Regulation 28 and the growth of your RA

Schalk Louw, portfolio manager at PSG Wealth
Schalk Louw, portfolio manager at PSG Wealth

We currently find ourselves in the middle of February, a time many refer to as RA season. Strangely though, many investors become uneasy whenever I mention retirement annuities (RAs) and the majority are reluctant to consider it as an investment option. 

There are two main reasons why investors feel this way. First, the costs related to older-generation RAs weren’t cheap, but RAs and similar products have become a lot more attractive cost-wise over the last 10 to 15 years. Another big concern for investors was the regulations that governed these older-generation RAs. 

In 2001, when the rand weakened to levels of around R12/$, investors and advisers could easily have allocated 100% of the available capital in their RAs to offshore investments, only to lose more than 50% of its value less than five years later. This is why National Treasury decided after 31 December 2011 that RAs also have to comply with Regulation 28 of the Pension Funds Act. 

The Act itself is nothing new to investors and it’s been in operation in our pension funds since 1962. In short, Regulation 28 was implemented to minimise risk by forcing investors, to a degree, to diversify their RAs. 

Of course, this caused a massive debate, because investors were now suddenly restricted to a maximum of 75% allocation in shares. The simple reason for the debate was that shares managed to outperform all other asset classes over the long term. Over the past 25 years, despite having experienced three massive corrections, the local stock market still managed to provide investors with a return of inflation plus 8 percentage points. 

From the perspective of a young investor in their early 30s with at least 25 years left before retirement, the opposition to Regulation 28 becomes obvious and you will have a tough time to convince them that Regulation 28 is to the benefit of all. 

Regulation 28 wasn’t implemented, however, to simply move investors from one negative environment to another. On the contrary, this risk management method was implemented to benefit broad spectrum investors in both good and bad market environments. 

So, we all agree that the past 25 years was a good time to be invested in shares. If you had invested 75% of your capital in the FTSE/JSE All Share Index and 25% in the FTSE All World Index 25 years ago, you would have earned an annual return of 14.5%. If you had to invest within the restrictions posed by Regulation 28, and allocated 50% of your capital to local shares, 25% to offshore shares, and 25% to local bonds, you would have earned an annual return of 14.1% at a fraction of the risk (volatility). 

It is precisely when the markets become volatile, as we were recently made well aware, when Regulation 28 should offer you more investment protection. 

The key to managing a successful RA is not to put it on a shelf and forget about it until the day you retire. Start your RA with greater exposure to shares while you are still young, and continue to actively manage these weights as you move closer to your retirement age. 

Schalk Louw is a portfolio manager at PSG Wealth. 

This article originally appeared in the 23 February edition of finweek. Buy and download the magazine here.


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