Two pots: MPs envisage staggered implementation

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Members of the National Assembly’s Standing Committee on Finance (Scof) expect the retirement industry and the South African Revenue Service (Sars) to be ready to implement the new two-pot retirement system in a matter of months.

The two-pot system, which has been in the works since 2020, will introduce the most significant change to South Africa’s retirement-funding system since the shift from defined-benefit to defined-contribution occupational funds in the 1990s.

In an unexpected turn of events on Tuesday morning, Scof rejected National Treasury’s proposal – announced when the committee met on 25 October – to move out the implementation date from 1 March 2024 to 1 March 2025.

Read: National Treasury proposes more changes to the two-pot retirement system

Treasury’s new implementation date was in response to submissions by the retirement industry – as represented by the Association for Savings and Investment South Africa (Asisa) and the Institute of Retirement Funds Africa (IRFA) – that administrators and funds need 12 to 18 months to effect (and test) the extensive changes to their IT systems and administrative procedures.

As of this week, the enabling legislation for the two-pot system has not been finalised. The industry says fund administrators cannot conclude developing new systems without the final specifications.

Furthermore, every retirement fund that participates in the two-pot system will have to amend its rules, and the FSCA must approve the rule amendments.

Staggered implementation

Scof met on Tuesday to deliberate clause-by-clause on the revised Revenue Laws Amendment Bill, which amends the Income Tax Act, and adopt its report on the legislation.

At the first mention of “1 March 2025” when the Bill was read, Scof’s chairperson, Joseph Maswanganyi (ANC), said MPs had not agreed to the new date.

Chris Axelson, National Treasury’s deputy director-general for tax and financial sector policy, briefly explained why Treasury had proposed moving the implementation date.

Axelson said the initial timeline was “very aggressive”. He said Treasury agreed with the industry’s concerns that a rushed implementation could result in “mistakes”.

But MPs from the ANC, the EFF, and – notably – the DA firmly opposed moving the implementation date to 1 March 2025.

They took the view that Treasury’s proposal was too accommodating of the industry, and the legislature must look after the interests of the people.

Based on MPs’ comments during the meeting, it appears they envisage providing funds that are not ready by 1 March next year with a grace period of up to 12 months to get on-board, although they will have to apply for an extension. The committee did not formulate the wording of an amendment that would provide for such phased implementation.

The legislation in its current form does not grant the Minister of Finance the discretion to exempt eligible funds from the system temporarily, nor does it provide for a phased-in implementation.

Treasury and the industry have previously rejected proposals for a staggered introduction of the two-pot system.

Axelson told Scof in October that a staggered implementation would be difficult to administer from a tax point of view, while Asisa and IRFA submitted it would be impractical to have funds inside and outside the system simultaneously.

For one, it would be impossible to effect transfers of a member’s retirement benefit from one fund to another if one of the funds did not have all the components (pots). In the event of a transfer, the legislation requires that all the pots are transferred from one fund to another.

A phased implementation would also be unfair because members whose funds are in the system will be able to withdraw money from the savings pot, whereas members whose funds are outside the system will not be able to do so.

Will Alexforbes and Old Mutual be ready?

Comments during Tuesday’s meeting indicate that some MPs are under the impression that Old Mutual and Alexforbes – both of which are members of Asisa – have declared they will be ready to implement the two-pot system on 1 March 2024.

Axelson told MPs that Old Mutual and Alexforbes have communicated to Treasury that they agree the implementation should be delayed by a year.

In a statement on Tuesday, Old Mutual said it was “disappointed” that Scof had not approved the proposed extension to 1 March 2025.

Michelle Acton, the retirement reform executive at Old Mutual, expressed concern about Old Mutual meeting the 1 March deadline, emphasising that readiness hinges on the government finalising and gazetting the Revenue Laws Amendment Bill and the amendments to the Pension Funds Act.

“In 2022, we confirmed that we would be ready for the two-pot retirement system on the condition that the relevant legislation was finalised expeditiously. As we approach the end of 2023, the legislation remains unfinalized, hindering our ability to fully prepare for the system’s implementation.”

Acton said: “The industry relies on Sars to guide us on their requirements for processing early withdrawal claims. Without this critical information, we cannot complete the system modifications to handle these transactions.”

Aside from system readiness, and the need for retirement funds to amend their rules, member education and awareness is critical to the success of the new system, “and with so many moving parts not finalised, this leaves us with a considerably shorter lead time, making it more challenging for us to be ready by 1 March 2024”, Old Mutual’s statement said.

