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How does Reg 28 and the grandfather clause affect my portfolio?

My portfolio needs to be rebalanced, as it's no longer protected under the grandfather clause. What happens if I contravene Regulation 28?

I have been advised as follows “In regards to the Regulation 28 (Regulation 28) breach we need to rebalance your portfolio as you no longer protected under the grandfather clause”. Please advise when this change of the grandfather clause occurred, as I’ve made no changes to my investments since the implementation of Regulation 28, as I know I have more invested overseas and wish to keep it that way. If I leave it as is until I buy an annuity (pension), what would happen if I contravened the Regulation 28 clause? Supposedly the investment house is supposed to rebalance for you if you don’t advise them, so why don’t they do it?

Brian Butchart - Brenthurst Wealth

As you may be aware Regulation 28 of the Pension Funds Act aims to ensure retirement savings are invested in a prudent manner by limiting allocation to certain asset classes. The intention is to protect pre-retirement assets by not exposing these funds to excessive risk, although many argue this should perhaps apply to post-retirement assets instead, especially when retirees start drawing an income.

The basic rules of Regulation 28 for individuals in a pre-retirement product limit exposure to a maximum of 75% in equities, 25% in property and 25% offshore. There are additional rules limiting other categories and asset classes, but the issue affecting your breach is your offshore allocation. A weaker rand and or stronger offshore growth pushed some retirement funds over the 25% limit which you have alluded to.

The grandfather clause refers to Regulation 28, as the rules applied, prior to April 2011 for all retirement investments invested prior to this date.

Although the limitations were similar, the assets were managed in accordance with Regulation 28 at fund level. Individual members of any retirement funds were therefore not required to comply with Regulation 28, as long as the collective fund complied . This in effect meant individual members may have been over the set limits of Regulation 28, but as long as the fund complied, Regulation 28 limits were satisfied.

In February 2011, the then-finance minister Pravin Gordhan, announced changes to Regulation 28 to apply at member level. Since April 2011, all new retirement investments must adhere to Regulation 28 per individual member of any retirement fund.

All individual retirement members invested prior to April 2011 remain exempt, as long as there are no transactional changes to the portfolio, which will automatically trigger adherence to Regulation 28 at the individual member level immediately. This would include, changes to debit orders, adhoc contributions or switches etc. to the portfolio.

If there are no transactional changes, but the individual retirement fund is in breach as a result of market movements, which I suspect is your issue, most product providers allow for a 12-month period to correct the breach. Within this timeframe, the product provider will communicate with both the investor and financial advisor and give them sufficient time to respond. If the investment remains continuously non-compliant for 12 months the product provider will switch the appropriate amount in breach to a money market fund in order to comply.

The FSB is monitoring this closely and the product providers are therefore forced to align any individual portfolios to avoid fines or penalties which may be imposed as a result of non-compliance.

Do you have any questions you would like answered by registered financial planners?

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