Two-pot legislation speed bump – the Amendment Bill must be amended to include public sector funds

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Squaring away the legislation required to implement the two-pot retirement system on 1 September may be delayed by the need to amend the Pension Funds Amendment Bill to provide for amendments to the statutes governing public sector retirement funds.

National Treasury on Tuesday briefed the National Assembly’s Standing Committee on Finance (SCOF) on the Pension Funds Amendment Bill.

A large part of the hearing was devoted to two issues that are not in the Bill: retirement funds that are not governed by the Pension Funds Act (PFA) and withdrawals from the retirement component when a member is retrenched.

The Pension Funds Amendment Bill provides for amendments to the PFA that are necessary for retirement funds to implement the amendments to the Income Tax Act contained in the Revenue Laws Amendment Bill, which establishes the two-pot retirement system.

An important aspect of the Pension Funds Amendment Bill 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.

Under the two-pot system, the deductions must be made proportionately across all three components (previously called “pots”):

  • the savings component (from which members will be permitted to make a withdrawal once every tax year);
  • the retirement component (which will preserve a member’s savings until retirement); and
  • the vested component (which will house a member’s retirement benefit accumulated before 1 September 2024).

The proposed amendments to section 37D will prohibit retirement funds from allowing members to make a withdrawal from their savings component if the withdrawal will result in insufficient funds remaining to repay a loan or guarantee granted by the member’s employer or comply with a court judgment obtained by the employer against them.

A fund may not, without the non-member spouse’s consent, grant a loan or guarantee to a member, or permit the member to make a withdrawal, if the non-member spouse has notified the fund that a divorce has been instituted.

The Bill will also prohibit a fund from permitting a withdrawal if it is notified that a maintenance order against the fund is pending, and the fund is uncertain whether the withdrawal will result in sufficient funds remaining to comply with the pending order.

Government Employees Pension Law must be amended

After taking MPs through the key aspects of the Pension Bill, Thandazile Alvinah Thela, Treasury’s director for retirement savings, said Treasury wanted the Committee’s approval to expand the scope of the Bill to provide for amending the legislation that governs public sector retirement funds that do not fall under the PFA.

These funds include the Government Employees Pension Fund (GEPF), which was established by the Government Employees Pension Law; the Telkom Pension Fund, which falls under the Post and Telecommunications-related Matters Act; and the Transnet funds regulated by the Transnet Pension Funds Act.

Thela said Treasury had been advised after the tabling of the Bill on 30 January that not only the rules of the rules of the GEPF but also aspects of the Government Employees Pension Law will have to be amended for state employees to participate fully in the two-pot system.

The GEPF, which manages R2.24 trillion in pension savings belonging to 1.26 million public servants, is the largest retirement fund in Africa.

Treasury was still assessing whether the Telkom and Transnet funds will have to amend only their rules, or whether the funds’ rules and their founding statutes will have to be amended, to provide for participation in the two-pot system. Treasury wants permission to amend the Bill so that the Act can provide for the latter scenario.

“What we are certain of as of now is that the GEP Law needs to be amended to take account of the two-pot system,” Thela said.

Following questions from some MPs who seemed to be confused or uncertain as to why Treasury wants to expand the scope of the Bill, Thela stated that Treasury’s intention, from the outset, was for the two-pot system to apply to all private sector and public sector funds, including the GEPF.

The reason Treasury wants to expand the scope of the Bill is to ensure the law and the fund’s rules are properly aligned when it comes to the administration of members’ benefits.

For example, if the GEPF amends its rules, but the GEP Law is not amended, and a GEPF member is subject to a divorce order after the two-pot system is implemented, the settlement will be paid only from the member’s vested component because the law will recognise only the benefit accumulated before the implementation date, not after, Thela said.

Advocate Frank Jenkins, Parliament’s senior legal adviser, said if SCOF agrees to extend the scope of the Bill, the administrators of public sector and private sector funds should be invited to make submissions on the amendments.

Committee chairperson Joseph Maswanganyi said Parliament rises on 28 March, and there may not be enough time to complete another round of public participation by then. If there is not, the processing of the Bill will have to be deferred to the next Parliament.

It is unclear what Maswanganyi meant when he said that Parliament will rise on 28 March. According to the Parliamentary Monitoring Group, the term of the Sixth Parliament ends in mid-May, and the latest parliamentary programme shows that the legislature will rise in early May.

Access to the retirement component if retrenched

Thela prefaced her presentation on the Pension Funds Amendment Bill with a summary of the features of the three components.

From 1 September, one-third of a member’s contributions will go into the savings component, and two-thirds into the retirement component. Members will be permitted to access their retirement component only when they retire, and the entire benefit must be used to buy a pension. Members will not be permitted to access funds in the retirement component if they are retrenched or resign.

But the vested component will continue to be subject to the current retirement regime, which means members will be able to access these funds on retrenchment or resignation.

Thela’s overview of the components resulted in some MPs raising the issue of withdrawals from the retirement component when members are retrenched.

Contrary to what some media reports suggest, Treasury did not on Tuesday for the first time announce that retrenched members will be allowed to access their retirement component when the second phase of the two-pot system is rolled out.

During public hearings on the two-pot legislation in 2022, Treasury agreed in principle that members who are retrenched will be allowed to make limited withdrawals from their retirement component.

Treasury announced in the Budget Review last year that withdrawals from the retirement component would be addressed in the second phase of the two-pot system.

The Congress of South African Trade Unions has lobbied for members to be allowed to access the retirement component if they are retrenched or “forced” to resign because a member’s spouse finds work in a different province.

In response, Treasury proposed during a SCOF hearing in September 2022 that members who are retrenched be allowed to make limited income-based withdrawals from their retirement component. These withdrawals would have the following conditions attached:

  • members must have depleted all their savings in their savings and vested components;
  • members must have exhausted their Unemployment Insurance Fund benefits;
  • members will have to prove they have no other source of income; and
  • instead of withdrawing a lump sum, members will receive an annuity for a limited period, perhaps up to a year.

On Tuesday, Thela said Treasury was still trying to work out a mechanism whereby retrenched members can access the retirement component without depleting their retirement savings completely. In line with what Treasury has stated previously, Thela mentioned the possibility of allowing these members to access their retirement component in small tranches or as an income stream instead of as a lump sum.

Chris Axelson, Treasury’s acting director-general for tax and financial sector policy, said Treasury hoped the savings component will be a sufficient buffer for retrenched individuals, but Treasury will explore other mechanisms for if there is nothing left in the savings component.

“But we do hope that employees will keep that savings component for emergencies. It really is to try and improve savings rather than be used as a transactional account,” he said.

Once a tax year, members will be permitted to make an unlimited withdrawal from their savings component, subject to a minimum withdrawal of R2 000.