Nkonki News

Amendments to Regulation 28 of the Pension Funds Act 1956

By: Technical Development team at Nkonki.

The Financial Services Board has published for comment The draft Regulation 28 which gives effect to Section 36(1) (BB) of the Pension Funds Act 1956.

The main amendments in the draft include Definitions, which have been updated in line with the exchange control environment, the Collective Investment Schemes Control Act of 2002, the Securities Services Act of 2004 and the accommodation of Islamic-compliant financial products.  In cases where Individual members have made choices of underlying investments these underlying investmentsmust now comply with Regulation 28.  The scope of Regulation 28 has been further extended to include all retirement annuity policies.    Investment Categories and limits are, to the extent possible, aligned with categories under the Collective Investment Schemes Control Act 2002.  Consultation is required to assess whether the proposed categories and limits are appropriate for pension funds as prudential entities. A money market and a bond “equivalent’ Islamic investment instrument is defined to create Islamic-compliant long- and short-term fixed-income type investments, to provide for their use in the pension fund framework.

The Registrar of Retirement Funds may prescribe which credit rating agencies may issue credit ratings for pension fund investment decisions. Kinds of assets are accorded a credit rating band from 1 to 3.

The amendments to Regulation 28 are not intended to relax restrictions and allow more risky investments but rather to allow for more efficient portfolio management and proper disclosure of investment vehicles. The amendments also guard against abusive practices.

Some of the other proposed amendments are:

• Borrowing: PF Circular 21 is inserted to protect the fund against irresponsible borrowing
• Foreign investments: to align with exchange control regulations pension funds will be allowed to invest 20% of assets outside the Republic
• Foreign investments into Africa: to align with exchange control regulations pension funds will be allowed to invest an additional 5% of the 20% foreign exposure limit into Africa
• Securities lending: this will now be permitted subject to limits and conditions to be prescribed by the Registrar of Retirement Funds. A draft notice governing securities lending by pension funds will be released for public comment.
• Derivative instruments: These have been defined and investment will be permitted subject to provisions and conditions to be prescribed by the Registrar. The FSB has released Draft Circular PF no 133, “Derivative instruments: investment in and disclosure thereof” to provide guidance for Regulation 28

In the past pension fund investment managers could potentially circumvent prudential limits. With the amended Regulation 28 the “look-through principle” will apply for calculating exposures and especially derivative, foreign asset exposure and investments in an underlying asset class through another fund will be transparent.

Source: National Treasury: Explanatory memorandum on the draft Regulation 28 that gives effect to section 36(1)(BB) of the Pension Funds Act 1956,