Regulation 28 and the FSCA Guidance Note
The National Treasury has articulated clearly that the aim of retirement fund investment regulation is to ensure that the savings South Africans contribute towards their retirement are invested in a prudent manner that not only protects the retirement fund member, but also is channelled in ways that achieve economic development and growth. Consistent with these goals, the National Treasury therefore incorporated the concept of RI into the revisions made to Regulation 28 in 2011.
Further guidance on Regulation 28 includes the PF130 on Good Governance of Retirement Funds and the FSCA Guidance Note issued in 2019.
Regulation 28 Preamble:
A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.
Excerpt from Regulation 28 – Principles:
(2) (a) A fund must at all times comply with the limits as set out in this regulation.
(b) A fund must have an investment policy statement, which must be reviewed at least annually.
(c) A fund and its board must at all times apply the following principles:
- promote the education of the board with respect to pension fund investment, governance and other related matters;
- monitor compliance with this regulation by its advisers and service providers;
- in contracting services to the fund or its board, consider the need to promote broad-based black economic empowerment of those providing services;
- ensure that the fund’s assets are appropriate for its liabilities;
- before making a contractual commitment to invest in a third-party managed asset or investing in an asset, perform reasonable due diligence taking into account risks relevant to the investment including, but not limited to, credit, market and liquidity risks, as well as operational risks for assets not listed on an exchange;
- in addition to 5, before making a contractual commitment to invest in a third-party managed foreign asset or investing in a foreign asset, perform reasonable due diligence taking into account risks relevant to a foreign asset including but not limited to currency and country risks;
- in performing the due diligence referred to in (v) and (vi), a fund may take credit ratings into account, but such credit ratings should not be relied on in isolation for risk assessment or analysis of an asset, should not be to the exclusion of a fund’s own due diligence, and the use of such credit ratings shall in no way relieve a fund of its obligation to comply with all the principles set out in paragraph 2(c);
- understand the changing risk profile of assets of the fund over time, taking into account comprehensive risk analysis, including but not limited to credit, market, liquidity and operational risk, and currency, geographic and sovereign risk of foreign assets; and
- before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long-term performance of the asset including, but not limited to, those of an environmental, social and governance character.
(d) With the appointment of third parties to perform functions which are required to be performed in order to comply with the principles in (c) above, the fund retains responsibility for compliance with such principles.
Code for Responsible Investing in South Africa
The Code for Responsible Investing in South Africa (CRISA) was launched on 19 July 2011.
CRISA aims to provide the investor community with the guidance needed to execute investment analysis and investment activities and exercise rights so as to promote sound governance.
CRISA applies to institutional investors such as pension funds and insurance companies as the owners of assets, and their service providers including asset managers and consultants. It encourages institutional investors and service providers to adopt its principles and practice recommendations on an ‘apply or explain’ basis.
The Code is currently undergoing revision to reflect local and global developments, and to align more closely with King IV. A revised Code is expected in late 2020.
King IV – Supplement for Retirement Funds
The King Code is a widely adopted voluntary code that guides corporate governance in South Africa. It is also recognised as leading international best practice on good governance.
Applicable across all businesses, The King (IV) Report on Corporate Governance for SA, 2016 guides good governance practice. The code was first developed in 1994 (with regular updates since then) and rests on the principles of leadership, sustainability and good corporate citizenship. The King Code asserts the importance of a sustainability integrated thinking of all company activities and the importance of ethical conduct and good corporate citizenship. It is recognised internationally as a best-practice standard.
King IV which was released in 2016 has the same philosophical underpinnings of King III (2009) however with the critical shift from a rules-based to a principles-based framework to enable the achievement of certain governance outcomes. Concepts have been refined to further emphasise the focus on an organisation’s role in sustainable development, and how its position as an integral part of society and mutually beneficial relations with all its stakeholders can help achieve this role. The King (IV) Report in reality makes integrated reporting and disclosure a requirement. It also refers to a paradigm shift from short-term capital markets to long-term, sustainable capital markets.
Additionally, in order to make it easier for all organisations to use the King IV Report, “sector supplements” were introduced for the first time. Part 6.4 of the King Report contains the “Supplement For Retirement Funds”.
The King IV report has also moved from an “apply or explain” to “apply and explain” model and has reduced the 75 rules in King III to 17 basic principles. In order for any institutional investor to substantiate a claim that it practices good governance, it must be able to demonstrate the implementation and practice of all 17 basic principles. The Supplement translates those principles into the retirement funding context.
King IV Supplement proposes responsible investing principles and practices, including the shareholder voting, as part and parcel of the good governance of retirement funds. It specifically makes mention of the opportunity for retirement funds in South Africa to subscribe to the Code for Responsible Investing in South Africa (“CRISA”) in addition to their boards’ statutory fiduciary duties under the Pension Funds Act, and the guidance offered in circular PF130 and the FSCA Guidance Note on the Sustainability of Investments and Assets in the Context of a Retirement Funds Investment Policy Statement.
The King Code is not enforced by legislation, but has been widely adopted by South African companies. Compliance with the King Code is a requirement of companies listed on the Johannesburg Stock Exchange (JSE).
The 17 Principles of King IV