Regulation 28 of the Pension Funds Act sets prudential investment limits for all retirement annuities and regulated retirement funds in South Africa. During his Budget speech in February 2022, the Minister of Finance announced that Regulation 28 would be amended to allow retirement funds to invest up to 45% of their fund assets in offshore assets. This change came into effect on 23 February 2022.
Retirement funds and asset managers welcomed the increase in offshore investment limits, believing this to be a positive change that would result in better savings outcomes for retirement fund members.
The increase in offshore allocation means that retirement funds, alongside the asset managers who manage the funds' investments, have been provided with a broader range of investment opportunities to utilise for the generation of more sustainable inflation-beating returns and portfolio diversification purposes.
Whilst offshore markets offer a broader range of investment options, it is also true that the asset managers might not increase their offshore allocation to the maximum 45% limit as a few investment principles remain unchanged. From a valuation and risk perspective, one must still consider the various investment fundamentals to build a strong investment case in any asset class. Offshore markets might not offer attractive value relative to local assets at a point in time. With the rand exchange rate being very volatile, one could also add significant currency risk and volatility into a portfolio meant for retirement savings purposes.
For retirement savings vehicles, such as retirement annuities and preservation funds, the relaxation of foreign exchange controls comes with attractive potential investment opportunities. Diversifying these investments is possible by investing in different geographic areas, currencies, industries, and alternative asset classes.
What is essential for investors, when considering increasing the offshore allocation, is to consider what their long-term investment objectives are, what offshore exposure they already have as part of their overall financial plan, where the best opportunities are being offered and their risk tolerance and appetite. Retirement fund savings are long-term by nature, so it is essential to ensure that sufficient risk is taken to achieve real returns above inflation to protect the purchasing power of retirement savings given the rising cost of living. Retirement fund members must view their company and personal retirement savings as part of an overall investment planning strategy when engaging with their financial advisors.
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