As it is the fund manager’s responsibility to manage the fund to ensure Regulation 28 compliance, the investor would remain compliant if invested 100% in a fund.
28 Sep 2022 00:25
If the underlying investments in my retirement annuity grow disproportionately to the allocation percentages which are Regulation 28 compliant, will the funds be redistributed to align with Regulation 28 or will they be left as is? Is it my responsibility to redistribute the funds?
Retirement funds are governed by Regulation 28 of the Pension Funds Act which limits the extent to which retirement funds may invest in certain assets. Retirement funds have various limitations, most notably being the limit of 75% to the equity asset class, and the total limit to offshore exposure of 45%. Other limits include a maximum allocation of 25% to the property asset class. Therefore, your investment asset allocation as a whole is required to be compliant. There are certain funds that are Regulation 28 compliant funds such as, example, the Allan Gray Balanced Fund. As it is the fund manager’s responsibility to manage the fund to ensure Regulation 28 compliance, the investor would remain compliant if invested 100% in this fund.
As an investor, you are not obligated to just invest in funds that are only Regulation 28 compliant. You can invest in multiple funds that might not be individually Regulation 28 compliant, as long as the overall portfolio complies. When an investor goes this route, the responsibility will fall on the investor to rebalance the portfolio.
Most service providers notify the client when their investment is no longer Regulation 28 compliant and requires rebalancing, although this is not always the case. When this happens, the investor will usually be given a 12-month time frame by the service provider in order to ensure the portfolio is Regulation 28 compliant.
It is also important to note that no additional transactions will be able to occur on the fund until it is compliant.
If the client does not have an advisor assisting them with selecting funds, it can become quite difficult for the average investor to choose funds from the fund list. In such circumstances, appointing a multi-manager can be beneficial as the key function of a multi-manager is to research and analyse the funds offered by various asset managers, and to build a portfolio from these funds in line with a specific investment objective, such as a Regulation 28 compliant portfolio. The investor agrees to an investment mandate which determines the set of investment returns required by the client in order to achieve their goals. A multi-manager, therefore, does not directly handle invested funds but rather strategically allocates a client’s capital to carefully selected funds in line with the agreed investment mandate. The multi-manager will ensure that the funds are invested as per the investment mandate and remain compliant with Regulation 28 which they achieve via rebalancing.
In the absence of an appointed multi-manager, an advisor and client would need to meet in order to select the underlying funds and agree on asset allocation, with the selected investment portfolio being reviewed typically on an annual basis. The danger of this approach is not only becoming non-compliant but also that the fund selection and asset allocation may become inappropriate as and when influenced by international politics and global economies.
If the funds are required to be compliant due to the investment no longer being of ‘grandfathered’ status – which is when the retirement fund is not required to comply with Regulation 28 – then the investor usually has until the end of the tax year to comply, and this remains their responsibility.
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