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Protect Your Pension

The Pension Fund Act has changed – and investors need to understand how that affects them.

Bryan Hirsch

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Every retirement fund is served by professional trustees who are either company nominated, employee elected or are there through an umbrella fund.  It’s very difficult for them to make investment decisions as so few have in-depth knowledge of markets and, therefore, must be guided by investment managers. In view of this, there are proposed changes to Regulation 28 of the Pension Fund Act, on how trustees should deal with investments.

The liability profile of retirement funds should define the investment decisions made by trustees. Consideration must be given to the long-term retirement expectation of members and ongoing liquidity required for withdrawals, pension payments and administrative costs. In matching investments with these return objectives, retirement fund portfolios could assume concentration risk. Regulation 28 of the Pension Funds Act was introduced to overcome this problem by limiting the extent of exposure to any one asset class (equities, bonds, cash and other). Further restrictions limit non-South African investments – currently at 20% of fund assets, and an additional 5% if invested in Africa.

Further sub-limits are set for the categories subject to the regulation, such as the 5% limit on unlisted shares issued within South Africa, as part of the broader overall limit for shares at 75% of total fund assets.

New proposals

National Treasury has released proposals that seek to address changes in the industry since the last review undertaken in the 1990s. These focus on:

  • Eliminating problems arising from discrepancies and disparities between various legislations that cross-reference each other and require alignment in their interpretation and implementation, within the context of retirement funds.
  • Innovation in the utilisation of foreign investments in circumstances where the exchange control environment has altered significantly.
  • The use of structured products and derivatives, not specifically catered for within the current regulation.
  • Policies issued with a guarantee that have increasingly formed the basis for flagrant disregard for the regulation.
  • The utilisation of Shariah Compliant investments by funds.

Further specific measures include making Regulation 28 applicable to retirement annuity funds.  Credit rating agencies are given a role in that once they rate an investment, a limit kicks in relating to that specific asset as rated.

Impact of Pension Fund Act

Many commentators have called into question the need for quantitative restrictions in the first place, arguing instead for a more principles-based approach that takes into account the risk profile of the investing fund.

The draft regulation does not enunciate clear underlying principles upon which it is based. For example, in the context of life staging, asset growth may be the more important consideration for younger fund members than income generating assets, which seems retained as a bias in the proposed revision.

Those who circumvented the regulations with the utilisation of derivatives for gearing purposes, will not welcome the ‘look through’ approach and the restriction that hedging be limited to efficient portfolio management. However, it would appear that part of the debate is misplaced as it is evident that there is a lack of understanding of how derivatives are utilised currently by fund investors, and this has led to suspicion on the part of the regulator.

Private equity funds are concerned that the restrictions on their utilisation are impeding upside growth for pension funds. However, the regulatory concerns seem to be the extent to which the managers of private equity funds override the investment objectives of the retirement funds themselves, in the decision making process.

Advocates of Socially Responsible Investments (SRI) may see the reference to Islamic Shariah Compliant investments as a missed opportunity to address wider SRI issues, even though this is not an asset class, but an overlay that will increasingly become the norm in a world guided by sustainability as the watchword.

For individual retail investors, the applicability of the regulations to their retirement annuity fund, and to retirement funds where they have been accorded individual investment choice, would elicit varied responses, dependant on each individual members’ risk appetite. Fatima Vawda, CEO of 27/Four provided assistance and guidance on the complex nature of Regulation 28.

BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.

Personal Finance

(Infographic) The Financial Advice Millennials And Gen Zers Want To Know

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful. And that starts with getting the right advice.

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Whether it’s saving for retirement or paying off credit card debt, money management can be a challenge. Of course, different people have different concerns – and that often comes with age. While a 60-something baby boomer might be organising their savings for retirement, your 20-something millennial might be focused on paying off student loans.

In a recent study, financial intelligence company Comet surveyed more than 1 000 people to uncover the top financial concerns of various age groups, as well as the financial advice millennials and Gen Zers want to know and what they hear instead.

Overall, saving for retirement was the top concern across all age groups, with saving for an emergency and affording monthly bills following in second and third. However, it’s no wonder these are some of the most pressing worries – according to the research, 23 percent of people admit they don’t have a savings account, and 43 percent reported not being on track towards their retirement goals. Perhaps that’s because they didn’t hear the right advice growing up. At least that might be the case for Gen Zers and millennials.

According to the research, these young people want to learn things such as how the stock market works, how to manage an investment portfolio, how to invest in real estate and how to build credit. Instead, they’re simply told how to create a budget, save for retirement and pay credit card bills in full every month.

Related: 7 Critical Things Your Financial Advisor Must Meet

Having a grasp on your financials is tricky, but it’s crucial if you want to be successful and comfortable. To learn more, check out Comet’s infographic below.

1532099434_2-cents-worth-infographic

Related: Financial Wellness Coach Nelisiwe Masango Shares Retirement Wealth Advice

This article was originally posted here on Entrepreneur.com.

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Personal Finance

14 Ways To Make Quick Cash On The Side

If you need money quickly, here are some solid ideas.

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Need to make some fast money on the side, whether it’s to pay off a credit card or to make your rent?

Keep in mind, making quick side cash isn’t about making a lot of money or getting rich. It’s about getting a shot of capital to help tide you over and put something extra in your pocket. However, some of these side-income ideas can build up your wealth over time. There’s many ways to accomplish this: By participating in the gig economy, the sharing economy, online sales networks, passive income techniques and more.

If you’re looking to make extra money in a relatively short period of time, check out these 14 slides.

