National Treasury seems to have paid close attention to comments from the retirement industry following the publication of the first draft of proposed changes to Regulation 28 of the Pension Fund Act. This section of the act tells institutional investors where they are allowed to invest pension money in an effort to do a bit of risk management.
Most of the concerns and changes asked for by the retirement fund industry have been addressed in the second draft, which was published on Tuesday for another round of comment.
When government first said that it intended to look at the provisions of Regulation 28 and mentioned that these changes would include provisions related to investing in public infrastructural projects – such as water supply, electricity and road networks – members and managers of pension funds feared that prescribed investments in these assets were on the horizon.
However, the proposals have been met with gratitude – and relief – in that the coming changes will do little more than clarify existing asset classes and update the limits of how much a fund manager will be able to invest in each class.
The proposals actually give fund managers more freedom to choose investments, not less.
Treasury notes that the first draft was published in February, with 39 submissions received via the public comment process. “Most submissions welcomed the proposed amendment of the regulation,” it said.
It is clear from the comments that one of the major concerns in the first draft was that the definition of “public infrastructure” was somewhat unclear and seemed to allow investment into government infrastructure projects only.
“Several comments pointed out shortcomings in the ‘infrastructure’ definition,” according to Treasury.
“This definition limited infrastructure to installations, structures, facilities, systems, services, or processes relating to the matters specified in Schedule 1 of the Infrastructure Development Act.
“A further limitation [was] that the infrastructure must be part of the national infrastructure plan, which excludes private sector infrastructure and infrastructure in the rest of Africa or abroad. The definition of infrastructure has been revised in the second draft of Regulation 28.
“The new revised definition is that infrastructure is ‘any asset class that entails physical assets constructed for the provision of social and economic utilities or benefit for the public’,” it says – specifically referring to the input received from the Association for Savings and Investment South Africa (Asisa).
In addition, says Treasury, including the social aspect in the definition will accommodate impact investing by retirement funds.
Impact investments are described as investments made with the intention of generating positive, measurable social and environmental impact alongside a financial return.
Andrew Davison, head of advice at Old Mutual Corporate Consultants, says changing the definition of infrastructure was very important as the first definition was very restrictive.
“The wider definition includes a lot more infrastructural projects, especially those initiated and built by the private sector,” says Davison. “This will enlarge the number of projects funds can consider for investment.”
However, he adds that the provisions applicable to how much pension funds can invest in infrastructure on a “look-through” basis is still a concern.
‘Extra admin’ concerns
Comments by the majority of stakeholders in the retirement industry relate not so much to the maximum limit of a fund’s exposure to infrastructure, but rather the additional administration to ensure that funds adhere to the limits on a look-through basis.
Treasury noted in its summary of the comments received that some investors said the limit of 45% across all categories was too high and others said it was too low, indicating that they probably got it right.
The gripe is actually about the extra work, in that fund managers, administrators and auditors need to add up all the bits and pieces of direct and indirect investments (through different investment funds that might have exposure to infrastructure) to ensure that they do not breach this limit and invest too much in infrastructure.
Asked whether this onerous requirement will scare investors away, Davison replies: “Scare away to where? There are no places to go. The industry has funds and [is] willing to invest in the right, bankable projects.”
He adds that the present Pension Fund Act allows investment in infrastructure and that the current amendments are a welcome effort to clarify things and to make investment in infrastructure easier.
Lack of opportunity
The comments on the first draft of the proposed amendments include several complaints lamenting the lack of ‘bankable’ projects that are able to offer pension fund members decent returns.
Treasury replies that its role is to construct the right legal framework, and that the planning and building of projects is not its responsibility.
“Government needs to push the right projects,” says Davison, adding that no compromise on investment returns will be tolerated as SA already has a problem that people do not have enough money to retire on.
Mike Adsetts, deputy chief investment officer of Momentum Investments, says it is good that both private and public projects qualify, as there is a trust deficit in government (which needs to be addressed).
“Including private projects will increase the investable universe and there will be, arguably, better governance standards in private projects,” says Adsetts.
“There is a real need for infrastructure investments, creating solid business cases and real return potential. Not all projects are created equal, so as investors we need to be very circumspect about which projects we support and invest in.”
He says the “one great thing about infrastructure investments is that they are tangible and that they can truly change and improve the lives of the people”.
“Infrastructure investments do have great potential to integrate responsible investment practices.”
Adsetts adds that infrastructure investments are by their nature long term and cash-generative, which meets the longer-term duration of retirement funds, at least in theory.
“One risk is that infrastructure investments are illiquid and the experience that we have had is that retirement funds tend to have a shorter duration than you would expect,” he says.
This is as a result of terminations, retrenchments and the ability of fund members to switch between different funds.
One area where Treasury apparently did not listen to the industry during the first round of public participation relates to the industry’s investments in hedge funds.
The first draft actually seemed to restrict pension funds’ ability to invest in hedge funds in that the new definition allows investment only in hedge funds that are structured as collective investments schemes.
“Treasury needs to relook the definition, or we will be forced to sell certain of our investments in hedge funds,” commented one fund manager.
And lastly, cryptocurrencies will still not be allowed as a pension fund investment.