Laura du Preez | 02 March 2022
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
Retirement fund members who enjoy the right to choose their underlying investments can increase their allocations to foreign markets to 45% of their savings with immediate effect, investment houses have confirmed.
This is a result of the South African Reserve Bank easing exchange controls for retirement funds, insurers and other institutional investors. The changes were announced in the Budget last week and confirmed to be effective immediately in a subsequent Reserve Bank circular.
The exchange controls previously limited retirement funds to 30% in foreign markets with an additional 10% for investments into Africa. The limit has now been lifted to 45% including any allocations to Africa.
Investment houses have confirmed that despite no changes being made to Regulation 28 of the Pension Funds Act, retirement savers will now potentially enjoy an additional 15% to invest in offshore investment markets.
Members can use any part of the 10% previously reserved for investments into African markets as well as the additional 5% granted, to invest in financial markets anywhere in the world.
Regulation 28 directly references the exchange control regulations and so there is no need to amend the regulation in order for the new limits to take effect, Ronald King, head of policy and regulatory affairs at PSG, says. Read more: How are my retirement savings invested?
Most retirement annuity and umbrella retirement funds offer members a choice of underlying investments. Many members, however, choose to invest in multi-asset funds that invest in line with the investment guidelines in Regulation 28. In these funds, the asset manager determines the allocation to offshore markets.
If you are invested in one of these funds, or are a member of a retirement fund with little or no investment choice, your fund manager may well increase the offshore exposure of the fund in time.
Offshore less attractive now
Asset managers may, however, not be in a hurry to immediately increase offshore allocations as a result of Russia’s invasion of the Ukraine, King says, adding that PSG is currently seeing more opportunities locally than offshore.
Daryll Welsh, head of product at Ninety One Investment platform, says given managers’ positions and lobbying for the increase in offshore limits, most are likely to take advantage of the new limits over time.
Managers of some of the larger funds on the platform have indicated that they will not be making any immediate changes while others have already started to increase their foreign allocations, he says.
Earl Van Zyl, head of product development at Allan Gray, says Allan Gray will not just increase offshore allocations in its funds as a result of the limit increase, but will continue to invest where the manager believes the best value can be found over the long term.
Van Zyl says before the budget speech, Allan Gray’s three flagship funds had approximately 25 percent invested offshore, below the previous maximum of 30 percent. This indicates that portfolio managers are finding good value in South African equities and bonds, he says.
Restrictions on some living annuities, endowments
The easing of the exchange controls will not necessarily result in some investment companies lifting restrictions they have been forced to place on offshore investing in products such as an investment-linked living annuity or an endowment.
Individual investors in an investment-linked living annuity or an endowment are not subject to Regulation 28 of the Pension Funds Act.
But life insurers who offer these products are subject to exchange controls – until last week they could only invest 40% of investments from individual investors (known as retail assets) in foreign markets, with an additional 10% for investments into Africa.
This limit has now been changed to 45% for investments anywhere in the world beyond South Africa.
When life insurers that offer endowments and living annuities reach these offshore limits, they are forced to impose restrictions on individual investors in these products.
Welsh says the increase in foreign exposure is unlikely to have a material impact on available offshore capacity for these products offered on investment platforms under a life insurer's licence.
He says a life insurer’s overall foreign exposure depends on all the underlying unit trusts’ foreign exposure and, as funds increase their exposure, it will take up the additional 5% foreign capacity.
Similarly Van Zyl also says, because underlying funds listed on its platform will increase their offshore exposure, the new limit does not sufficiently increase Allan Gray Life’s available offshore capacity.
The current offshore restrictions on the company’s living annuity, endowment and tax free investment products will not be adjusted immediately, he says.
Welsh adds that while some investors and their advisers may still consider the new 45% offshore limit restrictive, Ninety One’s research indicates that 25%-55% foreign exposure could be the optimal range for living annuities, depending on the rate at which a retiree is drawing an income from the living annuity.
Restrictions on feeder funds
Investors in some rand-denominated foreign funds – particularly feeder funds - may at times find these funds closed to new investments as a result of the exchange control restrictions on insurers and unit trust companies.
Van Zyl says it is not yet clear how the increase in the exchange control limit from 40% to 45% will impact rand-denominated foreign unit trusts and Allan Gray is engaging with the regulator on this.
Welsh says the impact of the increase will depend on how close a unit trust management company is to this limit and the extent to which the extra capacity is taken up by other domestic funds that a management company runs.
If, for example, a unit trust management company’s balanced funds increase their foreign exposure to 45% there may be no capacity left for the feeder funds, he says.
When a feeder fund closes to new investment, you can still invest directly offshore by converting your rands into a foreign currency. Read more: How can I invest safely offshore?
Fund classification addressed
The Association of Savings and Investment South Africa (ASISA) has granted its member unit trust companies a temporary exemption from the foreign exposure limits that determine how a fund is classified. The exemption will hold until the relevant standard is reviewed.
Until now ASISA classified a unit trust fund as a South African one if it had at least 60% of the fund invested in South African markets.
Sunette Mulder, senior policy adviser at ASISA, has confirmed that funds will continue to be classified as South African as long as they have 55% of their assets in South African investment markets. The mandate of the fund must, however, allow for the increased exposure to offshore markets.