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Personal Finance

Take Advantage Of Financial Democracy Made Possible By The New Stock Exchanges

Why should financial democracy matter to entrepreneurs?

Etienne Nel

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Because it creates a society able to afford products and services. Without it, even the innovative products and services that are entrepreneurs’ bread and butter will fail.

What is financial democracy, exactly?

It’s both the right and the ability of the (wo)man in the street and business people to make the decisions that affect their financial circumstances.

Financial democracy does not automatically follow political democracy. For almost 25 years after South Africa’s political transformation, the exclusiveness of our financial markets continued to deprive the vast majority of South Africans of the means to invest, save, and build wealth. South Africa has, therefore, never developed a retail stock exchange environment. So, it has deprived the majority of small and medium sized business of access to capital.

For entrepreneurs to truly flourish, they need a mechanism that easily and seamlessly connects the investor pool with every size of business. And, they need affordable ways to enter both the retail and institutional market.

In short, they need stock exchanges. Ones on which listing takes weeks rather than years, doesn’t break the bank for listing fees, and provides the shortest route to the largest possible potential investor base.

That’s not been possible in the stock exchange monopoly that existed for six decades. Now, it is.

What’s changed?

We now have four new stock exchanges. The resulting competitive environment will significantly reduce the cost of listing – and the cost for investors of buying and selling shares.

Instead of restricting share trading to people or organisations who already have tens of thousands of rands to invest or millions to spend on listing, by licensing four new stock exchanges, the Financial Services Conduct Authority (FSCA, formerly the FSB) has recognised that most financial decisions do not call for high levels of education.

Related: The Role Of Foreign Exchange In The Economy

Most people know how to spend their own grocery money. Most know that it’s better to keep their R1 000 monthly income in a coffee jar than spend R50 of it on bank account fees. People who can barely read and write are immensely skillful at manipulating air time deals to their advantage.

There is significant financial savvy in all social strata.

In the same way, although the mechanics of bookkeeping and accounting may be unfamiliar territory to many entrepreneurs, most have a clear understanding of the difference between profit and loss.

The FSCA has therefore enabled democratisation of the financial markets by enabling the broadest possible spectrum of entrepreneurs and investors to use stock exchanges to participate in and contribute to the economy – on their own rather than prescriptive terms.

How do you take strategic advantage of this democratisation?

  1. Base your business strategy on people’s instinct for making decisions in their own best interests. Trust financial decentralisation, such as one sees in crowd funding and in digital environments such as block chain, where people would far rather trust one another than institutions and governments. This is democracy innately at work in the financial environment and it’s accelerating organically as digital technologies give people more means and the confidence to help themselves – to information and opportunities. Ride the wave.
  2. Tap into people’s desire to innovate. Consumer organisations have proved that letting people interactively help them develop products is a powerful growth engine. Apply the principle by letting people grow your business by buying shares in it, giving you capital and themselves a platform on which to build wealth.
  3. Remember, the ultimate loyalty reward is equity.

Your financial democracy business plan

Look to list on an entrepreneurial stock exchange; one that was founded by entrepreneurs on entrepreneurial principles.

That means: A stock exchange that is already built on financial democracy and decentralisation. One that has, at its core, a single operational concept that keeps things simple for you, automatically gives you an immediate competitive advantage, and, ensures that no matter what your business needs in terms of attracting capital, the exchange can provide all the options in the same, consistent way.

What does such an exchange look like?

It has fintech capabilities. So:

It slashes your listing costs. It achieves this, among other things, by enabling you to populate an electronic prospectus, demonstrating your financial viability, and self publish.

It gives you control by having the granularity and agility to impose relevant governance right down to the individual investor. You get to decide the types and quantities of investors you want to attract. This also enables you to achieve black economic empowerment in perpetuity.

It leads the world by clearing and settling trades in T+0. No-one in the value chain has to hold large sums of money for days following a transaction. Small transactions become profitable. Investors don’t have to risk their life savings on a single large trade. A retail market is opened. An investment and savings culture is entrenched. The economy expands. Your business grows steadily.

It enables anywhere, any time trading via a mobile app that allows investors to see share value in real time. See economy expansion point above.

It integrates processes and procedures, simplifying them and ensuring rapid onboarding of issuers and, therefore, speed to market with new concepts and alignment with the digital economy.

It operates a principles-based regime. So:

It treats you, as an executive, with respect. It’s not prescriptive. It does not insist on excessive oversight, allowing the Companies Act to guide you to sustainability.

It does not attempt to squeeze your company into a pre-defined business or listings format. It recognises and works with your uniqueness.

It obviates the need for expensive specialist listings advisors.

It focuses on financial inclusion and access. So:

Shares can be bought and sold for no more than R1 000. See economy building point above.

Related: 27 Of The Richest People In South Africa

The new world of stock exchanges is integrated, synergistic, holistic, organic, self-fulfilling

Decentralisation of financial control, democratisation of opportunity leads to a whole new economy. One in which, for instance, a taxi operator can finance a minibus through a company in which his purchase gives him shares. A single purchase gives him two benefits: a vehicle on which to found his business and a longer-term investment in shares that he can trade. The funding company gains liquidity through access to a wider base of investors while being able to control who buys and sells and the conditions on which trading takes place. Increasing black equity in business becomes an organic, natural, self-perpetuating process.

Everyone wins in a decentralised, democratised financial market. And it’s the stock exchanges that drive the process.

As an entrepreneur, can you afford to ignore the acceleration that listing could give your business growth?

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