Since 23 February 2022, changes to Regulation 28 of Section 36(1)(bB) of the Pension Funds Act 24 of 1956 have allowed investors, including retirement funds, to invest up to 45% of their assets offshore. At the time of the announcement, this relaxation of offshore limits caught widespread attention because of its far-reaching impact on South Africans’ retirement savings.

Regulation 28 sets limits on how and where retirement funds are allowed to invest members’ money. The 2022 amendments increased the maximum offshore exposure from 30% to 45%.

‘It’s a very positive development,’ says Martin Poole, Asset Consultant at Old Mutual Corporate Consultants. ‘The South African government has recognised that people might prefer more diversification and want wider access to different markets. The amendments furthermore allow greater investment in infrastructure, which, in turn, allows the private market to get involved in these longer-term projects.’

Did asset managers jump at the chance to invest more offshore?

Poole says the market response has fallen into two camps: a minority of managers who immediately pushed to meet the 45% limit; and the majority whose response has been much more measured. ‘In general we’ve seen incremental increases as cash flows have occurred, and the global market prices fell during 2022,’ he says. ‘It certainly hasn’t been a widespread step change.’

This more considered response came on the back of South Africa’s equity valuations, where major local shares have been available at a discount relative to their global peers. ‘It’s not been the worst time to be owning South African shares, particularly in rand terms,’ Poole explains.

Typically, investment managers would allocate most (or all) of the previous 30% offshore allocation to equities. Now there has been a shift towards more fixed income and even cash investments – again because of the prevailing economic mood and valuations.

‘Since the 2008 global financial crisis, foreign investments in government bonds have been little more than a shock absorber,’ he says. ‘They’ve basically been return-free risk, because they’ve had very low yields.’ Equities were, relatively speaking, much more attractive – and much more popular among South African investors seeking higher real returns.

Even so, South African managers are slowly increasing their offshore allocation, and Poole expects them to settle around 30% to 35% in the longer term. What’s clear, though, is that South African commercial retirement fund members will likely enjoy more diversification in their retirement investments.

‘While the practical meaning and intent of the “hard limit” of 45% are yet to be tested, the changes to Regulation 28 mean that, in general, investment managers have more tools in their armoury to balance risk and returns,’ he says.

What do these regulatory changes mean for retirement fund members?

Poole believes that – from an investment-outcomes point of view – this change to Regulation 28 is a good thing. He emphasises, though, that just because fund managers can now take 45% of their portfolios offshore, it doesn’t mean they have to, or that they necessarily should. The same applies to infrastructure.

‘The fundamentals of investing don’t change,’ he says. ‘As always, you should look to diversify your portfolio. If you’re going to retire in South Africa, you need two things: a functioning economy, which needs direct investment, particularly from savings; and a pension in rand.’

Pension fund savings are, by their nature, long-term investments. This means that investor patience is both enabled and – given National Treasury’s proposed two-pot system – encouraged. ‘As an investor, if you are impatient, you run the risk of destroying your own capital,’ he says.

Poole uses the analogy of growing a young tree: ‘If you keep moving the young tree from one pot to another based on changes in the weather you’ll end up with a struggling little plant that hasn’t taken root. You have to allow it to take root in one pot so that the soil and the elements can take their natural course. This tends to give you a more resilient tree.’

Visit Old Mutual SuperFund, South Africa’s leading umbrella retirement fund, for information on the investment portfolios available to employers.