A group of panellists at the recent SAVCA Private Equity Conference debated National Treasury’s proposed amendments to Regulation 28. The regulation is part of the Pensions Funds Act and limits local retirement funds’ exposure to certain investments to ensure portfolios are well diversified and do not take on undue risk.
We expect the changes to provide much needed economic stimulus to South Africa’s struggling economy, the proposed changes to Regulation 28 provide retirement funds with an opportunity for a higher degree of diversification, greater access to sustainable and impact investing, and improved overall financial security for pension fund savers in the long run.
A welcome proposed change is that private equity was delinked from hedge funds and the investment limit for private equity will be increased from 10% to 15%. The proposed amendments also include increasing the limit local retirement funds can invest into South African and African infrastructure. Should the proposed changes become effective, retirement funds will be allowed to hold up to 55% of their value in infrastructure. It is hoped that such changes will make investing in infrastructure easier, which in turn should create jobs and spur economic growth.
SAVCA’s 2020 private equity industry survey showed that investment in African infrastructure has been an emerging theme over the past decade. Active investment from funds in various regions were funnelled into projects in energy, transport and ICT sub-categories.
This serves as a catalyst for development on the continent, in a way that fosters the achievement of targeted and specified developmental goals. Furthermore, infrastructure investment opens up new opportunities for add-on or related investments.
Changes are ‘hitting the mark’
Panel moderator Anne-Marie D’Alton, CEO of Batseta kicked off the session by asking Thomas Mketelwa, Principal Officer of the Kwa-Zulu Natal Municipal Pension Fund as to whether the changes hit the mark or not.
His response was that they were indeed hitting the mark but that things could be improved in places. “The changes may not have introduced the issue of infrastructure in the way we were hoping it would be introduced – as an asset class on its own,” he said. “But the bottom line is that we’re happy and would like the changes to be implemented without further delay. It’s an investment opportunity for us.”
Mantuka Maisela, chair of the Motor Industry Retirement Fund, was also positive about the changes. “Regulation 28 is going to bring hope to our people,” she said. She pointed out that unemployment is high and infrastructure development should uplift people by creating jobs.
Better definitions will help
Another change involves providing a more precise definition of what infrastructure investment means. Tebogo Kgosi, Deputy Principal Officer of the Transport Sector Retirement Fund, believes this will have many benefits. “It will enable better data collection and measurement,” she said.
According to the proposed definition, infrastructure includes installations, structures, facilities, systems, services, processes that relate to matters specified in Schedule 1 (of Section 1 of the Infrastructure Development Act of 2014).
“To us, the beauty of Schedule 1 is that it is diverse and a well-thought out definition that covers all areas relating to infrastructure,” said Kgosi. She did, however, comment that it would be preferred if the definition of infrastructure is included as part of Regulation 28 rather than in a separate act.
New allocation limits
According to Soyisile Mokweni, chair of the Consolidated Retirement Fund, the most important change is that hedge funds are no longer linked to private equity. “It’s fantastic that private equity investments now get a 15% allocation on their own,” he said.
“This regulation is giving us an opportunity to look at private equity and infrastructure investment as a way of having a meaningful impact on developing our own country,” commented Mokweni.
Execution by diverse and transformative boards is key
However, the changes to the regulation are only one part of the conversation. D’Alton questioned the panellists as to what else needs to be in place to ensure infrastructure investments materialise.
Maisela’s response was: “Diversity, including of expertise, is very important for boards, as is transformation and inclusivity. Trustees must use service providers who understand the plight of the people – who understand that some members may be in rural areas where there are no roads, toilets or bridges.”
She also advised boards of trustees to assign assets or give mandates to black asset managers who have roots within those communities and who truly understand the socioeconomic challenges they face.
Steps in the right direction
Drawing the session to a close, D’Alton highlighted the widespread support for the proposed changes to Regulation 28 across the panel and encouraged trustees to actively participate in the public consultation process.
Commenting on the session, van Lill said: “Overall, the session highlighted just how much work still needs to be done in this area for the implementation and execution of the proposed changes to be successful.
“However, ensuring alignment between retirement funds, that proper classification and definitions exist and that oversight and monitoring is effectively undertaken are all steps in the right direction,” she concluded.
Tanya van Lill is SAVCA CEO.