The retirement industry has serious concerns with certain provisions in the Pension Funds Amendment Bill (PFAB), one of the key pieces of legislation required to establish the two-pot retirement system.
The PFAB amends the Pension Funds Act (PFA) so that retirement funds can implement the amendments to the Income Tax Act contained in the Revenue Laws Amendment Bill (RLAB). The RLAB is the main enabling legislation for the two-pot system, which will take effect on 1 September.
An important aspect of the PFAB is that it sets out how retirement funds must effect deductions from a member’s retirement benefit permitted in terms of section 37D of the PFA. These deductions include amounts due by an employee to an employer, amounts due in terms of a maintenance order, and any portion of a member’s pension interest assigned to a non-member spouse in terms of a court order.
On Tuesday, two organisations representing the retirement industry, the Association for Savings and Investment South Africa (ASISA) and the Institute of Retirement Funds Africa (IRFA), made submissions on the PFAB to the National Assembly’s Standing Committee on Finance (SCOF).
Both ASISA and IRFA expressed their concern about the timeous promulgation of the legislation, which is essential for the industry to prepare for the two-pot system.
IRFA board member Nancy Andrews said not having the RLAB and PFAB promulgated in time could have negative consequences for fund members who want to withdraw from their savings components on 1 September.
IRFA’s understanding is that Parliament is currently processing 54 Bills, and the industry’s plea is for the RLAB and PFAB to be prioritised and promulgated as soon as possible, Andrews said.
Park the non-two pot amendments
The PFAB contains various amendments not related to the two-pot system. The industry would be better placed to implement the urgent administrative system changes required for the two-pot system if these non-two-pot amendments were held over until after 1 September, ASISA and IRFA said.
One of the proposed amendments is that the payment of a divorce award to a non-member spouse is made from pension income. This is a complete change from the current position, which is that the retirement fund capital is shared. The proposal raises a number of issues, including what the pensioner will live on if the former spouse takes the monthly income.
ASISA senior policy adviser Rosemary Lightbody said the proposal required extensive discussion, and this was not the opportune time for doing so.
Another non-two-pot proposal is for the registrar of court, instead of the former spouse, to send the divorce order to the retirement fund. One of ASISA’s concerns about this proposal is that the registrar might delay or omit sending the order because the registrar has no personal interest in the fund receiving the divorce order as soon as possible after the divorce.
Lightbody said it was, in any event, unclear why National Treasury wants to introduce this change. ASISA is not aware of any problems with the current arrangement.
“This type of thing just clouds the issue of getting the basics right for the introduction of two pots. It introduces additional concerns, misunderstandings, changing systems unnecessarily at this point in time when all we want is to get the two-pot amendments right,” she said.
Contradictions between PFAB and Divorce Act
ASISA and IRFA’s main concern are the contradictions between the PFAB and the Divorce Act. Unless these contradictions are resolved, they said, retirement funds will be unable to apply the “clean-break” principle when a fund member is divorced. The clean-break principle allows the member’s former spouse, who does not belong to the fund, to access a court-ordered share of the member’s retirement savings.
ASISA and IRFA said the PFAB must include a clause stating that where the provisions of the PFAB and the Divorce Act conflict, the provisions of the PFAB will prevail.
Such a provision is contained in three Bills to amend the Government Employees Pension Law, the Post and Telecommunications-related Matters Act, and the Transnet Pension Fund Act. National Treasury published the amendment Bills on Monday.
The Government Employees Pension Fund, the Telkom Pension Fund, and the Transnet retirement funds do not fall under the PFA. Each of these public sector funds was established by a separate piece of legislation.
In February, National Treasury told SCOF it had been advised after the tabling of the PFAB that the public sector funds’ founding legislation will or may have to be amended for state employees to participate fully in the two-pot system.
Read: Two-pot legislation speed bump – the Amendment Bill must be amended to include public sector funds
Lightbody told SCOF that ASISA’s best solution at this stage is to insert a line stating that the PFA trumps the Divorce Act. The problem, though, is that the Divorce Act itself contains a trumping provision. Ideally, the Divorce Act should be amended to cross refer to the PFA, but there was insufficient time for that, she said.
“How divorce orders are dealt with in pension funds are absolutely essential for a sensible outcome on the two-pot divorce, for fairness between divorcing parties, for them to get what they expect to get. So, we certainly do need some sort of amendment, but the amendments won’t work if they are subject to the Divorce Act that simply overrides them. So, somehow the PFA amendments have to override the Divorce Act. It’s difficult, but somehow it has to be achieved, or else we’ve got a serious problem on our hands […] How it’s to be resolved […] we really need to put our heads together and work that out. Hopefully, a line in the PFA overriding the Divorce Act will work,” Lightbody said.
Deductions across the components
Adri Messerschmidt, also a senior policy adviser at ASISA, briefed the committee on another of the industry’s concerns: the components to which the deductions permitted by section 37D will apply.
National Treasury’s presentation to SCOF in February indicated that the deductions from a member’s accumulated assets in a fund will be taken across all three components in the fund: the savings, retirement, and vested components. But, she said, the current wording of the PFAB suggests the retirement component will be excluded in the case of divorce orders and the repayment of home loans.
Messerschmidt provided the committee with a breakdown of the effects on divorce orders and home loan repayments before and after 1 September, based on the current drafting of the PFAB.
- Occupational funds. Before 1 September, the member’s entire interest is shared at divorce. Once the two-pot system is implemented, the savings component will be shared but not if it has already been accessed in the tax year. The retirement component will not be shared, unless the PFA is amended to state that it overrides the Divorce Act. The vested pot will still be shared.
- Preservation funds. Before implementation of the two-pot system, 100% of the member’s interest is shared on divorce. After 1 September, nothing will be shared unless the PFA is amended to state that it overrides the Divorce Act.
- Retirement annuity funds. Before implementation of the two-pot system, 100% of the member’s interest is shared on divorce. After 1 September, 100% of the member’s interest is shared on divorce, but the amount due could exceed the amount available in the fund, particularly if the member has regularly accessed the savings component. To prevent this, the PFA must be amended to state that it overrides the Divorce Act.
- With home loans, before 1 September, what is available in all three components can be used to repay the loan on default. After the implementation date, if section 37D is not amended, the fund cannot use the savings component to repay the loan on default if it has already been accessed during the tax year. The fund also cannot access the retirement component. The vested rights stay the same.
Curtailing a member’s access to the savings component
Messerschmidt said ASISA also believes the Bill gives the savings component “unfair protection”.
The PFAB proposes that if a fund member’s spouse sends the fund “formal notification” that he or she has instituted divorce proceedings against the member, the fund must not allow the member to withdraw from his or her savings component or obtain a home loan or guarantee from the fund.
ASISA’s members do not agree with this proposal, particularly in respect of divorce orders.
“The fund member’s rights should be fairly balanced with the rights of the non-member spouse. Divorces can take a long time. The fund should need a court interdict before a fund member’s retirement fund access rights are removed for an extended period of time. A fund member then has a chance to state their case to the court,” Messerschmidt said.
“In any event, the vested component can be accessed on resignation, and the member’s spouse will need a court interdict to remove the member’s access rights to that.”
Treasury’s response
Chris Axelson, Treasury’s acting director-general for tax and financial sector policy, said Treasury will work with stakeholders to ensure there is “as little uncertainty as possible”.
Nomalizo Bulisile, the director of financial sector and legislation at National Treasury, said Treasury proposes to include an application clause in the PFAB similar to the application clause in the public sector amendment Bills.
Treasury will respond to the submissions on 19 March.
