South African retirement savings are governed by the Pensions Fund Act. Within this act, Regulation 28 lays out the maximum percentage of a fund that can be invested in different asset classes. For example, only 30% is permitted to be invested offshore. This aims to force diversification and prevent savers from keeping all their eggs in one asset basket.

The changes mean to make it easier for funds to invest in infrastructure and provide a way for the government to measure such investment. Infrastructure will be recognised as a classification within the current asset classes, and funds will be able to invest 45% domestically and 10% in the rest of Africa. That’s a high percentage compared to other limits like offshore investment (30%) and property (25%).

According to the government, “The proposed review to Regulation 28 is informed by a number of calls for increased investment in infrastructure given the current low economic growth climate.”

The changes could be good for South Africa and are in line with the government’s commitment to boost infrastructure in this year’s Budget. Infrastructure investment can provide long-term, stable returns, which appeals to fund managers. However, investors would be justified in being a bit nervous considering South Africa’s track record with mismanagement and corruption of such projects. Furthermore, the investment vehicles created to channel funds into these projects could become targets for further corruption.

The other possible issue with infrastructure investment is the liability mismatch issue. Infrastructure investments usually have to be built before they generate a return. Therefore, they can have a long lead time between investment and providing a yield to investors. For those whose RAs and pensions are close to maturity, they may not see the benefits of such investment before they need to exit their funds.

As infrastructure is not an asset class, individuals will seldom have control over how much of their savings get invested into it. If you’re in a group scheme, the trustees govern the portfolio options and relevant asset allocations. Even in cases where you can select your asset allocation (for example when setting up an Retirement Annuity), infrastructure investment is spread across asset classes and the specific allocation will be up to the underlying fund manager.

Read more @The South African