A new trend of seeking Islamic compliance for private retirement funds (PRFs), a norm in South Africa for decades, is steadily gaining prominence – to further enhance authenticity and foster contributors’ trust, an asset manager told IFN Investor.
Due to political uncertainties dating back to colonial days, low levels of trust in government entities led to the rise of PRFs as the preferred choice for most firms operating in South Africa, noted Stanlib Portfolio Manager Nadeem Hoosen.
What made PRFs especially attractive was these entities being highly transparent of who was managing the cash inflow and where the funds are invested, said Nadeem, since pensions account for the bulk of savings among South Africans.
“Companies buy into PRFs as you know exactly who’s responsible within your pension fund if anything goes wrong. All PRFs have a board of trustees and their own investment policies. There is only one Regulation 28 under the Pension Funds Act that governs us all.”
Regulation 28 protect PRFs members’ savings by limiting the extent to which funds may invest in a particular asset or asset classes. New retirement investments and any investment transactions on current retirement savings must follow the limits of Regulation 28.
Preventing excessive concentration risk and promoting diversification, an investment portfolio would be a basket of mixed asset classes of equities, property, bonds, cash and other specialized asset classes such as infrastructure. It can also be a mix of South African and offshore investments in other countries, explained Nadeem.
Since the 3rd January 2023, Regulation 28 has set a limit of 25% of a pension fund investing in a single company – regardless of asset class – with the exception of government instruments.
Such renewed focus on the integrity of pension funds had also led to the embracing of Shariah compliance principles to ensure the underlying assets of PRFs remain viable – providing an added layer of confidence for the savings of contributors.
“More and more companies are trying to enter the Islamic private retirement fund space due to its growing popularity. These investors are both Muslims and non-Muslims.”
With six asset management companies currently in South Africa that offer Islamic private retirement funds, Stanlib claims to be the fourth largest with the pension fund’s assets under management at US$125 million.
Waseem Abrahams, the head of distribution and client experience, wealth management and investments at Stanlib, said another key development is the Two-Pot Retirement Fund System being implemented from the 1st September 2024 in South Africa.
Splitting the contributions such that a third of savings can be withdrawn once every year for financial emergencies, the remainder two-third would be locked till the retirement age of 55 – resulting in better liquidity planning for pension fund managers.
Persuading contributors that their investments in pension funds under the new regime would remain safe has added another further impetus for Shariah compliance among PRF operators, said Waseem.
