Two-pot legal hurdle crossed, now the race to prepare is on

Pension Funds Amendment Bill signed into law.

Earlier this month, on 21 July, the president signed the Pension Funds Amendment Bill into law. This follows his signing of the Revenue Laws Amendment Bill on 1 June, which means that all prerequisites have successfully been concluded for SA’s new two-pot retirement system to take effect.

“In five weeks’ time, members of South African retirement funds will be able to access a portion of their retirement savings before they retire,” says Guy Chennells, chief commercial officer of Discovery Corporate and Employee Benefits.

Big deal for many

While many South Africans under financial pressure will be relieved to be able to dip into a portion of their retirement savings in times of crisis, Chennells warns that “funds that have not submitted their rules amendments by 31 July can’t be certain that their withdrawal rules will be registered and approved by the Financial Sector Conduct Authority (FSCA) before 1 September”.

According to ‘FSCA Communication 24 OF 2024 (RF)’ issued on 19 July, only 30% of anticipated submissions (rule amendments) were received before the initial deadline of 15 July. The authority is still waiting for more than 350 retirement funds to submit their respective rule amendments, so it has extended the deadline to 31 July.

Rules submitted after the 31 July extension date will not be prioritised, will be subject to normal FSCA service level agreements, and may not be registered by September. The FSCA further confirms that rule amendments remain invalid unless registered and approved by the regulator, and funds/administrators may not act on unapproved rules. Further, the funds/administrators will take responsibility for any consequences resulting from non-compliance with these legislative changes.

Discovery submitted its rules amendments for its pension and provident umbrella funds and its retail funds in April and May 2024, with queries quickly resolved.

With no outstanding issues on any Discovery fund rules amendments, “we are confident that members of all our funds will be able to access their retirement savings under the new two-pot system from September 2024”, says Chennells.

Some funds may experience delays

Funds that miss the 31 July deadline may be unable to pay over withdrawals to members until their rules are finally registered. This means that “some South Africans may experience a delay in accessing their retirement savings under the new two-pot system,” cautions Chennells.

Delays resulting from funds failing to submit their new rules to the FSCA could also impact the tax approval status of retirement funds during South African Revenue Services (Sars) assessments.

Contributions to retirement funds that are not tax-approved will not be tax deductible, which will present a significant challenge for the members of unregistered funds.

Another important consideration is whether your employee benefits provider can process claims using a ‘straight-through process’. A straight-through process is an automated electronic payment process that does not need manual intervention.

Chennells points out that the finance minister is on record anticipating a R5 billion revenue windfall from taxing two-pot withdrawals in the next financial year. The government clearly expects many hundreds of thousands of South Africans to access the savings component of their retirement funds as soon as two-pot goes live.

“One could easily see claims volumes in September 50 to 80 times higher than a normal month of exit claims,” warns Chennells.

“It would not be possible to increase staffing adequately for this. Without a straight-through payments process, some providers could have very long payment turnaround times before savings withdrawal claims can be paid.”

Discovery Employee Benefits anticipates that about half of its fund members will make withdrawals from September. That said, “with our straight-through automated process in place, even if 100% of our fund members make withdrawals, we will be ready,” assures Chennells.

Next steps

• Members of funds that have successfully lodged their amended rules with the FSCA can expect to make withdrawals from about 16 September, after the seeding capital has been calculated and appropriate checks and balances applied.
• Members of funds still needing to apply for FSCA-approved rule changes should not bank on a September withdrawal.
• Withdrawals from funds with straight-through processes (like Discovery’s pension and provident umbrella retirement funds) will take around five days if there are no issues with a person’s bank verification or Sars tax directive applications.
• Withdrawals from funds without straight-through processes will take longer. Depending on volumes, delays could extend to weeks or even months.

As a member looking to withdraw, what could trip you up?

• Incorrect ID or passport number lodged with the employer;
• Incorrect cell phone or email address lodged with the employer, preventing two-step verification;
• Bank account verification not matching ID or passport number;
• New bank accounts – bank accounts should be opened at least three months before application;
• Incorrect or unavailable Sars tax number;
• Unresolved disputes with Sars, resulting in it not issuing a tax directive; and/or
• Sars deducting money owed to it from the withdrawal, leaving little or none for you.

Preservation remains king

While some funds may experience a delay in activating two-pot for their members, Chennells believes South Africa’s new retirement system is a win. Two-pot provides a welcome social relief mechanism for people in real crises to access emergency funds without resorting to loan sharks or quitting their jobs to access their retirement savings.

There is no doubt, however, that “the main intention of the Pension Funds Amendment Bill is to improve South Africa’s retirement outcomes’’, says Chennells.

Employees who withdraw from the savings component of their retirement funds will have significantly less to retire on than those who haven’t withdrawn.

The initial amount that will be moved into your savings pot, known as the seeding capital, is capped at R30 000. Thereafter, monthly contributions may increase the amount in your savings portion quite quickly, presenting significant temptation.

Since members can only make one withdrawal every tax year, Chennells advises waiting until they genuinely need the money. “It is important to avoid situations where you access your fund prematurely and are unable to call on your savings when a real emergency arises.”

Tool to manage two-pot

To manage the impact of withdrawals on retirement outcomes and calculate how much they can withdraw, Discovery’s Corporate and Employee Benefits team developed a ‘nifty’ calculator for fund members to enter their annual remuneration figures, including their monthly retirement fund contributions. The calculator then estimates how much they can take out in September and how much they would actually get out after tax.

The calculator “also tells you how much you will need to increase your contributions each month to make up for the funds you just withdrew – or how many extra months or years you would need to work to make up for the withdrawal,” says Chennells.

The signing of the Pension Funds Amendment Bill (which will now be referred to as the Pension Funds Amendment Act) into law on 21 July amends the Pension Funds Act of 1956, the Post and Telecommunications-Related Matters Act of 1958, the Transnet Pension Fund Act of 1990 and the Government Employees Pension Law of 1996.

This marks an important milestone in the evolution of an effective retirement ecosystem in South Africa by creating a level playing field for the movement of retirement fund members between public and private sector retirement funds.

That said, “while providing welcome relief for those in crisis, the primary intent of two-pot is to encourage – and reward – South Africans to save more for retirement and keep those savings invested – and untouched – until retirement age,” concludes Chennells.

Brought to you by Discovery CEB

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