Industry wanted 12-months for not-so-simple two-pots

Financial services firms that were hoping for more time to make system changes to comply with National Treasury’s two-pot retirement system received bad news this November, following a decision by Parliament’s Standing Committee on Finance (SCOF) to decree a 1 March 2024 implementation date. The committee outright rejected Treasury’s suggestion that the implementation be delayed by another year, to March 2025.

Pushing TCF boundaries

Commenting on the latest development, Adri Messerschmidt, senior policy advisor at the Association for Savings and Investment South Africa (ASISA) said that the two-pot system was a fundamental change to the South African retirement fund landscape. “Its implementation should be handled with great care to ensure that all retirement fund members are treated fairly and afforded the opportunity to consider the impact of the changed landscape on their individual financial affairs,” Messerschmidt said. 

FAnews has penned and shared countless articles about the two-pot retirement reform, including a newsletter titled ‘How bizarre: Three-pots in a two-pot system’. This newsletter already hinted that the industry was concerned about regulatory uncertainty as the proposed implementation date neared. For a ‘quick and easy’ explainer, today’s newsletter borrows from Sanlam’s ‘What you need to know about the two-pot system’ consumer-focused communication. 

The Sanlam communication reminds advisers and fund members that the change is aimed at “helping South Africans preserve their retirement savings when changing or leaving a job” as well as to introduce a mechanism for “people to have access to [some of their retirement] savings should they face financial difficulty and need extra cash”. 

Divvying up fund members’ cash

From 1 March 2024, retirement fund administrators will have to apply various rules to separate fund member’s assets into separate retirement funding and savings ‘pots’ with due consideration for contributions received before the implementation date, and the previously introduced rules around vested and unvested funds. 

They will have to create a savings pot, that will receive a once-off ‘top up’ from the vested component of a fund member’s retirement fund, being money that a member has already saved towards retirement. The ‘top up’ amount must be a minimum of 10% of the members’ vested balance, capped to R30 000,00. After the implementation date, one-third of every retirement fund contribution will accumulate in the member’s savings pot. There are countless rules that apply to the withdrawal and transfer of funds from the saving pot, and fund members must pay close attention to the tax implications of same. 

The retirement funding ‘pot’ must contain the balance of both vested and unvested retirement balances at implementation date, and continue to receive two-thirds of the member’s subsequent retirement fund contributions. Members will not be able to touch the money in their retirement funding pot until they reach retirement age. 

Advisers, employers and / or retirement funds will have their hands full in the coming years as they explain the taxation and withdrawal rules that apply when members dip into either of the two pots. As Sanlam explains: “Any withdrawal from the savings component is taxable; it will be added to your income, and you will be taxed at whatever your income tax rate is for the year”. And savers are already being warned about withdrawing their savings early, with Sanlam suggesting they do so as “a carefully considered last resort”. 

Implementing without a legal roadmap

One of the issues raised by the industry is that although the regulatory changes have been under consideration for some time, there were still points that had to be clarified in the final law. So, even though ASISA members have worked relentlessly to prepare their processes and systems for the implementation of the two-pot system, they have been unable to complete preparations absent the final legislation. “The Revenue Laws Amendment Bill will only be finalised by the end of December 2023 or early January 2024, while the final required amendments to the Pension Funds Act have not yet been made known, let alone been processed by Parliament,” Messerschmidt said. 

In an article on EBnet.co.za, Michelle Acton, Retirement Reform Executive at Old Mutual expressed concern about meeting the 1 March deadline, reiterating that the industry’s readiness depended on the government finalising and gazetting the 2022 Draft Revenue Laws Amendment Bill and the required Pension Fund Act  amendments. “In 2022, we confirmed that we would be ready for the two-pot system on the condition that the relevant legislation was finalised expeditiously; the legislation remains un-finalised, hindering our ability to fully prepare for the system’s implementation,” Acton said. 

This writer has also seen some articles online criticising the rush implementation of these reforms as an election ploy by the ruling party to ‘score points’ by giving voters access to some of their retirement savings; but ASISA takes a more pragmatic position. 

Unreasonable due to uncertainty

“We believe that it is unreasonable to expect full implementation by 1 March 2024 given the uncertainty regarding the final enabling legislation,” Messerschmidt said. “ASISA has consistently pointed out that the required administration changes are complex, and that there will need to be significant communication with members of different retirement funds”. Acton echoed this sentiment, and said that a later implementation date would have provided the industry with more time to prepare for the changes. 

The South African Revenue Services (SARS) also has some work to do. “The industry relies on SARS to guide us on their requirements for processing early withdrawal claims; without this critical information, we cannot complete the system modifications to handle these transactions,” Acton noted. But despite the many challenges, financial services providers are committed to following the letter of the law. In Old Mutual’s case, the insurer “acknowledged government’s decision” and pledged its “unwavering support for the two-pot system”. 

ASISA was somewhat less compromising: “We understand the urgency for retirement fund members who desperately need access to their retirement savings; however, a hasty implementation and inequitable treatment between members of different funds could introduce risks with unintended consequences,” Messerschmidt warned. 

Chance of a last-minute reprieve?

All is not lost, however, and there is still a chance that the National Assembly will reconsider the implementation date. The next steps are for the SCOF findings to be sent to the Minister of Finance; and for the minister to finalise and send his report on the implementation date for consideration by National Assembly. 

Writer’s thoughts:

The two-pot retirement system will give your clients emergency access to some of their retirement capital. How will you help clients to leave their savings pot invested for retirement as opposed to making early withdrawals against it? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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