Why is there a limit to pension fund investment offshore?

When you invest in your pension fund or retirement annuity, your fund manager won’t simply leave your money in a basic savings account. Instead, they will invest it in various asset classes.

In order to protect you, regulations have prevented fund managers from investing more than 30% of your retirement abroad. We find out why this is the case, and whether it’s best for the consumer.

Tip: Start saving for your retirement today by opening an annuity here.

Getting familiar with the law: Regulation 28

According to Richard Bray, head of strategy and positioning at Amplify Investment Partners, pension funds are governed by regulation 28 of the pension funds act.

He explains that this regulation limits the extent to which retirement funds may invest in particular assets or asset classes.

“It aims to ensure that individuals' hard-earned savings are invested in a sensible way and protected from poorly diversified portfolios. This is done by limiting the maximum exposure to more risky asset classes, making sure that no unnecessary risks are taken with your retirement money,” says Bray.

He points out the following limits according to regulation 28:

• Equity - 75%
• Listed Property - 25%
• Offshore Assets - 30% (as prescribed by SARB)
• Hedge funds - 10%

According to Ruvan Grobler, wealth manager at Bovest, fund managers are forced to comply with regulation 28 in order to receive retirement capital and debit order inflows to their funds.

However, he adds that the main motive behind regulation 28 is to help simplify investors’ investment strategies, and to make the decisions around it easier.

“Ultimately, this could maximise capital at retirement and decrease market risks, especially for non-professional investors,” says Grobler.

How effective is the regulation?

Grobler says that, given the fact that South Africa comprises only 0.4% of the global economy, and that the JSE has been close to flat over the past five years, adjusting the 30% offshore exposure purely to chase higher returns may be appropriate.

“But one could also argue that it might lessen investments in South Africa and take away some of the stimulus in our economy,” says Grobler.

According to Brandon Ellse, wealth manager for AlphaWealth Cape Town, the discussion around the pros and cons of regulation 28 tends to focus on whether potential returns are being sacrificed. He believes this to be the wrong focus.

“It would be more useful to consider whether the limits prevent members from gaining exposure to an appropriate asset class mix as per their determined capacity for loss – the maximum portfolio capital loss that could be sustained without compromising their objective,” says Ellse.

In this respect, he thinks it’s reasonable to suspect that externally-imposed asset class limits would lead to inappropriate portfolios for at least some members.

“My sense is that the limits are probably a blunt tool that protects some investors at the expense of others. It may be possible to implement a different regulatory regime that provides adequate protection to vulnerable members, without disadvantaging members for whom an increase in offshore exposure would be appropriate,” says Ellse.

Is it always best to invest offshore?

Bray believes that, when looking at the past performance of the various asset classes, investors fall into the “braai talk” trap of only looking at what has performed well over the short term and they tend to chase this kind of performance.

Instead, he believes investors should look at performance relative to the lifecycle of their investment. In the case of investing for retirement, this is a long-term investment and therefore the performance of the asset classes should be viewed as such.

“The past ten years have been tough for emerging markets equities, relative to North American and European equities. South African equities experienced similar challenges over this period. However, looking at returns longer than ten years, you will notice the strong return of the various South African asset classes relative to their global counterparts,” says Bray.

Make sure you’re prepared for your retirement days by applying for an annuity here.