The future of RA’s looks bleak…
…in my opinion at least!
I cant understand the motivation behind treasury and the FSB’s latest (very zealous) implementation of the regulation 28 rules that apply to retirement funds.
These rules have a whole host of unintended consequences, not least of which, will probably be that RA’s are no longer used as savings vehicles and especially by younger people.
First a brief bit of background:
The Prudential Investment Guidelines (PIGS) are part of Regulation 28 that has been applied to pension funds and how the assets can be invested. Without getting into too much detail, the past rules stipulated that in terms of PIGS, funds could have a maximum equity exposure of 75%, property and equity was limited to 90% with the balance of the funds being invested in the other asset classes (bonds and cash). Typically “pension” funds have tended to sit with around 65% in equities, 10% in property and the balance of the assets in bonds and cash. On top of this, funds were allowed to have up to 25% of their assets invested offshore.
Now most companies tended to allow individual investors to do as they please so long as the fund as whole complied with the regulations. In practise this meant that because some investors were more conservative and had most of their money in bonds and cash, others could be more aggressive with some investors (typically the younger ones) having 100% in equities. The same applied to the offshore exposure. This seemed to work fine for just about everyone. Or so it seemed…
However, recently, the national treasury and the FSB saw fit to amend Regulation 28 (I still cant figure out why) and the worst part of the amendment seems to be that they want each individual member to comply with the legislation with some talk of them even forcing members to comply. This could mean that the companies would be forced to switch some individual members funds until they comply (that could be a legal nightmare). Talk about big brother watching you!
Going forward, 2 of the unintended consequences that I can already see are as follows:
- Anyone who has an existing RA will have to make sure that it complies with the regulations before they can add to it (this will even apply if they want to increase an existing debit order). Practically this will have the following effect: I have an existing RA where the equity exposure has grown to 78% and the offshore exposure is sitting at 30% of the fund. I am happy with this but I will now not be allowed to add to this RA fund unless I reduce the equity exposure to 75% and the offshore exposure to 25%. Now there will certainly be times when this might be appropriate but there are also times when investors will not want to reduce equities or their offshore exposure (for example when the market is weak and the rand is strong – it would be a classic case of buying high and selling low – and this enforced on us by the regulators!). The practical solution will be to leave the existing RA as it is and start a new RA at a different company. This exercise could be repeated each time investors want to add to their RA’s and it is not inconceivable that they could end up with 10-15 different RA’s at 10-15 different companies over the years – this is an admin nightmare for everyone.
- A second unintended consequence will be that younger investors who up until now have been able to invest 100% in equities will now shun RA’s in favour of discretionary funds where they can determine their own asset allocations. Sure there are no tax deductions and they will probably end up accessing the funds before they retire but that’s what you get when you try to force an inappropriate situation onto people. Why should a 30 year old investor with 35 years to go until retirement not have 100% in equities if she wants to?
I cant see why the new regulations have been introduced and more specifically why they seem hell-bent on enforcing them at individual investor level – it is certainly not about protecting investors from themselves – under the new rules, it is now possible to have 75% of your fund in equities and the remaining 25% in property – that is certainly not lower risk than the previous guidelines and will certainly mean more volatility for anyone who opts for this route. So what are the real intentions behind this all?
In our practice, we are very close to advising investors to stay away from RA’s until they are ready to retire – at retirement age they could transfer their discretionary assets into an RA. Under current legislation this would have multiple tax benefits for them.
Is anyone at treasury or the FSB listening to investors?
This article appeared in Finweek on 14th October 2011