The postponement of deadlines several times last year shows that retirement funds are battling to meet the reporting requirements of the revised version of Regulation 28 of the Pension Funds Act, which governs what these funds can hold, and in what proportions.
Promulgated in February 2011, the revised version became effective on 1 July that same year. The first breach reports that had to be submitted to the FSB, for the first quarter of 2012, were due in April 2012 but, after several extensions, were only due at the end of January this year, together with the first and second quarter reports.
“Without timeous, accurate reporting, the Regulation won’t be enforceable,” says René Swart, Head of Investment Accounting and Regulatory Reporting at RisCura Analytics, an independent analytics provider.
One problem trustees face is the lack of accurate data from some asset managers, without which trustees can’t prepare their reports. “One of the complexities is that asset managers are being asked to provide instrument categorisations as well, but there are inconsistencies, particularly in money market instruments, which complicates reporting,” Swart says.
Under the previous Regulation it was possible for funds to annually aggregate reports prepared by their asset managers. With the daily monitoring requirements created in the new Regulation, this is no longer feasible. Trustees need to overcome these obstacles in preparing the annual and quarterly reports that need to be submitted to the FSB.
The revision of Regulation 28 was crucial as markets had changed significantly. “The range of financial instruments available to retirement funds has expanded over the years and alternative investments, such as private equity and hedge funds, weren’t explicitly dealt with in the previous Regulation. Including these in the new version as separate categories prompts trustees to properly consider these options in structuring the optimal investment combination for their members. At the same time, by setting clear limits, it protects members from overly risky investment strategies.”
Under Regulation 28, retirement funds can invest up to 10% of their portfolio in either private equity or hedge funds, or a combined total of 15% of their portfolio if they invest in both. Previously there was no explicit limit for private equity or hedge funds, so many of the larger retirement funds have had to reduce their alternative investment exposure. On the flip side, trustees of smaller retirement funds with no previous exposure have been encouraged to find out more about these alternative investments.
Swart says RisCura is seeing a number of breaches of the Regulation 28 offshore limits, mainly due to the volatility of the Rand. “Where appropriate to the needs of the relevant members, funds are aggressive in utilising their offshore allowances,” she says. The exposure limits are 25% for international investments, plus a further 5% ring-fenced for African investments. “This means funds may have up to 30% of their portfolios invested in Africa.”