The Legalities of Increased Offshore Investment Limitations for Pension Funds

The Financial Sector Conduct Authority (FSCA) recently published Communication 8 of 2022, confirming the increase in the foreign portfolio investment limits as set out in Regulation 28 of the Pension Funds Act.

Then we take a closer look at the impact thereof on retirement funds and their members.

Section 36(1)(bB) of the Pension Funds Act provides that the Minister of Finance may make regulations limiting the amount and the extent to which a retirement fund may invest in particular assets or in particular kinds or categories of assets, prescribing the basis on which the limit shall be determined and defining the kinds or categories of assets to which the limit applies.

Currently, these limitations are set out in Regulation 28. The main purpose of Regulation 28 is to mitigate excessive concentration risk to member savings and to ensure protection by limiting the extent to which retirement funds may invest in a particular asset or in particular asset classes.

This is echoed in the preamble to Regulation 28, which clearly states that “a fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets ... This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the funds specific member profile, liquidity needs and liabilities.”

Regulation 28(3)(i) states that the aggregate exposure to foreign assets must not exceed the maximum allowable amount that a fund may invest in foreign assets as determined by the South African Reserve Bank (SARB), or such other amount as may be prescribed.

On February 23, following the 2022 Budget announcement by the Minister of Finance, the SARB issued Exchange Control Circular No 10/2022, indicating that the foreign investment limits of 30% and 40% respectively – as well as the African allowance of 10% – applicable to institutional investors (retirement funds, long-term insurers and collective investment scheme managers) have been combined into a single limit of 45% of total assets under management.

Consequently, on March 18, the FSCA published Communication 8, which confirmed the increase in foreign investment limits as set out in the SARB circular. The increased foreign investment limits came into effect on February 23, being the date of the publication of the SARB circular.

While portfolio managers are likely to take advantage of this increased allowance, it is important for the boards of trustees of retirement funds to ensure that they revise their investment policies and mandates (where needed) to ensure that the overall investment strategy of the funds remains focussed on helping members reach their goals within the regulatory limits.