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Your retirement capital fully invested in the ANC’s chaos

A serious relook at Regulation 28 is needed.
Due to the limitations imposed by Regulation 28 South Africans' pension funds have little protection from the economic woes the country currently faces, writes Heystek. Picture: Moneyweb

Planning for retirement is full of obstacles. That we already know.

Hardly a day goes by when one article or another doesn’t warn about the dangers of underinvesting, not investing, bad advice and the impact of fees. Even National Treasury has waded into this debate and several years ago published the by now well-known report compiled by actuary Rob Rusconi.

But the biggest obstacle, currently, that prevents most South Africans from creating enough capital from which to retire is at heart a quasi-political one: Regulation 28 of the Pensions Act. More worryingly, there seems to be a deathly silence on this issue. Like not wanting to discuss the elephant in the room.

I have previously written about this but there has been no reaction on this issue from the massive investment industry in South Africa, at least not officially. Defenders of the status quo have invariably been linked to the industry, but privately they would agree with my sentiments.

There might be behind the scenes discussions with Treasury on this issue, but I cannot find or recall one industry spokesman prepared to rock the boat and appeal for an adjustment of Regulation 28, which will allow pension funds and their members — i.e. you and me — to have greater freedom to invest our retirement capital where we choose to do.

Currently, Regulation 28 prescribes the maximum exposure the fund (of the individual) may have to various asset classes.

In an explanatory note when the revised guidelines were issued in 2011, the Financial Services Board (FSB) had the following to say: “Regulation 28 to the Pension Funds Act imposed limits on the investments of retirement funds. These were intended to protect funds against making imprudent investments…”.

Regulation 28 prescribes maxima for the various types of investments that may be made by a retirement fund. The maxima are broadly:

*No more than 75% may be invested in equities;

*No more than 25% may be invested in property;

*No more than 90% may be invested in a combination of equity and property;

*No more than 5% may be invested in the sponsoring employer;

*No more than 25% can be invested offshore but this can be increased to 30% if the additional 5% is invested into Africa.

We know what’s good for you

Prior to the amendments in 2011 retirement funds were only allowed to invest 15% into the listed property sector, despite this sector being the best asset class over the previous ten to 15 years.

The local listed property sector has, for many years, been the outstanding asset class, outperforming all other sectors including offshore until fairly recently. Yet, investors were not able to have more than 15% exposure to this asset class until recently.

Is this how the regulators protect individual members? By limiting their exposure to the best asset classes and forcing them into underperforming assets, such as bonds and recently South African equities?

We are now having a repeat with the local equity market massively underperforming its global counterpart for more than six years now and yet retirement fund trustees and investors are continuously told that this restriction is good for them.

It prevents them from making stupid mistakes. Officialdom knows best. And so on and on.

I would love someone from the investment industry or Treasury to give me and the readers of Moneyweb an explanation how this decision was made — considering the massive outperformance of listed property initially and now offshore assets.

I have a suspicion that this will also not happen as the industry, or very large and profitable parts of it, is allowed to flourish on the back of very attractive tax incentives for which in return the investment industry acts as an unofficial collector of revenue for the fiscus.

The investment industry acts as a non-paid administrative arm of Sars for which, in my view, it gets very handsome tax and other incentives.

By blowing the whistle on the impact of Regulation 28 on investment returns of retirement fund members, you are guaranteed a very short career in the financial services industry. If you want to make a stand on something, don’t do it with Regulation 28.

Over the last six years and more the JSE has been the worst-performing market when compared to all other major regions in the world, whether measured in US dollars or in rands. And not by a short head but by a long shot. But Regulation 28 of the Pensions Act, no doubt under direct influence from exchange control regulations, says you may only invest 25% into offshore markets. The rest must be invested locally.

Why can’t individual members of pension funds who are sophisticated and experienced investors be given freedom to invest their money where they wish? Such as in progressive countries like Australia?

 No protection against the ANC’s disastrous economic policies

In essence, retirement fund members have very limited protection against the economic collapse we are experiencing under the chaotic and disastrous rule of the ANC led by President Jacob Zuma. What is more worrying, is that very few investors truly understand this and what it is doing to their future retirement capital. I have been writing about this for several years now. One of the first things I do on a Monday morning is a comparative analysis of the performance figures of the JSE versus all the other major sectors in the investable universe, in rands or in US dollars.

And for a very long time now the results have been the same: SA is lagging the investment race and lagging badly. See from the table just how poorly we are doing. These returns are in rands. Measured in US dollars the result is the same. Investment returns in dollars have been negligible over the last five years.

  Stone last over every period measured

Source: Financial Express

*Returns in ZAR

Yet, Regulation 28 forces your pension fund (or yourself if your investments are self-administered via retirement annuities or preservation funds) to invest up to 75% in the worst-performing equity market in the world. Let me say that again: Regulation 28 forces your fund manager to invest your pension in the worst-performing equity market in the world! And not a peep from the industry.

How much of a drag has this been on the investment returns of SA pension funds and retirement funds? It would take an actuary to do the actual calculation but I would suggest that it has been at least 3% to 5% per year (if current trends continue) over the last five years and more.

