Transition to two-pot retirement system faces administrative hurdles

National Treasury has admitted that the new retirement system – whereby members will have access to one third of their pension fund money before they retire – is bound to have “teething issues” that must be ironed out after the 1 September implementation date.

During a two-hour workshop on the so-called “two-pot system” on Friday, National Treasury officials were inundated with media questions about the technical and administrative aspects of the reforms.

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A big issue is that retirement fund administrators are required to draw up draft rules for the new system even though the relevant legislation has not yet been finalised.

South Africa has just under 900 active pension funds, and the Financial Sector Conduct Authority (FSCA) must consider and approve every fund’s rules before the implementation date.

The FSCA said pension funds will need to submit their draft rules between the beginning of May and mid-July so that it can give “in principle” approval of the rules, even though the legislation will not have been finalised.

It was previously mentioned on Moneyweb that funds may also need to adjust service level agreements with service providers, which could require negotiations and fee changes.

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National Treasury acknowledged that some challenges and complexities will not have been completely addressed before the implementation date.

“We are trying our level best to stick to the date and then make tweaks going forward,” one official said.

Legislation pending

Fiona Rollason, head of legal at Alexforbes, told Moneyweb that the legislation required to implement the new system is at various stages of development.

“The Revenue Laws Amendment Bill 2023 – the one that forms the basis for the new system – needs the president’s signature. So we will have the foundation in place, but not yet all of the details.

“There will be mistakes because we won’t have all the i’s dotted and t’s crossed.”

The second piece of legislation – the Pension Funds Amendment Bill – was the subject of public hearings in parliament on Tuesday (16 April).

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Both pieces of legislation still need to be promulgated before the new system can be implemented.

National Treasury reiterated that the 1 March 2025 implementation date would have been ideal. This date was also proposed by members of the retirement fund industry. Both parties were overruled by parliament at the end of 2023 when lawmakers insisted that the date be moved to 1 March 2024. Finance Minister Enoch Godongwana, however, announced a compromise and moved the implementation date to 1 September.

Two pots are, in fact, three

Although the new regime is called a two-pot system, it will in reality consist of three components:

1. A vested pot containing all the retirement savings up until 31 August 2024;
2. A savings pot for one third of retirement contributions, to which members will have access once a year; and
3. A retirement component for two thirds of contributions that will remain untouched until retirement.

“The so-called ‘two pots’ are only relevant for people who get a job at the beginning of September 2024 and join a retirement fund for the first time,” said Rollason, adding that for those who are already in the system, there will be three pots.

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Rollason said considerable consumer education still needs to happen because some of the messaging is getting lost.

Among the important messages that need to be effectively conveyed is the fact that the withdrawal of retirement savings from the savings pot “is a very expensive way to get money”.

Pension fund members who withdraw money from this ‘pot’ will be taxed at a marginal rate. So a considerable number of benefits are being forfeited, such as the value of compound interest, the tax benefit of contributing to a retirement fund and the return on investment.

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“It’s going to take retirement fund members a long time to recover that and to catch up again,” Rollason added.

This article was republished from Moneyweb. Read the original here