Pension Lawyers Association Conference · Revised Regulation 28 The facts on the Tide: –...
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Pension Lawyers Association Conference 27 February 2012 Regulation 28 High tide or Low tide for your fund? … between the tides… Financial Services Board Ms Wilma Mokupo Head: Pensions (Prudential Supervision)
Transcript of Pension Lawyers Association Conference · Revised Regulation 28 The facts on the Tide: –...
Pension Lawyers AssociationConference
27 February 2012
Regulation 28High tide or Low tide for your fund?
… between the tides…
Financial Services BoardMs Wilma Mokupo
Head: Pensions (Prudential Supervision)
Revised Regulation 28Facts, fiction and fallacies:
– Effective date 1 July 2012 vs 31 December 2012?
– Report position at quarter end or throughout the quarter?
– Report at fund level vs member level?– Grandfathering: effective 1 April 2012 or 1 July
2012 or 31 December 2012?– General extensions: to grant or not to grant?– General exemptions: to grant or not to grant?– De minimus rule does not apply to derivatives?– Auditors: to qualify financials or not to qualify?
Revised Regulation 28The facts on the Tide:
– Effective dates: – Grandfathering 1 April 2011– Reg 28 revised 1 July 2011– Reporting requirements after 31 December 2012 (6 months
transition period after issue for Notices on securities lending, derivatives, hedge funds, etc)
– Reporting requirements:– revised sched IA, – revised sched IB, – revised Note to financials– Quarterly Breach reports
– The Grandfathering principle clarification– The de minimus rule– Trustees responsibilities– Investment & Benefit Administrators’ responsibilities– Auditors and PO responsibilities
Regulation 28 complianceThe Rip Tide: what does this mean for you?
Penalties?Enforcement Committee?Directive 33A?Other regulatory action available to Registrar?Registrar will look at themes across industry following first quarter 2012 breach reports due from end April 2012Registrar will apply his mind based on the Facts/ breach reports/ onsites etc.
Regulatory Developments RSA
New/ revised Regulation 28 (prudent investment guidelines effective 1 July 2011); NT & FSB press releasesTransitional arrangements (Notice 1&2 of 2011)
Notice 1: Quarterly reporting (continuous compliance)Notice 2: General conditional exemption under s36 till 31 December 2011 “funds not less compliant”Notice 3: Prescribed format for reporting, Reg28 audit reportNotice 4: Public entities for purposes of s2.1(d)Notice 5: Conditions for securities lending transactions.
Regulatory Developments RSA
Notices on Reg 28:Notice on Securities Lending;Notice on Public entities;Draft Notice on Hedge Funds;Draft Notice on Private EquityDraft Notice on use of Derivatives;Draft Directive on guaranteed policies (LTIA)
TCF roadmap 2011 on FSB websiteDrafting Directive to combine Good Governance/ King III/ CRISA code (Exercise of converting Circular PF130 into a Directive)
Recent Regulatory Developments RSA
Regulation 28 gazetted into law:
Gazette 34070 dated March 2011Final regulation 28 with Explanatory Memo and matrix of comments:
Reg28 published in Gov Gazette, part 1Reg28 published in Gov Gazette, part 2
Regulation 28History: prescribed assets 53%, only rules-based now combination of principles & rules (lessons from GFC)Principles: comply at all times & IPSFurther Board must -
1. Spirit of the regulation (EM)2. Improve trustee education3. Check compliance by advisors & service providers4. In contracting consider B-BBEE5. Assets appropriate for liabilities (ALM)6. Understanding changing risk profile (risk analysis &
foreign risk exposure)7. Member level compliance & look through principle8. Due diligence NB9. Sustainable investing – ESG
Regulation 28Exclusions: only 3
Linked policies (Reg28 compliant cert)Guaranteed policies (Reg 28 compliant cert) draft Directive 157.A.i (LT)
CIS (Reg28 compliant cert)
Islamic debt instruments are now specifically included & defined
Revised limits & sub-limitsPer Entity TOTAL Old TOTAL
CASH 25% 100% 100/ 20%GOVT DEBT 100% 100%BANK DEBT 25/15/10/5/5 75/25CORP DEBT 10/5/5 50/25 25%EQUITY 15/10/5/2.5 75/10 75%PROPERTY 15/10/5/5 25/15 25%COMMODITIES 10/5 10% 10%PART. EMPLOYER 5/10 10%HOUSING LOANS 95% 95%HEDGE FUNDS 5/2.5 10%PRIVATE EQUITY 5/2.5 10%AFRICA 5% 5%FOREIGN FSB SUB LIMITS SARB LIMIT
OTHER 2.5% 2.5%
Revised Regulation 28What trustees need to do:
Clarify roles & responsibilities of trustees, administrators, agents mandates, etc & oversightHow does the new Reg28 affect the Fund’s decisions & what do we need to revise/ change in the light of the new requirements? Do we need to align our existing IPS (investment policy statement) to address the issues of scrip lending, foreign exposure, B-BBEEE, ESG etc?What is a sensible governance model to execute the Fund’s investment strategy?What is in the best interest of the members?What is likely to help members reach their retirement goals?Do trustees have the sufficient knowledge to conduct a reasonable due diligence?
