Two-pot system effective date - 1 September 2024?
Discussions with the National Treasury, SARS, FSCA, GEPF and the Government Pensions Administration Agency have indicated that the date proposed by the Minister of 1 September 2024 would be achievable.
The Minister of Finance, Enoch Godongwana, has proposed that Parliament extend the date of implementation of the two-pot system contained in the Revenue Laws Amendment Bill (the RLAB) from 1 March 2024 to 1 September 2024. This matter is due to be tabled before the National Assembly on Wednesday, 6 December 2023, for debate.
In his letter to the Chairperson of the Standing Committee on Finance, Minister Godongwana raised the following concerns with the 1 March 2024 implementation date:
Retirement funds cannot amend their fund rules to cater for the “two-pot” system until the Pension Funds Amendment (PFA) Bill is tabled in Parliament, explaining that the effective date of the RLAB cannot predate the implementation of the PFA Bill.
Once these bills have been tabled, funds will have to submit their amended fund rules to the Financial Sector Conduct Authority (FSCA) for registration. Funds are also required to communicate the proposed amendments to the fund rules and its impact to members.
There are 1 324 active retirement funds which will all be required to submit amended rules to the FSCA for registration and approval. Godongwana cautioned it will take at least three months for the FSCA to do so.
Not all funds are regulated under the Pension Funds Act, such as the Government Employees Pension Fund (GEPF) where fund rule amendments require consultations through the Public Sector Coordinating Bargaining Council. In this case, the employer (represented by the Department of Public Services and Administration) must submit the amended rules for consideration by parties in the Bargaining Council. Godongwana warns that these processes are likely to extend beyond 1 March 2024 before they are completed.
The South African Revenue Service (SARS) has indicated that they need at least six months after the promulgation of the legislation to put a system in place to deal with applications from funds for the correct tax rate to be applied to withdrawals from the new “savings component”. SARS warned that if the 1 March 2024 implementation date is retained the incorrect amount of tax may be withheld, resulting in either hardship or liability for members on assessment at the end of the tax year.
The implementation date of 1 March 2024 “would require fund managers of retirement funds to urgently reallocate their portfolios to meet the potential liquidity demands from the expected withdrawal requests”. This can have a negative knock-on impact on markets, “as assets will need to be disposed of over a shorter period to prepare for those increased withdrawals”.
Godongwana emphasised that “retirement fund members and financial advisors will need sufficient time to assimilate the implications of the new system, otherwise, members may make hastened decisions that could undermine their financial future”.
The two-pot system arose from a simple concept which has huge political appeal, to allow financially distressed fund members to withdraw a limited amount of money from their pension savings. Up to now, financially distressed members of funds have had to leave their employment to access their pension and provident fund savings. Actuarial studies have also indicated that the retirement component which must be annuitised only on retirement will overall result in members having greater amounts of retirement savings, even if they decide to withdraw the savings component in full every tax year.
Godongwana also confirmed that much work was still needed on several aspects of the RLAB which are complicated.
One of the complexities of the two-pot system is how it will be implemented for defined benefit funds (DB funds) the largest of which is the Government Employees Pension Fund (GEPF) which has more than 1,2 million members. A major difference between defined contribution funds (DC funds) and DB funds is that in DC funds, it is possible to calculate the value of the contributions that have already been made by the member, but in DB funds, the final pension fund benefit will be based on the final salary of the member plus the number of years’ service.
The RLAB has provided for the savings and retirement components of DB funds to be determined with reference to a member's pensionable service on or after 1 March 2025, or a reasonable method of allocation as approved by the FSCA. The implementation of the two-pot system for DB funds must be carefully undertaken to ensure fairness to all members of each DB fund. Any necessary engagements with the FSCA by DB fund administrators will also require additional lead time from the promulgation date to implementation date.
The Association for Savings and Investment South Africa (ASISA's) position is that the industry needs at a minimum, a 12-to-18-month lead time from promulgation date to implementation date. The Minister's proposal of 1 September 2024 recognises members' urgent need for funds, and the practical challenges of implementing the system after promulgation.
