The market is alight with speculation over a statement which quietly crept into Finance Minister Tito Mboweni’s recent medium-term budget policy statement around the reclassification of inward-listed financial products.

National Treasury has made a decision to reclassify all inward-listed debt and derivative instruments as well as exchange-traded funds (ETFs) referencing foreign assets as domestic, where previously they were classified as foreign.

Saving in a South African registered retirement fund means that investment choices are limited in terms of Regulation 28 of the Pension Funds Act. Simply put, only 30% of your pension, provident, preservation fund or retirement annuity can be invested in offshore assets. The remaining 70% must be invested in assets classified as domestic (South African).

Growing dissatisfaction over pedestrian returns from particularly domestic assets over the past six years, coupled with decreasing trust in government economic policies, has resulted in many investors wanting to increase the offshore allocation in their portfolios. This desire includes pre-retirement vehicles – which to many is a sizable portion of their savings – only to be constrained by Regulation 28.

What this reclassification could mean is that investors can invest 100% of their retirement savings in global assets by investing in rand-denominated offshore ETFs (now classified as domestic).

Jury still out on Reg 28

What needs to be clarified though, is whether, in fact, this reclassification will be adopted into Regulation 28 by the Financial Sector Conduct Authority (FSCA).  Regulation 28 falls under their jurisdiction and they have issued a communication stating that they are considering the impact of the reclassification and will revert to the industry, once a decision has been reached.

The FSCA have been very clear in their request for no presumptive action to be taken by industry players until they have clarified their position.

It would be the sincere wish of many South Africans saving for retirement for the reclassification to pertain to Regulation 28, but for the moment, the jury is still out.

It is no secret that many South Africans are already considering prematurely liquidating their retirement savings where possible and paying the consequent punitive tax rates, with the sole purpose of increasing their offshore exposure. Some have even gone so far as to cease paying retirement annuity contributions (which are also subject to Regulation 28) forgoing the very rich tax benefits in favour of taking their money offshore.

This is completely understandable as investors try to protect their capital from the vagaries of the rand and want to invest in growth industries which have no representation on the JSE. Furthermore, in a country with a dwindling tax base and a severely financially challenged consumer, it is hard for SA-based companies to grow their earnings.

Greater flexibility for retirement savings

The intent of the National Treasury message seems to be that they recognise the problem and they are taking steps to help investors preserve their retirement savings for their intended use (income during retirement), by giving them greater flexibility and choice as to where the assets may be invested.

There is no doubt that a nation’s retirement savings does become a rich source of income tax as members retire and start drawing down into retirement. It is this pool which National Treasury must also be seeking to protect. This is all good news and bodes well for investors.

So, perhaps Christmas will come early this year as we sincerely hope that the FSCA rules in favour of the new classification applying to Regulation 28. This will certainly be some good news in what has been a very challenging year for everyone.

UPDATE: On 24 November the FSCA issued a statement that the announced reforms to the capital flow management framework “do not alter the prudential framework currently applicable to all regulated funds, including retirement funds, collective investment schemes and insurance”. Due to the ambiguity around this and to prevent the mis-selling of products, the “reclassification of inward listed instruments is therefore suspended with immediate effect, to reduce the scope for ambiguity related to compliance with the prudential framework for regulated funds”. The FSCA said it will issue an amended circular following a period of public consultations. “All approvals granted on the basis of Circular 15/2020 are also suspended. The dispensation before Circular 15/2020 remains extant”.

This article was written by Helena Conradie, CEO of Satrix