Pension fund reform may be one of the “dryer” topics on the national agenda, but as with the nature of this subject matter, the impacts have long-term implications for all generations. Whilst the pace of change is decidedly slow, it is meant to be in order to take many views into consideration before embarking on a path of innovation. For the past year, the Government has been reviewing modifications to Regulation 28, the area of pension law that dictates where and in what quantity a pension fund can invest its assets and a variety of other measures intended to improve the general system.

The Government released its second draft proposal on changes to Regulation 28 in December, awaiting potential implementation in the 2011-12 timeframe. This section of the pension code has not been revised since 1998, and the proposed modifications are seen to both update investment limits based on current “best practices” and to work in tandem with the government’s desire to liberalize foreign exchange controls. The primary focus is to broaden the ability of fund managers to invest overseas where growth and potential returns are greater due to prevailing global economic trends.

Emerging markets have produced extraordinary returns over the past decade, but due to concerns over potential shocks to the value of the Rand linked to capital outflows, the general thinking has been to limit off shore investments to protect national foreign currency reserve deposits. However, the era of globalization has opened international commerce to new levels, and the flow of investment capital across borders has increased accordingly. Allowing for more investment overseas is now seen as a prudent mechanism to balance these various capital flows.

The new proposed overseas limits are summarised in the following table:

From an exchange control perspective, the Government clarified its position with the following statement, “The prudential approach to regulating foreign exposure aims to manage and encourage two-way flows of capital, whilst allowing a small, open economy such as South Africa, to respond to external shocks with appropriate policy instruments.” Capital flows can result from investors from overseas or from pure speculation from online currency trading, but the new rules are designed to protect the economy from large outflows by offsetting the potential for these flows with counter flows back to the country.

Regulation 28 may have received the most attention in press headlines, but there have also been other minor proposals and concerns that resulted from the extended comment period over proposed changes. One such proposal was to place a limit on pension plan contributions for wealthy individuals. A limit of 22.5% of total salary was placed on pension contributions to a plan, thereby impacting individuals that earned over approximately 900,000 Rand per annum. This limit is common in most other developed countries of the world. Wealthy individuals are encouraged to invest to the limit and then manage their other plans without general tax advantages. Companies overseas follow similar tactics with their various compensation programs.

Concerns have also been raised about the preponderance of pension plan withdrawals that have occurred over the past year, due primarily to trying economic times. Limits and restrictions have been offered as solutions, but no proposals have yet to be crafted. The broader issue of a national social security and healthcare coverage program remains on the agenda going forward.

Much is proposed, but much is yet to be accomplished.