The gazetted amendments to Regulation 28 of the Pension Funds Act, which are set to take effect from January 3, 2023, have a broader definition of infrastructure than the first draft of the changes and are welcome, as the changes now include investment in private infrastructure, says Sanlam Tailored Investments head Darryl Moodley.

There may, however, be added uncertainty at an instrument level as many listed counters, such as MTN, Vodacom, Curro, Growthpoint and other property real estate investment trusts could, according to the regulation’s strict definition, be classified as infrastructure, he highlights.

Depending on the classification approach taken, it may be the case that certain portfolios are inadvertently constrained by the 45% infrastructure limit, which, therefore, is something that needs to be monitored and clarified, if necessary, he notes.

Funds are required to report on their top 20 infrastructure holdings, which will likely have a small cost impact on service providers and administrators, Moodley points out.

He adds that this reporting requirement may also be viewed as a monitoring mechanism for the National Treasury.

The concern prior to the release of these regulations was around the possibility of prescribed assets, particularly as it pertains to infrastructure. Over time, should there not be a reasonably sufficient level of infrastructure investment by retirement funds, this may then re-introduce the possibility of prescribed assets in the future, he notes.

"It is widely recognised that infrastructure investments have the potential to boost economic growth in South Africa. The respondents to the 2022 Sanlam Benchmark survey also appear to have agreed, signalling an increased intent to invest in infrastructure investments from an average of 4.7% in 2021 to 15.5% in 2022.

"While this is promising, the gazetted changes to the regulations place a duty on retirement fund trustees to educate themselves sufficiently on infrastructure investments to be able to adequately assess the merits of an investment. The obvious risk is of retirement funds piling into infrastructure projects with poor investment fundamentals or governance failures, to the detriment of members and wider society," says Moodley.

"We, at Sanlam Corporate, largely welcome the changes to the legislation that were gazetted last week. It is notable that the increased 45% offshore allowance, which was announced in February, is a function of Exchange Control Circular No 10/2022, and therefore became effective immediately.

“Retirement funds could, therefore, have taken up to 45% of their assets offshore from February 23 onwards. The offshore change is distinct from the newly gazetted amendments."

Further, despite the potential benefits of investing in cryptocurrencies and blockchain companies, Sanlam Corporate thinks the prohibition on funds investing in crypto assets is a sensible decision, at least until the sector is formally regulated in South Africa, Moodley says.

The regulation is, however, silent on investing in companies that have indirect exposure to crypto assets, such as Naspers, Tesla, Coinbase or Mastercard, besides others.

These are large companies which are also included in many South Africa and global indices, and it is likely that the majority of retirement funds have some exposure to those companies.

"Until there is more clarity on indirect investment, funds will have to bear the compliance risk. A blanket ban on investments in these companies with indirect exposure could have severe implications for South African investors," says Moodley.

The wider exposure limits for private equity, from 10% to 15%, and decoupled limits for combined investments in private equity and hedge funds, from 15% in aggregate to individual limits of 15% and 10%, offer increased flexibility to investors, although Sanlam Corporate does not believe the prevailing limits have constrained most investors.

Therefore, the company expects this change to have a limited impact.