By-lined by Raazia Ganie, Head of Investments at NMG Benefits
The recent announcement that South African pension funds can now invest up to 45% of their portfolios offshore is great news for anyone who invests in a company retirement fund or their own retirement annuity fund.
The move means investment managers now have greater flexibility when it comes to allocating assets and opens a wealth of additional opportunities globally. This will lead to improved diversification of portfolios and should see better risk-adjusted returns over the long term.
Until earlier this year, retirement funds and members could invest a maximum of 30% of their investments offshore in terms of Regulation 28 of the Pension Funds Act, which governs all retirement annuities, pension, and provident funds in South Africa.
The changes to Regulation 28, which were confirmed by the SA Reserve Bank in February, can have potentially far-reaching effects for members, as it gives investment managers more options to diversify their investments.
This doesn’t mean you’re going to see any dramatic changes immediately, though. While the industry has welcomed this increased allowance, it will probably take some time for investment managers to assess their options and offshore opportunities.
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For individual members, it’s important to think carefully about your long-term goals, objectives and capacity to take on additional risk when choosing an investment portfolio.
For retirement funds, the process may take a bit longer. The boards of trustees of retirement funds will have to ensure that the overall investment strategies of their funds remain focused on their mandate of helping their members reach their goals within the new regulatory limits.
The increase in offshore exposure is substantial and there may be additional considerations that trustees would need to consider. These include the potential for currency hedging, offshore manager selection and fees for offshore investments. There would also be administrative impacts that need to be considered, such as for example withholding taxes and custody issues.
That’s why it’s generally advisable to take external advice from retirement and investment specialists before any revisions of investment policies and mandates. Any changes to the investment strategy must also consider the government’s ongoing restructuring of the retirement system, such as the proposed ‘two-pot’ system that allows for greater preservation and partial access to funds.
Ultimately, any changes in approach to offshore investment will need the approval of the trustees of each fund. We’re excited about the opportunities that the amended regulations bring, and look forward to discussing these with clients to improve outcomes.