What to do?

Current members of retirement funds cannot do much, apart from hoping that their trustees and advisors are using the full offshore capacity in order to generate some much-needed additional growth as the local market has been struggling of late. Strip out Naspers, Richemont, Glencore and BAT and the rest of your portfolio (your future pension) has gone backwards. And as I’ve pointed out in many other columns — your second leg of future retirement funding — residential property — is also declining in real value.

The future for retirees will become increasingly bleak if these two trends don’t change anytime soon.

My advice, for a very long time, has been for investors (older than 55) to remove their retirement funds from the stranglehold of Regulation 28 as soon as it is legally possible.

Investors over the age of 55 with money in a wide range of retirement investments, such as retirement annuities, pension and provident preservation funds have the option of moving their retirement capital away from the clutches of Regulation 28. This can be done by making permissible withdrawals, tax free and/or taxed, and moving the balance into a living annuity.

Certain funds also allow a full withdrawal (provident preservation) but such a move is subject to taxation. It would need careful consideration as the impact of taxation is onerous.

By moving money out of the fund in question, either into cash or into a living annuity, you move away from the restrictions imposed on your money by Regulation 28. Money in your hands can be moved directly offshore while a living annuity can have 100% offshore exposure, in the best asset classes and best investment themes in the world.

I have done this with my own money and have seen the difference in returns.

So, pardon me when I react with a heavy dose of cynicism whenever I hear someone from the investment industry or even worse — government —exhorting people to save more for their retirement. Invest more into the weakest-performing investment market in the world right now? No thank you.

Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.

Read more from Magnus:

Investment advice from the tea boy

A blueprint for financial survival

How Zumanomics is crashing your retirement

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COMMENTS   26

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Clearly then, from what is going on in the country, from the presentation of this article, and in anticipation of what is about to befall South Africa, simply put, we are fcuked.

That is why I started investing in bitcoins. 50%+ growth the last 3 months! JSE…4.25% the past 6 months. Ofcourse if I omit NASPERS from my portfolio it is even worse.
Fcuk investing in this country. I am sick and tired losing my money here. What is the point of investing on the JSE if everyone is putting their cash into NASPERS? What about the other companies? There is zero trust in the future of this country…hence no one is willing to invest here. That includes locals. Only companies with a foreign expose ala NASPERS are growing.

That’s the african way : lure investors in with big promises and then change the rules to cover their incompetence. when that funding is gone take from the haves.
this place is f@#$d

You’re still better off investing in Naspers than bitcoins. With cryptocurrencies popping up like mushrooms that whole lot is going to tank sooner rather than later.

That is why I started investing in bitcoins. 50%+ growth the last 3 months! JSE…4.25% the past 6 months. Ofcourse if I omit NASPERS from my portfolio it is even worse.
Fcuk investing in this country. I am sick and tired losing my money here. What is the point of investing on the JSE if everyone is putting their cash into NASPERS? What about the other companies? There is zero trust in the future of this country…hence no one is willing to invest here. That includes locals. Only companies with a foreign expose ala NASPERS are growing.

I agree with Magnus here, Regulation 28 needs some amendments. More and more progressive countries are giving individuals more wiggle room to invest their money as they please. Although the rationale for Reg 28 is somehow valid, I think the rules need to be changed to allow for greater flexibility

The only true purpose of Reg 28 is to create a piggy-bank for the National Treasury. Don’t be fooled by the “noble aims” of managing the risks for retirees. All the parameters and limits are set merely to ensure that 70% of retirement capital stays in South Africa. Once the Treasury secured you in the shearing-pen, they can begin to fleece you. If needed, they will simply force fund managers to lend to Luthuli House.

The moment these criminal ANC politicians and cadres face austerity measures, they will force pension funds to buy government bonds “for the safety it offers”. This criminally inept socialist government has shown it’s hand many times. Nothing they do is to your benefit. Reg 28 is the fence that keeps you secured for the master-shearer Zuma to fleece you.

The local financial industry will have to break the barriers of Reg 28, or see their clients leave in droves to take their funds offshore. Reg 28 gives a competitive advantage to offshore fund managers who don’t have to comply.

Your are so correct. And Magnus is 100% correct but remember that the median voter in this country is so destitute that Reg 28 and retirement savings is something they have no idea about!

We need to accept that this country is terribly poor and getting poorer daily i.e. with GDP growth below 1% and population growth more than this the average South African is getting poorer every day. The answer would have been growth policies and programs that achieve 6%-7% growth thus making more economically active people. But that would not make a small elite billionaires. ( Look at Cyrils house in Head Road Bantry Bay( beautiful Stefan Antonie design!!) -probably R 200m-how many jobs did his businesses create?)

Coupled with the incessant daily racial hatred( from both “sides”) we have a thermonuclear weapon here in the making. Take Magnus advice-take every cent you can outside this place-and if you are young -and not dumb-leave!!

