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SA retirement fund industry faces multi-component challenge

03 October 2023 Gareth Stokes

Yes, dear reader, there are worse things in life than giving financial advice, or writing newsletters on insurance and investment topics. For example, you could be a financial services provider (FSP), retirement fund administrator or trustee tasked with ‘bedding down’ one of the most expansive retirement fund reforms to ‘land’ in South Africa in decades, and by no later than 1 March 2024 to boot. This writer left a recent discussion on the two-pots retirement system relieved that the complex implementation its introduction necessitated would be somebody else’s problem.

Comprehensive and progressive reform

The recent Retirement and Investment Conference webinar, hosted by the Financial Planning Institute of Southern Africa (FPI), featured two retirement-focused discussions. Today’s newsletter will focus on the administration and planning requirements that go hand-in-hand with the two-pot, or as National Treasury now refers to it, the two-component retirement system. Geraldine Fowler, President of the Institute of Retirement Funders Africa (IRFA) opened with some background information. 

“South Africa’s two-component system is seen as one of the most comprehensive and progressive retirement reforms being introduced globally; the reform process, and progress made to date, is highly regarded and followed by pension fund stakeholders worldwide,” Fowler said. National Treasury has been eyeing changes to domestic retirement funding mechanisms for some years, with the overarching objective being to ensure better retirement outcomes. 

Two pieces of legislation have been introduced to chase through the two-pots reforms, namely the Draft Revenue Laws Amendment Bill, 2023 and the Draft Revenue Administration and Pension Laws Amendment Bill, 2023. For simplicity we will christen these RLAB and RAPLA. According to Fowler, these laws serve two purposes. First, they enforce preservation by “discouraging the early withdrawal of the whole fund through employer changes and / or resignations”. And secondly, to allow for one withdrawal per tax year for emergencies. 

The process was still underway at the time of writing: final commentary on the RLAB / RAPLA closed mid-July 2023 with National Treasury consultation sessions set down for 6-8 September; comments to Parliament’s Standing Committee on Finance from 18-19 September; and a second draft of the bills due end-October. “Hopefully, we will see promulgation of both bills in the first week of January 2024, leaving little time for industry to finalise implementation,” Fowler said. 

Two- or three-components, and a new seeding requirement

Nancy Andrews, Head of Legal at Discovery Employee Benefits, took to the virtual podium to offer comment on the administrative load that would greet industry stakeholders early in the New Year. She confirmed the shift in terminology from two-pots to a two- or three- component system, which this writer adopts in the remainder of this piece. PS, the legislation also introduces a seeding requirement, so that retirement savers would have access to a pre-funded component for emergencies rather than building up from a zero balance. 

South Africa’s previous ‘major’ retirement reform saw fund balances split into a vested benefit for pre-1 March 2021 balances, and a non-vested benefit for post-1 March 2021 amounts. “We will now have three components: a retirement component made up of your vested and your non-vested benefits with values determined on 29 February 2024,” Andrews said. “And a savings component will be set up when the legislation is introduced, on 1 March 2024”. From the implementation date, two thirds of your retirement-funding benefits will go to your retirement component, and one third to your savings component. The balance in the retirement component is accessible upon retirement, in line with the legislation. 

Retirement fund administrators need to pay close attention to the legislative requirements described for the savings component. Their first task will be to transfer an amount of seed capital to the savings component, being the lesser of the value of total retirement benefits on 29 February 2024 or R25 000,00. This sounds simple enough but there are still some unanswered questions about how the seeding capital calculation should differentiate between non-vested and vested retirement balances. From 1 March 2024, a third of your monthly retirement funding contributions will be added to the savings component. 

Non-vested versus vested ‘tug of war’

“There is no clarity in the legislation about how the 10% seeding capital should reduce the non-vested and vested balances; we assume that funds would opt to reduce each of these balances proportionally,” Andrews said. The funding of this component features in the IRFA comment to the new laws, with the institute calling on National Treasury to make an ‘opt in’ requirement for retirement fund members who are over-55 on 1 March 2021. “Members over age-55 should have an opt in provision as opposed to an opt out provision because the change affects their vested rights; [under the previous laws] they were not expecting access to this money,” she said. 

Another challenge that the IRFA reckons should be addressed is that the current amendments treat all funds the same, whereas there is a need for beneficiary funds, or retirement funds where all members are pensioners, to be treated differently. “You cannot apply this to beneficiary funds because the benefit has already exited the fund of which a member was a member, and it is now in a fund for the benefit of beneficiaries or dependents; the same with pensioners: if you have a fund with pensioners only, you need to exempt this kind of provision … pensioners are getting regular pensions and would not need access to a lump sum amount,” Andrews said. 

Take note of this taxation change

The latest iterations of the RLAB and RAPLA offer greater certainty around withdrawals from the savings pot. There is no limit to the maximum that retirement fund member can withdraw each year, subject to the balance on the account; but they cannot withdraw less than R2000,00. Financial advisers should note that withdrawals from the savings component will be taxed at the taxpayer’s marginal rate as opposed to the retirement taxation tables applicable to retirement fund withdrawals. Another point worth noting is that although members can sweep their savings component balance into the retirement component, they cannot reverse that decision. The seeding of the savings component will only happen once. 

Retirement fund administrators are quite anxious about how the new legislation will treat transfers between components. “Moving between the components is not a transfer but a reallocation of a member’s benefit to a different component within the fund; the tax directive application should only be relevant when you transfer to another fund,” said Andrews. Financial advisers and planners are going to have to study up on how future withdrawals from the retirement and savings funds of their clients will be treated; but this requirement pales in comparison to the challenges facing retirement fund administrators. 

Complex and technical

“The system development that needs to happen to accommodate these changes is extensive because you need to accommodate three different components; keep track of the vested and non-vested parts pre-March 2024; and develop system rules around the entitlements, restrictions and tax applications,” concluded Fowler. “These changes are complex and technical”. 

Writer’s thoughts: The “complex and technical” comment that concluded today’s newsletter is apt for the changes awaiting South Africa’s retirement fund industry. Are you up to speed with amendments in the RLAB and RAPLA? Or do you intend studying up on this multi-component retirement system nearer its implementation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za

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