PRETORIA, South Africa - South African regulators want to require money managers to register with authorities, loosen pension fund investment rules, ease employer access to surplus assets and regulate custodians.
Sanctions against South Africa and the existence of exchange controls have isolated the country for 25 years. The country's regulators now are trying to update existing legislation to contend with South African institutions' reentry into the global marketplace.
Several key proposals have been developed by the Financial Services Board - South Africa's equivalent of the U.S. Securities and Exchange Commission. Among the proposals:
Draft legislation will be introduced by late October that would regulate foreign and domestic money managers.
While non-South African-based managers merely would have to meet registration and disclosure requirements, domestic managers might also have to meet a capital adequacy test.
The overseas investment restrictions might be raised to 20% or 25% in increments, though any increase in foreign investments would have to be accompanied by easing of foreign exchange controls by the South African Reserve Bank.
Detailed limits by asset class for overseas investments are a possibility.
Draft legislation would enable companies to recapture surplus assets from their pension funds, subject to approval by trustees and plan participants. The proposed measure is drawing fire from South African unions.
Detailed requirements for nominee companies, custodians and sub-custodians were spelled out in the proposed rules. The rules are not expected to impair major bank custodians.
FSB officials recently said foreign insurers would have to meet the same rules as domestic insurers, including registration, capital and tax rules, which could restrict foreign insurers from doing business in South Africa.
But regulators do not intend to keep out reputable foreign-based managers from the South African marketplace.
"We don't mind if Fidelity or Save and Prosper or PaineWebber comes to solicit business," said Gerry Anderson, head: financial markets for the FSB. "But if 'Get Rich Quick' from Timbuktu comes in to solicit business, that is the question."
FSB officials want to know who is soliciting business by requiring managers to register and meet so far undefined disclosure and advertising rules. South African managers also might be required to meet capital adequacy tests.
Regulators believe that many officials and trustees at South Africa's 16,500 pension funds - including some of its largest funds - are unsophisticated financially, and require protection through regulation. South African pension funds have a combined 400 billion rand ($85 billion) in assets.
Regulators do not draw any distinction between institutional and individual investors, unlike the U.S. SEC.
By the same token, FSB officials are drawing their bead on South Africa's fast-growing mutual-fund industry. Unit trusts now have 56 billion rand ($12 billion) in assets, and are growing at a rate topping 20% a year. Some 20 billion rand has been gathered by so-called linked-product providers, where brokerage firms offer a variety of mutual funds to investors.
Investment limits may rise
Current rules permit South African pension funds to invest up to 10% of their assets overseas.
Renier Botha, manager: retirement funds for the FSB, said the agency might boost the permissible ceiling to 20% or 25%, but would do so in incremental stages, probably at 5-percentage-point intervals. A move to 15% might occur within six months, he said.
Political pressures appear to weigh against a shift to an unrestricted prudent-man test. "Labor is not very much in favor to open up the floodgates to overseas investments," Mr. Botha said. Instead, labor unions are pushing for job-creating investments in South Africa. Official figures show unemployment at 29%.
Rather, a balance will have to be found. During the past two years, the amount pension funds could invest abroad through asset swaps - where the domestic institution finds a counterparty to invest an equal amount of money in South African securities - has risen from 2.5% in July 1995 to 10%.
That incremental approach gives trustees time to become educated about foreign markets. "If you mess up, do it with 5% rather than 20%," Mr. Botha added.
However, increases in the investment ceiling will be meaningless unless the South African Reserve Bank further eases exchange rules.
At present, bank officials privately say there is little incentive to increase the limit on asset swaps, but the bank rarely tips its hand in advance. The conventional wisdom in the South African investment community is that exchange controls will be abandoned, but in steps.
Mr. C.J. de Swardt, deputy governor of the reserve bank and chairman of the FSB, said prudential limits for overseas investments - including possible limits for subasset classes, such as international equities - will be addressed by the agency after abolishment of exchange controls. Bank officials decline to speculate on when controls might be lifted. Through April 1997, 40 billion rands in asset swaps had been approved, of which half had been executed.
Surplus recapture proposed
Proposed legislation to allow employers in South Africa to access surpluses in retirement funds is starting to come under fire from the Congress of South African Trade Unions, a confederation of labor unions.
A 1994 appeals court decision allowing Lintas (Pty) Ltd., Sandton, to access the surplus in its pension fund has prompted the proposal. Under the prevailing laws, employers' access to pension fund surpluses was limited to their ability to take a contribution holiday. Subsequently, a task group, including both employer and labor representatives, recently concluded employers should be permitted to remove excess assets from retirement funds under certain conditions.
Peter Milburn-Pyle, the FSB's chief actuary, there were several reasons for the decision. Since employers bear the risk of making up any shortfalls in the pension fund, then they are entitled to benefit from the surplus. If employers were denied access to the surplus, they would be tempted to underfund pension schemes which would affect all participants' benefits. Employers also could be encouraged to use the surplus to fund post-retirement medical costs, he noted.
But the proposed legislation contains several hitches: Any recapture of surplus assets must be approved by the trustees - half of whom must be labor representatives by Dec. 15, 1998. What's more, two-thirds of plan participants must endorse the plan. Participants who object still could complain to the FSB, which must approve each transaction.
In addition, if an employer withdraws excess assets, any future pension deficit would become a legal liability of the employer's. At present, employers are not legally obliged to make up shortfalls.
The payout would taxed at normal corporate rates, currently 35%.
The upshot is that employers will have to have compelling reasons to persuade trustees and members to approve a reversion of surplus assets. For example, boosting pay or benefits, or using the money to bail out a company in dire straits might convince employees to approve a recapture, said Janine Descoins, legal counsel for RMB Asset Management (Pty). Ltd., Sandton.
Despite the safeguards, opposition to the proposal is stiff. The Association of Retired Persons & Pensioners, Cape Town, argued surpluses have risen because many retirees received annual increases well below the inflation rate and the bulk of pension assets have performed much better.
Ravi Naidoo, acting director of National Labour & Economic Development Institute, a Braamfontein-based thinktank with ties to Cosatu, said the federation's objection is based primarily on how the surplus arose in the first place. Officially, Cosatu also is opposed to the principle of employers getting the surplus.
"As the legislation stands at present, there are many ways that an employer can generate a surplus in the pension fund, one of which is by ensuring the rules of the fund lay down that when employees leave the company, they may not take their full share with them.
"When you allow employers access to the pension fund surplus you are opening the door to various consequences and we believe the checks and balances contained in the draft legislation are too weak," he added.
Cosatu officials believe workers should have right to say how surplus assets are distributed, since contributions on made on their behalf. If employers are to be allowed access to the surplus it ought to be possible to limit what they can do with it, Mr. Naidoo added. For example, as a matter of principle they should not be allowed to take the money out of the country.
Shift to defined contribution
The debate about surplus assets in retirement funds is likely to become increasingly less relevant as South African defined benefit plans are converted into defined contribution plans.
In the case of defined contribution funds, employers' moral claim on the surplus - which exists as a reserve in some conversions - is more tenuous. Mr. Milburn-Pyle suggested participants will be inclined to vote against a proposed recapture. The bill to implement this legislation will be presented shortly to the cabinet for approval in principle