Moonstone also asked Alexforbes whether it would be ready to implement the system on 1 March next year.

Alexforbes reiterated its support for the two-pot system but expressed its “concern” over Scof’s rejection of the new proposed effective date of 1 March 2025.

“Alexforbes has been diligently working on implementation plans based on draft legislation. However, our progress is contingent on the final legislation, which is still unavailable. This limitation hinders us from making final changes and updates to our communication efforts, systems, and processes,” said Vickie Lange, the head of best practice at Alexforbes.

“These reforms represent significant changes to the retirement system, with substantial implementation requirements. Therefore, it is crucial to allow a reasonable amount of time between the finalisation of the legislation and the effective date of these changes. This will enable all stakeholders in the industry to ensure a smooth transition that works well for retirement fund members.”

Will the Minister try to persuade Scof?

A procedural matter may yet result in MPs changing their mind – as unlikely as this seems. The Revenue Laws Amendment Bill is a Money Bill. Scof must therefore inform the Minister of Finance, Enoch Godongwana, of its intention to amend the legislation (that is, the implementation date) and provide him with 14 days to respond.

Assuming Treasury’s position on the implementation date echoes that of the Minister, Godongwana might attempt to persuade MPs to agree to 1 March 2025. But the Minister cannot override the committee’s decision.

Godongwana’s response will be included in Scof’s report on the Bill, which will be considered by the National Assembly.

The Bill, as approved by Scof, must still be adopted by the National Assembly. It must also be processed by the Select Committee on Finance of the National Council of Provinces (NCOP) and adopted by the NCOP. Thereafter, it must be sent to President Cyril Ramaphosa for assent and promulgation. Barring any further hiccups, this will be at the end of December or in January.

Higher seeding amount accepted

Scof accepted Treasury’s proposal to increase the cap on the seeding amount by R5 000 to R30 000. This means that each retirement fund (unless excluded from the system) must transfer 10%, but no more than R30 000, of the value of a member’s savings on 29 February 2014 from his or her vested component (or pot) to his or her savings component (pot).

The purpose of seeding is so that members will have money in their savings pot that can be withdrawn immediately when the system is implemented.

The Congress of South African Trade Unions lobbied for the seeding cap to be increased to R40 000 or R50 000, to take account of inflation since 2020, when, according to the labour federation, the then Minister of Finance agreed to R30 000 as the seeding cap.

Asisa’s concerns

Adri Messerschmidt, senior policy adviser at Asisa, reiterated the organisation’s support for the two-pot system, but said its implementation should be handled “with great care” to ensure that all retirement fund members are treated fairly and afforded the opportunity to consider the impact of the changed landscape on their financial affairs.

“Our members have worked relentlessly to prepare their processes and IT systems for implementation of the two-pot system, but they cannot finalise implementation without final legislation that clarifies uncertain elements. The Revenue Laws Amendment Bill is expected to be finalised by the end of December or early January. The final required amendments to the Pension Funds Act to implement the two-pot system have not been made known and must still be processed by Parliament.

“Asisa and its members believe that it is unreasonable to expect full implementation by 1 March 2024 with so much uncertainty regarding final enabling legislation. We have consistently pointed out that the required administration changes are complex. Furthermore, there will need to be significant communication with members of different retirement funds.

“We understand the urgency for retirement fund members who desperately need access to their retirement savings. However, a hasty implementation and inequitable treatment between members of different funds could introduce risks with unintended consequences,” Messerschmidt said.

Cosatu praises MPs

Cosatu praised Scof for “standing with workers” in defence of 1 March 2024 after “some” in the industry, “in pursuit of maximising profits”, sought to delay the reform until 2025 and possibly even further.

Matthew Parks, Cosatu’s acting national spokesperson and parliamentary co-ordinator, said the 1 March 2024 implementation date will provide welcome relief to millions of highly indebted workers, who will be able to access a portion of their retirement savings without having to resign from their jobs or cash out their entire funds.

“Workers are drowning due to a struggling economy, a 41% unemployment rate, rising costs of living, and repo rate hikes. The current pension laws only allow workers access to their pension funds when they retire or in the event of losing their job or resigning. As a consequence, many workers opt to resign and cash out their entire pension funds.

“The two-pot reforms offer a positive balance where workers will be able to access up to R30 000 when the law comes into effect and from then on to access one-third of their annual contributions. They will no longer need to resign to have some access to their pension funds.

“These reforms will have the added benefit of helping to boost savings in the longer term, as workers will no longer be cashing out their entire pension funds but rather accessing a limited portion,” Parks said.