I agree with some of Magnus’s arguments. Regulation 28 is hugely problematic, makes no sense at all and is penalising investors heavily. There is no justification for enforcing the same asset allocation on 25 year old and 65 year old investors.
BUT we also need to consider the impact of the tax incentive for using pension/RA funds. I can effectively enhance my investment contributions by up to 40% by using a retirement fund. For every rand I invest offshore, I can invest R1 into my RA and then the additional 40c into something else (offshore for example) because of the tax refund. We need to do the maths on this enhancement. And if SA has a future then this needs to be considered.
I also think that the elective conference in December will be pivotal – a bad outcome and SA Inc will be a future Zimbabwe (from an economic point of view at least). In that case there will be little case to be made for continuing to invest in SA, especially via a restrictive vehicle like a pension fund or RA.

If the choice is in or out of retirement products (and a lot of people don’t have that choice) the maths are quite complex, and counterintuitive. I tried calculating after-tax returns on a couple of RAs a few years ago and found the tax deduction improved the return by about 3%, barely compensating for the fee structure. The trick is weighing up the relatively large % saving on contributions against the ‘small’ cost % on accumulating capital over many years.

The big tax incentive actually lies in the Funds’ CGT-free trading, which an individual can’t replicate, and is difficult to model up front.

The ANC want your pension funds to act as a shock absorber for bailing out failing SOE’s that have suffered excessive ANC corruption by its corrupt depolyees.

How many of these Magnus articles do we need? Been the same message for the past 18 months and nothing has changed so need to keep pushing this button surely?

Thanks the man for kicking your ample backside and getting you to wake up! We need Magnus to remind us that looking after what you have is important and as importantly fluid so changing constantly. You should value his advice and brutal honesty in addressing the issues that are destroying the country

Most importantly Magnus has been correct-have you?

@’teamed209

Oh, whats the problem….?

Truth making you uncomfortable ??

Ok…carry on sticking your head in the sand then

I’d agree on most points. One saving grace for Saffers is that, in addition to the direct 25% offshore allocation and perhaps 5% in Africa, a lot of the JSE is offshore ($) businesses and earnings from the likes of Naspers, Richemont, the miners, Steinhoff, some of the property, MTN, ABInbev, British American Tobacco etc. So, to a degree, you’re investing offshore in a huge chunk of the rest of your retirement savings anyway. But these are not necessarily the best performing shares/markets out there. They are better than being invested in SA Inc. though

Agreed – Reg 28 is arbitrary nonsense. Adults should be able to decide how they want to invest their retirement funds.
That said – I don’t think more than 5% of investors can justify having more than 75% in equities. Research shows that risk adjusted returns suffer when a long-term portfolio has more than 80% in equities.
The offshore limit is a serious impediment for average retirement fund members in my opinion. I think 40% offshore is about right.

Bylo…..are u actually AGREEING with Magnus for a change?

With the tax advantage, I believe that Regelation 28 funds may not be so bad. I believe if you had invested in the Coronation or Allan Grays balanced funds RA, that you may has beaten some of the worlds markets if you take the tax advantage into consideration. Also remember that the surplus amount that you contribute above the limits can be carried over and can be used for less tax payable from your annuities (monthly pay out)when you retire. Please advice if I’m wrong. High risk in SA’s political climate, but 22 years ago we had also thought it is high risk.

The FSB, under the FAIS Act, may take regulatory action against both the financial services
provider and the adviser where they do not act with the interests of their clients or the integrity
of the industry in mind. This action includes the ability of the Registrar to debar a person from
working in the financial services sector for an appropriate period of time

……..I still believe that the FSB, like so many of the other local regulators, will make laws and statements like this, but mostly ‘’fail to act’’

@askmeI know…..

The FSB ???…plse dont make us laugh

That same toothless body sponsored by the very entities its meant to keep in line ?

Like asking dracula to look after a blood bank.

Whats wrong MH – No Biotech punt? – Watch them crash and burn…

@ Gemini…

Off topic and verging on trolling

The reality is Magnus doesnt only write about biotech funds – he’s articles cover the whole gamut when it comes to investing [ property, pension funds as in this case etc etc ]

Its just that ppl dont appreciate his sobering view of SA unfort

Otherwise, ignore at your own peril

Really? Maybe go back to his previous article stating that he sold all his retirement funds and invested in Biotech stocks… So my comments are not off topic.

Well apart from forcing you into SA equity it caps your total equity exposure, which makes no sense for anybody with more than 10 years left to retirement.

But I am afraid any change will go the opposite way – soon a portion of retirement savings will have to be in SA bonds and SOE credits. Will not be the first time. Apartheid government used this as funding when all other sources dried up

That is why I started investing in bitcoins. 50%+ growth the last 3 months! JSE…4.25% the past 6 months. Ofcourse if I omit NASPERS from my portfolio it is even worse.
Fcuk investing in this country. I am sick and tired losing my money here. What is the point of investing on the JSE if everyone is putting their cash into NASPERS? What about the other companies? There is zero trust in the future of this country…hence no one is willing to invest here. That includes locals. Only companies with a foreign expose ala NASPERS are growing.

End of comments.

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