Spotlight interview: Joe Letswalo and Mabatho Session 

The 2022 amendment to Regulation 28 of the Pension Funds Act in South Africa introduced several key changes that asset managers must consider when determining aggregate exposure within approved funds. Regulation 28 governs the investment limits for retirement funds to protect the interests of members by ensuring prudent investment of fund assets. The amendment reflects a move towards encouraging diversification, promoting infrastructure investments, and addressing ESG (Environmental, Social, and Governance) considerations. Here are the key considerations: 

1. New Asset Class Limits 

• Infrastructure Investments: A significant change is the introduction of a specific allocation to infrastructure investments, with a maximum limit of 45%. This reflects the government’s desire to channel more retirement fund capital into infrastructure projects. Asset managers need to assess infrastructure opportunities carefully, ensuring they fit within this allocation while considering risk and return profiles. 

• Private Equity: The amendment increased the maximum allocation to private equity from 10% to 15%. Managers must weigh the higher potential returns against the liquidity and risk factors inherent in private equity investments. 

• Hedge Funds: The amendment continues to allow hedge funds as an investment option but does not increase their allocation limit. Asset managers need to monitor exposure carefully to ensure compliance. 

• Listed and Unlisted Real Estate: The allocation to listed and unlisted real estate remains at a combined maximum of 25%, with listed real estate capped at 15%. Asset managers need to differentiate between listed and unlisted investments, particularly considering liquidity and valuation challenges. 

2. Overall Portfolio Diversification 

• Compliance with Limits: Managers must ensure that the total portfolio complies with the set limits for various asset classes, including equities, debt instruments, cash, and alternative assets. Over-concentration in any one asset class could lead to regulatory breaches. 

• Risk Management: Diversification is not just about complying with regulatory limits but also managing risk across different asset classes. This includes considering the correlations between asset classes, the geographic exposure of assets, and the impact of macroeconomic factors. 

3. ESG Considerations 

• Sustainable Investments: Regulation 28 has begun to emphasize ESG considerations, pushing asset managers to integrate ESG factors into their investment decision-making processes. Managers must assess the ESG credentials of their investments, particularly as they relate to infrastructure and private equity. 

• Reporting and Compliance: There is an increasing expectation for transparency in how ESG factors are integrated into investment strategies. Asset managers must establish frameworks for monitoring, reporting, and compliance with ESG principles. 

4. Liquidity and Valuation Challenges 

• Unlisted and Alternative Assets: With increased limits on private equity and infrastructure, managers must carefully consider the liquidity of these investments. Unlike listed equities or bonds, these assets can be difficult to sell quickly, and their valuation may not always be straightforward. 

• Cash Flow Management: Managing the liquidity requirements of the fund, particularly in light of the higher allocation to less liquid assets, is crucial. Asset managers need to ensure that the fund can meet its obligations, such as paying out benefits, without being forced to sell assets at a loss. 

5. Regulatory and Compliance Framework 

• Ongoing Monitoring: Asset managers must implement robust monitoring systems to ensure continuous compliance with the revised Regulation 28 limits. This includes both pre-trade compliance checks and post-trade monitoring. 

• Engagement with Regulators: Given the evolving nature of Regulation 28, asset managers must stay engaged with the Financial Sector Conduct Authority (FSCA) and other regulators to remain informed of any further changes and interpretations that may impact their investment strategies. 

6. Stakeholder Communication 

• Trustee and Member Education: Trustees and fund members must be kept informed about how the amendments affect the fund’s investment strategy. Asset managers should work closely with fund trustees to ensure that investment decisions align with the fund’s objectives and members’ expectations. 

• Reporting: Enhanced reporting to stakeholders, particularly regarding ESG integration and infrastructure investments, is becoming increasingly important. Clear communication helps maintain trust and transparency. 

7. Strategic Allocation and Tactical Adjustments 

• Long-Term Strategy: The amended Regulation 28 encourages a strategic approach to asset allocation, particularly with the focus on infrastructure and ESG. Asset managers must align their strategies with long-term economic and social goals, as well as the specific objectives of the fund. 

• Tactical Flexibility: While maintaining a strategic view, managers also need to be tactically flexible to adjust to market conditions, regulatory changes, and evolving risk profiles. 

In summary, the 2022 amendments to Regulation 28 require asset managers in South Africa to adopt a more sophisticated and holistic approach to portfolio construction. This includes a greater emphasis on infrastructure investments, private equity, and ESG factors, while ensuring ongoing compliance with regulatory limits and managing risks associated with liquidity, valuation, and market dynamics. 

Section 3:  

Should we be worried about GNU in terms of advancing ANCs transformation policy? 

Pension funds in South Africa may indeed have reason to consider the implications of a Government of National Unity (GNU) on the advancement of the ANC’s transformation policies in the financial services sector. While the exact impact would depend on the specific composition and dynamics of such a government, several key considerations and potential concerns could arise: 

1. Policy Continuity and Change 

• ANC’s Transformation Agenda: The ANC has historically championed policies aimed at transforming the financial services sector, including measures to increase Black ownership and control, promote financial inclusion, and direct more investments into sectors that support broad-based economic growth. 

