Two of SA’s biggest financial services firms have warned that amendments to the asset allocation limits of local pension funds could result in as much as R600bn-R800bn in outflows from the country’s asset pool over the next three to five years.
While local asset managers welcomed finance minister Enoch Godongwana’s 2022 budget speech announcement that changes to regulation 28 of the Pension Funds Act would allow insurance, retirement and savings funds to invest 45% of assets offshore, they have warned of possible unintended consequences.
Before the amendment, the offshore asset limit was 35%, with a further 10% allocation to the rest of Africa. The changes to regulation 28 mean the 10% allocation that was ring-fenced for the rest of Africa — an allowance that was seldom fully used — has been rolled into the general offshore allocation, which now stands at 45%.
However, a research note by RMB Morgan Stanley warns that may result in “potential outflows from the SA pool of assets of up to R550bn to R800bn”.
Ninety One, SA’s biggest listed asset manager, which oversees almost R2.8-trillion in assets locally and internationally, puts the figure somewhat lower, but says there may be several unintended consequences, including the closure of rand-denominated offshore feeder funds.
“Our sense is that it’s probably somewhere between R400bn and R600bn,” said Sangeeth Sewnath, deputy MD of Ninety One SA, adding that the outflows could occur in “the next three to five years.
“It’s potentially a large sum so the question is which companies will benefit from this and which companies will lose out from the fact that money is being withdrawn from the SA capital market,” he said.
Feeder funds
While Sewnath warned that the effect could go beyond the asset management industry, his immediate concern is that it will disincentivise local investors from investing in rand-denominated offshore feeder funds, potentially resulting in their closure. A feeder fund is an SA-registered, rand-denominated unit trust that feeds into an offshore fund without requiring investors to apply for Reserve Bank approval if their investment exceeds the R10m annual limit for taking money offshore.
“In SA, we sell a lot of offshore feeder funds, which are sold on the back of having capacity that is higher within the investment collective scheme than individual retirement funds themselves,” said Sewnath. “The relaxation of the offshore limits is absolutely great for clients. But the industry, regulators and underlying investors need to make sure they are properly prepared for its implications.”
He explained that the offshore asset allocation limit — now at 45% — applies to an asset manager’s total domestic asset base rather than that of the individual funds it manages. This means asset managers that run large money market books that are 100% rand-denominated can allocate the unutilised international asset allocation of those funds towards creating offshore investment capacity. They can then open up that offshore capacity to domestic investors through rand-denominated feeder funds, which are popular with SA retail investors due to their convenience and administrative simplicity.
Sewnath said that before the raising of the offshore allocation limit to 45% in February 2022, individuals and individual unit trust funds could allocate 30% offshore with an additional 10% allocation for the rest of Africa.
However, under the previous regime management companies of collective investment schemes and life companies as a whole could allocate 40% of their domestic assets offshore and 10% to the rest of Africa.
“That extra 10% buffer is what allowed the industry to sell feeder funds,” he said.
“The new asset allocation limits effectively mean that buffer has been closed off.”
Extra buffer
Sewnath said the National Treasury may need to give consideration to relaxing the limit further than 45% for management companies of collective investment schemes and life insurance firms, as their ability to sell rand-denominated feeder funds in SA has been compromised.
“If that limit isn’t increased for the collective investment scheme and life industry I think the ability of companies to sell rand-denominated feeder funds will diminish over time,” he said.
“Some collective investment schemes may be forced to close their offshore feeder funds in the not too distant future if regulators don’t adjust the levels higher.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.