by alternative investments, including private equity and hedge funds, in diversifying risk and enhancing investment returns.

The National Treasury emphasized that the ultimate responsibility for protecting the interests and investments of pension fund members vests squarely with the trustees. Regulation 28 provides a second protective measure to ensure that there is some diversification in the investment profile of pension funds and setting overall limits to the types of investment that may be made by pension funds.

To further support stakeholder understanding of the intention and principles underpinning the revised draft regulation, the National Treasury and the FSB will host public forums during December. Any further comments should be submitted by January 28, 2011.

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