• GNU Compromises: A GNU, typically comprising multiple parties with differing ideologies, may lead to compromises on policy positions. While the ANC might seek to continue advancing its transformation agenda, other coalition partners might push for modifications or delays in implementation. This uncertainty could impact the strategic planning of pension funds. 

2. Regulatory and Policy Uncertainty 

• Potential Shifts in Regulation: A GNU might introduce changes in regulatory oversight or the pace at which transformation policies are enforced. Pension funds may face uncertainty regarding future regulatory requirements, particularly if new or amended legislation is introduced. 

• Impact on Investment Strategies: Uncertainty about the regulatory environment could affect pension funds’ investment strategies, particularly in sectors targeted by transformation policies, such as infrastructure, mining, or financial services. Funds might become more cautious, potentially affecting returns. 

3. Impact on Market Confidence 

• Investor Confidence: The formation of a GNU could create uncertainty in the financial markets, especially if it leads to perceptions of political instability or incoherence in economic policy. This might affect asset prices, currency stability, and overall market confidence, all of which are critical for the performance of pension fund investments. 

• Risk Premiums: Increased political risk could lead to higher risk premiums in South African assets, potentially impacting the cost of capital and the returns on investments in local markets. Pension funds would need to factor these risks into their portfolio management strategies. 

4. Transformation vs. Stability 

• Balancing Transformation and Stability: A key concern for pension funds would be the balance between advancing transformation goals and maintaining financial stability. If a GNU struggles to find consensus on key economic policies, there could be delays in implementing transformation initiatives, or policies might be introduced that could destabilize certain sectors. 

• Impact on Infrastructure Investments: Given the emphasis on infrastructure investments in the ANC’s transformation policies, any shifts in government priorities under a GNU could affect the flow of investments into infrastructure projects, impacting the long-term returns that pension funds might expect from such investments. 

5. Social and Economic Pressures 

• Broader Socio-Economic Environment: A GNU might be formed in response to significant social and economic pressures, including demands for faster economic transformation, reducing inequality, and addressing unemployment. Pension funds could face increased pressure to align their investments with social goals, such as job creation and inclusive growth, even if these objectives may conflict with maximizing financial returns. 

• Labour and Stakeholder Demands: Pension funds, particularly those with large public sector exposure, might face demands from labour unions and other stakeholders for more aggressive support of transformation policies. This could lead to conflicts between fiduciary responsibilities and broader social objectives. 

6. Potential for Policy Reversals or Acceleration 

• Acceleration of Transformation Policies: If the ANC remains dominant within a GNU, there might be an acceleration of transformation policies, especially if the party sees this as necessary to retain political support. Pension funds would need to quickly adapt to more stringent regulations or expectations regarding Black Economic Empowerment (BEE) and other transformation measures. 

• Risk of Policy Reversals: Conversely, if coalition partners push back against the ANC’s agenda, there could be delays or reversals in transformation policies. This unpredictability could complicate long-term planning for pension funds, particularly in sectors where policy stability is crucial for investment decisions. 

7. Communication and Stakeholder Management 

• Engagement with Government and Regulators: Pension funds would need to engage closely with government and regulators to understand the evolving policy landscape and to advocate for a stable and predictable investment environment. This would be particularly important in a GNU, where policies might shift rapidly. 

• Transparent Communication: Pension funds would also need to maintain transparent communication with their members, trustees, and other stakeholders about how they are managing the risks and opportunities associated with the political environment. 

8. Long-Term Implications for Transformation 

• Long-Term Commitment to Transformation: Even in a GNU, the long-term trajectory of transformation policies is likely to persist, given the deep-rooted socio-economic challenges in South Africa. Pension funds should prepare for ongoing, and potentially more intense, demands for transformation, particularly as the electorate and stakeholders push for tangible economic changes. 

• ESG Considerations: The global trend toward integrating ESG factors into investment decisions may align with the ANC’s transformation objectives. Pension funds could use ESG frameworks to address transformation goals while also managing investment risks and opportunities. 

A heavy-hearted Frederick Engels pontificated at the funeral of his friend and collaborator Karl Marx: “just as Darwin discovered the law of development of organic nature, so Marx discovered the law of development of human history: the simple fact, hitherto concealed by the overgrowth of ideology, that mankind must first of all eat, drink, have a shelter and clothing before it can pursue politics”.  Ideology cannot sustain loyalty in milieu of prolonged suffering. It would be the natural human reaction to reevaluate its assumptions if those assumption did not produce an improvement in one’s material condition. The agreement between political parties should be based on material transaction – improvement of standard of living.  

President Nelson Mandela’s January 8^th statement leading up to 1994 transition spoke of restructuring the economy and attaining “hight and sustainable rates of growth”. If the GNU runs its course and fails the economic question, it will not survive the next election.  

In summary, while a Government of National Unity could introduce some uncertainty and potential risks for pension funds, it also presents opportunities for strategic adaptation. The key for pension funds will be to remain agile, monitor the political and regulatory environment closely, and engage proactively with stakeholders to navigate the evolving landscape.