Revised Regulation 28
What trustees need to do:How are we going to assess the appropriateness of assets & liabilities for our unique member profile?How are we going to perform appropriate due diligence of our asset managers (including offshore ones) How are we going to assess our investment strategies & conduct risk assessments?Do we want to invest in Africa, hedge funds, private equity or ETFs and what are the risks?Do we understand the benefits of taking environmental social and governance factors into account when making investment decisions? see CRISA code
Revised Regulation 28What trustees need to do:
What processes & procedures are we going to use to arrive at a justifiable decision?Do we rewrite our IPS in line with the new Reg28 & CRISA (code for responsible investing in SA) Do we take a more active interest in proxy voting ( e.g. via securities lending)Do we rewrite our management agreements & mandates with our asset managers?Do we ask for more regular feedback from asset managers?Do we ask for more meaningful reporting from all service providers so as to better monitor & measure their performance or lack thereof & report breaches to Registrar within the required timeframes (quarterly, annually)?
Note: even if the board of trustees outsource these functions they will still be held jointly and severally liable as the fiduciaries/ decision-makers of the fund
Notice on Public Entities (issued)
Entities as prescribed for purposes of paragraph 2.1(d) of the Table to Regulation 28: Approved Public Entities -
1. Airports Company of South Africa Limited (ACSA)2. Development Bank of Southern Africa (DBSA)3. ESKOM4. Industrial Development Corporation of South Africa (IDC)5. Land and Agricultural Development Bank of South Africa6. Trans-Caledon Tunnel Authority7. Transnet Limited8. The South African National Roads Agency Limited (SANRAL)9. Rand Water10.Umgeni Water
Notice on Securities lending (issued)
• Conditions for securities lending transactions:• Safe & prudent manner• Fees & income to the benefit of the fund• Seek professional advice, where appropriate• Perform a due diligence on the counterparty & institutions
to whom the administration is outsourced & consider their risk ratings of the counterparty
• Listed counterparties for securities lending:• South African & foreign banks, CIS, LT insurers• Authorised users of an exchange as defined in the
SSA• Collateral security (cash 105% debt 110% equities 115%)• Contractual arrangements (minimum requirements)• Transactions may not exceed 12 months• Disclosure of securities lending transactions
Draft Notice on Guaranteed Insurance Policies: certificate to be issued by statutory actuary ito Reg28(8)(b)(iii)
Definitions Reg28 vs definitions Part 5 of Insurance Regulations (LTIA prevails where there is a conflict)Reg28(8)(b)(iii) allows exclusion of guaranteed policies that meet criteria of Registrar of Insurance:
The policy benefit must be ascertainable;A policy guarantees policy benefits if the statutory actuary provides the confirmation on retirement of a fund member in the case of:
– A fund member policy– A fund policy
In respect of each annuity instalment for the lifetime of the annuitant in the case of an annuity
Draft Notice on Private EquityIn terms of Section 5(2) of the PFA: fund beneficial owner of all its assets, therefore:All assets PE is invested to be kept in an FSB approved NomineePE Manager Category II FSP license under FAIS Act; PE Fund s.t. annual audit & quarterly reports to investors & valuations (methodologies of International Private Equity & Venture Capital Valuation Guidelines as adopted by SAVCA)
Prior to investing funds PE Fund must obtain legal opinions: capacity & authority of all persons in transaction; check existence & good standing of all parties to the transaction (esp several intermediaries), valid & unrestricted transfer of title by seller to purchaser of all assets, obtain all regulatory approvals to implement transaction, verifications across the chain of ownership, copies of opinions lodged with custodian & available to investors
PE Fund to maintain separate bank account for funds of investors not yet invested & for the payment of expenses & for expenditure or distribution to investorsPE Manager/ advisor to maintain current assets to meet current liabilities (liquidity requirement also set)
Draft Notice on Private EquityStructures of PE Funds a concern, therefore only Section 5(2) of PFA compliant PE funds to be considered:
En commandite partnerships s.t. conditionsBewind trusts s.t. conditionsCompany structure s.t. conditions
