by | Jul 1, 2021

All retirement funds (retirement annuities, pension funds, provident funds, and preservation funds) are governed by Regulation 28 of the Pension Funds Act. This regulation guides fund managers in where they can invest and places certain limits on how much to allocate to various asset classes, to ensure investors funds are invested prudently and, in a risk averse manner. In essence, prescribed assets are already something we accept as retirement fund investors. The article below further highlights the proposed changes which have received a far warmer welcome than some of the previous suggestions that were put forward.


SA ideally needs to invest around 30% of GDP into infrastructure to grow the economy, but is nowhere near this.

While just about everybody contributing to a pension fund usually gets very concerned whenever changes to the so-called Reg 28 – Regulation 28 of the Pension Funds Act – are mentioned, some within the industry see the latest set of proposed amendments as a positive development that could have real long-term benefits for the country and pensioners alike.

What are the amendments to the act?

The proposed changes to Reg 28 give the pension fund industry more leeway and the opportunity to increase investment in infrastructure by increasing the proportion of funds (up to 15%) they are allowed to invest in asset classes other than the traditional top three – shares, bonds and property.

The proposed changes widen the opportunities to invest in infrastructure by referring to infrastructure as a separate asset, in contrast with the current regulation that lumps it under a group of assets called alternative assets. Pension funds could choose to do so if they believe in the asset opportunities and would not be forced to invest into infrastructure.

Johan Marnewick, Head of Credit Alternatives at Stanlib, supports the proposed amendments. “The market was anxious leading up to the announcement of draft legislation,” says Marnewick, referring to concerns that government will force pension funds to invest in certain assets by setting a minimum to invest in government bonds or infrastructure.

“That would have opened the door to prescribed assets. That the proposals rather set a ceiling, or a maximum, gives pension fund investors the freedom to choose the best investments from a range of different assets, including infrastructure.

“In fact, the industry may be comfortable with an increase in the allowance to 20%.”

Infrastructure: physical assets that grow the economy

Marnewick refers to infrastructure investment as investing in the “real” economy, where it realises the goals of economic growth and creating employment, while investors earn good returns.

“Currently, SA has an enormous capacity constraint to grow the economy. The truth is that the constrained capacity is both financial but also due to a lack of skills. The result is that our economy can only grow at around 1% to 2% per annum, at best. Investing in infrastructure can address some of these headwinds and increase capacity through financial investment and attracting and growing skills in the sector,” he says.

Infrastructure shouldn’t only refer to public infrastructure but also private infrastructure such as schools, hospitals, housing, electricity installations, fibre networks, communications, cellphone towers and many other examples of assets that are needed to make economic activity possible.

“We have had chronic underinvestment in these real assets that promote economic growth and it’s stifling the potential within the economy.”

Infrastructure is a suitable long-term investment proposition.

Currently in South Africa often banks and private equity funds are financing infrastructure projects.

“Bank funding for these projects results in a mismatch in liabilities and assets for bank balance sheets – causing them to have to hold more expensive capital and other liquidity buffers. Investing in infrastructure is a long-term endeavour. In contrast, life companies that underwrite retirement products and pension funds have longer dated liabilities which they should match to longer-term investments. The retirement industry is much better placed to finance infrastructure,” says Marnewick, adding that it comes down to bringing longer term providers of capital closer to where it is needed, resulting in more efficient outcomes for the economy as a whole.

In addition, he points out that there are several other benefits in recognising infrastructure as an asset class for pension fund investors, including access to a wider range of investment opportunities and a lower-risk outcome through more diversification away from traditional assets which seem expensive at the moment.

Private investors – in partnership with the public

Marnewick points to the fact that the private sector is already the largest investor in infrastructure in SA.

“Ideally we need to invest around 30% of GDP into infrastructure to grow the economy. We are nowhere near this,” he says.

“We dropped from 20% five years ago to 18%. Government contributed 5%, with the private sector making up the other 13%. Ideally a partnership is needed between the public and private sectors, however the public sector’s contributions don’t have to be in the form of capital, but can be in the form of the necessary regulations to allow the private sector access to public assets or services.”

Marnewick refers to the success achieved with regards to renewable energy projects, which have to date attracted over R200 billion in investment and created around 40 000 jobs during the construction of the various wind farms and solar array installations.

Transforming South Africa for the better

Marnewick believes it is in all South Africans’ longer-term best interests to grow and modernise the economy. Government’s contribution doesn’t have to be financial, but through regulations that foster and attract real investment

“The pension fund industry can be part of the solution here,” he says.

Cautioning against ever-present investment risks, he says pension funds can avail themselves of the expertise and experience that already exists in the fund management industry to avoid the obvious pitfalls.

“Once investments start to flow, the jobs, skills development and long-term wealth creation will follow.”

(Source: Stanlib Asset Management.)