Significant disagreements between the Congress of South African Trade Unions (Cosatu) and organisations representing the retirement industry over the two-pot retirement system emerged during presentations to the National Assembly’s Standing Committee on Finance (Scof) this week.
The two main areas of disagreement are:
- The implementation date of 1 March 2024. As of Scof’s meeting on Tuesday, there were five months and 11 days to 1 March. It is likely that the final legislation will be gazetted at the end of this year, leaving some two months.
- The seeding of the savings pot – in particular, the cap on how much retirement funds can transfer to the savings pot so that members have money to withdraw immediately the system takes effect. The draft legislation proposes 10% of a member’s accumulated savings, capped at R25 000.
The Association for Savings and Investment South Africa (Asisa), the Institute of Retirement Funds Africa (Irfa), and Cosatu were the only three organisations to make presentations to Scof on Tuesday on the enabling legislation for the two-pot system.
One thing all three organisations agreed on is that the two-pot system is a desirable change because it will enable more fund members to reach retirement with sufficient capital with which to buy a pension.
Adri Messerschmidt, Asisa’s senior policy adviser: regulatory affairs, reiterated Asisa’s long-held position that it was not feasible for all the work required for the system to up and ready to be completed by 1 March next year.
Asisa’s members include service providers to retirement funds, such as administrators, investment managers, long-term insurers, and collective investment schemes.
Messerschmidt said retirement administrators need between 12 and 18 months from the date on which the final legislation is gazetted to be able to implement the system.
National Treasury’s publication of the two-pot discussion paper and the 2022 and 2023 draft Revenue Laws Amendment Bills for comment over the past two years was “of limited assistance” in enabling the industry to prepare. Much uncertainty on important aspects remains unresolved, and important details have not been finalised, she said.
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“We [Asisa] do not support the rushed implementation of the system. This would cause confusion and be extremely unfair to retirement fund members, who need to be in a position to make informed, timeous decisions about their retirement funds and their retirement planning in general,” she said.
Nancy Andrews, a member of Irfa’s executive board, said Irfa supported Asisa’s call for the implementation date to be postponed.
But Cosatu said workers have waited long enough for the two-pot system to be implemented, and they could not wait any longer.
Matthew Parks, Cosatu’s acting national spokesperson and parliamentary co-ordinator, said adherence to 1 March 2024 as the implementation date was a “red line” for Cosatu.
Workers have been waiting since 2020 to be able to access their retirement savings without having to resign, and many of them were “drowning in debt”, he said.
Cosatu appreciated that the retirement industry faced significant logistical challenges in preparing for 1 March 2024, but this must be weighed against the plight faced by workers, who were “hanging on by their fingers”, Parks said.
Not implementing the system on 1 March next year will result in workers who are barely coping resigning “out of desperation”, so they can access their retirement savings.
If Asisa’s 18-month lead-up time were accepted, the system would be implemented in 2026, and the delay will result in mass resignations, which will undermine the objectives of the system, Parks said.
Messerschmidt went into some detail explaining what retirement fund industry participants must do to prepare for the two-pot system.
Two other significant challenges were integrating the changes with the South African Revenue Service’s systems and all retirement funds have to change their rules, which rule changes must be approved and registered by the FSCA.
Andrews said Irfa was also concerned about the FSCA’s capacity to approve and register rule changes at short notice.
Parks mentioned one prominent industry participant that has apparently stated it is on track to being ready by 1 March 2024. This indicated the industry could meet the deadline if it made an all-out effort, he said.
Messerschmidt said although some industry participants may have indicated they will be ready by 1 March, everyone must be ready at the same time, or some fund members will be prejudiced. Savings cannot be transferred between funds if only some funds or administrators are able to do so.
She said Asisa sympathised with the plight of workers, but the system must be implemented properly.