Trust deed or partnership must provide for:PE will never incur debt that may be enforceable against its investorsPE will never engage in activities that expose investors to loss that exceeds capital invested by the investor
SAVCA members or equivalent industry body approved by Registrar;PE Fund must have > R50 million total capital commitments;PE Funds can apply to be approved under PFA in terms of Section 5(2)(e) but must meet conditions i.t.o Section 5(2)Terms to be contained in PE agreements to be spelt out e.g. fees, ownership, agreed hurdle rates or preferred returns, method of distribution of gains & surpluses, SRI, targeted investments, default provisions, standards of care for key role players, etc
Draft Notice on Hedge fundsFAIS Act set minimum requirements for asset managers/ Category IIA FAIS license Regulatory concerns around Hedge Funds & FOHF:
LeverageSignificant performance feesInvestors permitted to redeem their interest only periodicallyOften own funds invested by the manager “skin in the game”Derivatives are used for speculative purposesShort sellingDiverse risks & complex underlying products involved
Details to be finalised after internal consultations within FSB
Draft Notice on DerivativesPrinciples for use of derivatives same Reg28 principles:
Derivatives may not be used to circumvent Reg28Look-through principle applies hence classified according to the underlying asset (matching)May be used solely to reduce / hedge investment risk or liability risk & for efficient portfolio mnt (EPM)No gearing/ leveraging may be usedCovered positions at all times Residual risk/ exposure must be disclosed after netting off must be similar when netting off (highly correlated)CollateralisationAgreements ISDA compliantDisclosure & Reporting (revised Schedule IA, IB in financials with revised audit reports to be issued soon consultation with industry, SAICA & IRBA being finalised)
Draft Notice on DerivativesTrustees responsibilities i.r.o use of derivative instruments:
Assess current use of alternative assets (who, to what extent, costs etc)Assess process & timeframes for reporting of breaches & implementation of
corrective action e.g. out-of-mandate-tradesReporting by asset managers done in a manner that allows benefit
administrator & Board to effectively manage & monitor & take corrective action in good time
Revise mandates and align with fund’s revised Investment Policy StatementSet down properly authorised & signed mandates ensuring service providers
clearly understand Board will not tolerate non compliance (incl. redress, exit clause, stop loss, etc)
Trustee training & upskilling to understand unique risks of derivatives & alternative investments
Monitor the actual investments not just adherence to policyAssess risks including counterparty risk that it is well understood & managed
adequatelyAssess quality of collateral provided (ratings can assist but not sole criteria)Valuations & valuation methodology used
Future Regulatory Landscape RSA
Some responses to global financial crisis GFC:
Proposed regulation of OTC mkts ?Proposed regulation of Credit rating agencies “Credit Rating Services Bill, 2011”Revision of SSA - “Financial Markets Bill, 2011”Regulation of Hedge fund managers & FoHFsSAM (Solvency Assessment & Management) for InsurersRed Book on Twin Peak Model “A safer financial sector to serve South Africa
better”
King III statesRetirement fund “boards… must act for the ultimate beneficiaries, who are individuals. The ultimate beneficiaries of retirement funds, which are currently among the largest holders of equities in South Africa, are individuals who have become the new owners of capital.”Members of retirement funds are financial decision makers and so are their boards who invest on their behalf over R2.3 trillion assets today!It is therefore critical that boards take account of the principle of “shareholder activism” and must therefore ensure that the fund itself, or - where an investment manager will be exercising the voting on behalf of the fund, that voting occurs in accordance with the instruction of the boards.
Traversing the Tides…
Trustees are the DECISION MAKERS
Act in the best interest of all members at all times
Don’t get caught in the RIP TIDE…. ACT NOW – it is never too late!!!
If you Don’t Act …. there will be consequences for your failure
In the thick of things… will your Fund sink or swim ???
Cruising… on the wave to full compliance… end in sight…
Wait and See approach… still cruising along .. Stuck in the past ????
Useful links
www.treasury.gov.za
www.fsb.co.za
www.trusteetoolkit.co.za
