Draft amendments to Regulation 28: Good or bad?

Earlier this year, the Treasury published the draft amendments to Regulation 28 of the Pension Funds Act for public comment, sparking a contentious debate on the implications for pension funds in South Africa. Capital Markets Company Intellidex has weighed in on the proposed reforms, highlighting both positive and negative aspects from a public interest perspective. In a recent interview, Peter Attard Montalto, Head of Capital Markets Research at Intellidex, dissected the implications of the draft amendments and shed light on the sentiments of their clients. The focus of the amendments revolves around the infrastructure overlay and changes to investment limits, particularly in private equity. Montalto emphasized that these changes signal a significant shift in approach rather than imposing rigid investment mandates. One key aspect of the amendments is the creation of a 45% infrastructure investment bucket within Regulation 28. While this does not mandate investments, it encourages discussions among pension fund trustees and advisors on the importance of infrastructure in asset allocation strategies. Montalto pointed out that the definition of infrastructure within the amendments poses challenges due to its complexity and reliance on government-defined lists. The current approach, he argued, hinders the optimal allocation of resources and investment opportunities in vital sectors such as utilities, healthcare, and education. Despite concerns over definitions, the introduction of the infrastructure overlay is generally seen as a positive development, albeit requiring further clarity. The impact of the infrastructure overlay on pension funds and infrastructure development in South Africa is contingent upon the availability of bankable projects. Montalto underscored the necessity for viable projects to attract pension fund investments and drive economic growth effectively. The infrastructure spend is deemed crucial for South Africa's economic recovery, making the selection and execution of projects a pivotal consideration. Addressing the limits on domestic and rest-of-Africa exposure, Montalto noted that the proposed caps aim to balance investment opportunities and regulatory constraints. While the limits may suffice for the current landscape, future adjustments could be warranted to accommodate evolving dynamics, such as regional integration and emerging investment prospects. Regarding the separation of private equity from hedge funds and the adjustment of investment ceilings, Montalto emphasized the importance of fostering patient capital and nurturing long-term investments. The increased ceiling for private equity aligns with the call for more active involvement in assets and sectors that demand sustained financial support over extended periods. Private equity investments are seen as crucial for addressing challenges like the energy transition and social infrastructure development, requiring a shift towards a more enduring investment approach among pension funds. In essence, the draft amendments to Regulation 28 offer a platform for constructive dialogue on asset allocation strategies, infrastructure investments, and the role of patient capital in driving sustainable economic growth. While uncertainties persist over definitions and project viability, the amendments signal a transformative shift in pension fund management, emphasizing long-term value creation and strategic investment decisions.