MPs support higher cap
Cosatu said the cap on the seeding amount should be raised to R50 000, and withdrawals from the savings pot should not be taxed at a taxpayer’s marginal tax rate. Instead, they should be taxed according to the withdrawal benefit table, as is currently the case for pre-retirement withdrawals.
Cosatu’s call for the cap to be raised to R50 000 received support from ANC MPs Dorothy Mabiletsa and Gijimani Skosana, as well as the DA’s Dion George, who said R25 000 was “hopelessly too low”.
The higher cap of R50 000 was an acceptable compromise between providing workers with “meaningful” immediate relief and ensuring they have sufficient savings at retirement and the sustainability of retirement funds, Parks said.
The seeding cap of R25 000 was sufficient in 2020 when National Treasury and Cosatu discussed the proposals for two-pot system. But this was no longer the case, considering the impact of higher inflation, electricity tariff hikes, and other price increases, he said.
Cosatu’s retirement funds have said they can provide R50 000 without liquidity risks, Parks said, adding the multi-trillion-rand retirement industry could afford to give members R50 000.
Cosatu wants withdrawals from the savings pot to be taxed according to the withdrawal benefit table, where there is no tax on the first R27 500 and amounts between R27 501 and R726 000 are taxed at 18%. The top rate of 36% applies to amounts of R1 089 001 and above.
On the other hand, a marginal rate of 26% kicks in for taxable income of between R237 101 and R370 500. The marginal rates increase to 45% as one moves up the income bands.
Taxing savings pot withdrawals at the marginal rates will give rise to the perception that Treasury is “profiteering” from workers’ misery, Parks said.
Messerschmidt said Asisa is “strongly opposed” to seeding because will it erode members’ retirement savings.
If seeding is introduced, the current seeding of 10% capped at R25 000 proposed in the draft legislation should not be increased. A higher cap could result in a retirement fund facing a liquidity crisis.
“The knock-on effect is that if the withdrawals are higher, it will have a significant impact on our financial markets. If [those] assets flow out of the financial markets, it will also have an impact on our economy,” Messerschmidt said.
“Liquidity management is a big issue for a fund. They need to understand exactly how to change the investment of their assets to fund withdrawals, in addition to what they must fund when members resign or retire,” she said.
The potential back-flows through taxes will not make up for the potential liquidity shortfall and the “systemic risk” that higher withdrawals could cause to the financial system.
Full access on retrenchment or dismissal
Cosatu once again raised the issue of access to savings in the retirement pot when a member is dismissed or retrenched.
The draft legislation proposes that savings allocated to the retirement (or preservation) pot can be withdrawn only at retirement, to buy a pension.
Members’ savings accumulated before the implementation date will go into the vested pot. Savings in the vested pot will be subject to the existing (pre-two pot) legislation. Therefore, members of an occupational fund who are retrenched or dismissed can withdraw their savings from the vested pot, but they cannot make withdrawals from the retirement pot.
Cosatu said members who are retrenched or dismissed must be able to withdraw all their retirement savings, not only those in the vested pot.
Treasury has agreed in principle that members who are retrenched will be allowed to make limited income-based withdrawals from their retirement pot, and these withdrawals will have conditions attached. The latest draft legislation does not provide for retrenchment-triggered withdrawals from the retirement pot, and Treasury has indicated this will be addressed in later legislation.
Parks said the provision for full withdrawals should also apply to dismissals because employees are often dismissed for “spurious” reasons.
He said the provision should be dealt with via a supplementary amendment bill in February’s Budget, so it can be introduced in 2025.
The supplementary bill should also extend the type of loans that members take from their retirement funds – for example, for tertiary education, he said.
We really need this for the 01 march 2024 we were promised for long now the date cannot be changed.
What is the reason why workers should not access their retirement money until retirement age because the’re lot of employees who earns low salaries with lot of responsibilities that they cannot do other things which should be done because they don’t afford to,e.g building houses etc atleast expect to use provident fund/pension fund money when they retire but most of them because people are not leaving the same life some can but some cant