Proper record-keeping essential for two-pot retirement system

20 May 2024 Office of the Pension Funds Adjudicator (OPFA)

Retirement fund administrators must ensure proper records are kept of members’ contributions, especially with the soon to be implemented two-pot retirement system, says Nondumiso Ntshangase, Senior Legal Advisor at the Office of the Pension Funds Adjudicator.

The two-pot retirement system will come into effect on 1 September 2024, promising access to financial relief for retirement fund members. While this system holds great promise, it also presents many potential challenges and complexities if not managed and implemented properly. One of the main concerns to the Office of the Pension Funds Adjudicator (OPFA) is record-keeping by retirement funds and fund administrators.

Under the two-pot retirement system, a member’s contributions in a fund will be split into a savings component, and a retirement component. There is also third component known as the vested component.

The vested component will consist of the member’s contributions in the fund up to 31 August 2024. From this component, 10% or R30 000, whichever is lower, will be utilised as a once-off seeding amount in the savings component, which can be claimed starting from the implementation date. The vested component will be subject to existing retirement laws, allowing a member to claim a withdrawal benefit from this component when they resign from employment.

The savings component will consist of the seeding amount and one-third of the member’s contributions in the fund from the implementation date, which can be accessed annually by the member. When a member accesses this component, the withdrawal amount will be taxed on the member’s marginal rates.

The retirement component will consist of two-thirds of the member’s contributions from the implementation date and can only be accessed at retirement.

“Funds and administrators are responsible for administering these benefits and maintaining accurate records of the separate components. Different rules on access and tax apply to each component, requiring funds to ensure separation of the respective components.

“Historically, a substantial number of disputes referred to the OPFA relate to the calculation of benefits. This requires funds to furnish records relating to members' contribution history to ascertain if the correct amount was paid by the fund. However, experience has shown that funds often struggle to maintain accurate records concerning members' contributions, particularly in matters related to post section 14 transfers,” said Ntshangase.

She said for the proper implementation of the two-pot retirement system, funds must address existing record-keeping challenges.

“Given that different rules apply to each component, it is crucial for funds to maintain accurate records of values within each respective component, especially during benefit transfers.
Funds and administrators will be compelled to enhance their systems to effectively administer the two-pot retirement system. Funds are also expected to communicate with their members to ensure they understand the proposed changes that come with the two-pot system.

“Members also have the responsibility to consult with their funds to ensure that they are ready to implement the two-pot retirement system. Members can request their fund values before the implementation date to ensure that they are aware of the values in their vested pots, as well as the necessary process to follow when claiming a withdrawal from the savings component,” Ntshangase said.

She added while the two-pot retirement system aims, among other things, to alleviate members’ financial burdens in the short term and enhance retirement savings in the long term, its effectiveness depends on proper record-keeping and effective communication by funds and administrators.

“This is crucial for maintaining the hard-earned trust in the South African retirement fund system.”

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