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Retirement fund changes: how it affects your retirement fund

The National Treasury and the Financial Services Board have recently finalised the revision of Regulation 28 of the Pension Funds Act of 1956, which governs retirement fund investment structures.

What is Regulation 28?
Regulation 28 aims to ensure that savings invested in retirement funds are invested in a prudent manner safeguarding the assets of these funds whilst taking on an acceptable level of risk. This is achieved by ensuring that assets of retirement funds are diversified by setting the asset classes and limits into which the assets may be invested.

The financial services industry has changed dramatically since 1998, when Regulation 28 was last revised. Substantial changes have therefore been made to this Regulation.

To whom does Regulation 28 apply?
It applies to all retirement fund savings, including retirement annuity funds, pension and provident funds, preservation funds and unclaimed benefits funds. It does not apply to Living Annuity Funds (ILLA), endowments and other non-retirement investment savings.

How was the Regulation changed?
The main amendments to the regulation include the following:

  • The introduction of principles to strengthen the rules-based approach to regulation to help fund trustees in their decision making process.
  • The application of the look-through principle so that funds must disclose their asset structures and the underlying assets.
  • The revision and inclusion of definitions of assets classes.
  • The revision of the investment limits for the different asset classes.
  • In the past, compliance with Regulation 28 was achieved at an overall fund level, allowing individual members to choose their own investments at varying limits.

However, the amendments now make it clear that individual member choice must also comply with the new requirements.

When will the Regulation come into effect?
It will come into effect on 1 July 2011. However, “grandfathering” provisions have been introduced. These allow all individual retirement annuity and preservation fund policies issued before 1 April 2011 to be exempt from complying with the Regulation until such time as a material change to the contractual terms of the policy is made. Examples of material changes include making ad hoc contributions, increases or decreases to contributions, changes to annual contribution increases (ACI’s), changing the frequency thereof, as well as any changes to the underlying assets held in respect of the policy.

New retirement annuity and preservation fund policies sold after 1 April 2011 must be compliant with Regulation 28. If they are not compliant after this date, they will have to be so at the latest on 31 July 2011.

What are the implications?
Implications include the following:

  • Policies taken out before 1 April 2011 will lose their exemption from complying with Regulation 28 if any material changes are made. Once this has happened, the policies will be required to comply with the Regulation at policy level. Such material changes should therefore be considered with caution as these transactions will not be unwound.
  • From 1 April 2011, new policies and those written before this date and where material changes have been made to them, will have to comply with Regulation 28.
  • New policies sold after 1 April 2011 or any policies which have lost their Regulation 28 exemption and which are invested in non-compliant portfolios, will need to be compliant by 31 July 2011.
  • This will be achieved by the retirement fund member, in consultation with his/her financial adviser, selecting a compliant portfolio(s).
  • Should no compliant portfolios be chosen by this date, the Linked Investment Service Provider will make the necessary changes to ensure compliance.

The Linked Investment Service Providers will provide financial advisers and retirement fund members with further information regarding the implementation of investment restrictions, as well as guidelines regarding appropriate portfolio selection.

Contact Suzette van Niekerk (BComm LLB, CFP 4635) at Exceed Private Client Services (Pty) Ltd, tel. 021 852 0382 or e-mail to assist you in making the necessary changes to your retirement portfolio.

The above information was provided by Andrew Methmann of the Liberty Group