There are a number of thorny issues that need to be resolved before the two-pot retirement system’s proposed implementation date of March 1, 2024.  

By Laura du Preez

Justice minister Ronald Lamola had lawyers, trustees and representatives from retirement fund administrators at this year’s Pension Lawyers Association conference in Cape Town thinking the two-pot system of retirement savings was an April Fool’s joke. 

In his address to the conference, Lamola left everyone non-plussed when he spoke of the two-pot system being implemented on April 1, 2024. Thankfully, before long, National Treasury’s director of retirement savings, Alvinah Thela, stepped up to assure the audience that the implementation is, in fact, going ahead on March 1, 2024.

The proposed new system will require contributions made to all retirement funds from that date be split into two notional pots – two thirds will be in the retirement pot that must be preserved until retirement, while the other third will be kept in a savings pot and can be accessed before retirement. Withdrawals can only be made once a year, with a minimum amount of R2000.

Nonetheless, all jokes aside, a poll of attendees at the conference showed that an overwhelming majority believe that the implementation date isn’t feasible. 

Thela said the industry would have three opportunities to express its view on this, and other issues with the system, in the next few months. 

Treasury envisages that the second draft of the legislation will be released for public comment before the normal Taxation Laws Amendment Bill is released in July, she said. Then, amendments to the Pension Funds Act which are required to bring the two-pot system to life are expected to be released for public comment soon after the Revenue Laws Amendment Bill, Thela pointed out.

The industry will have its first opportunity to comment when the draft bills are released, then a second opportunity when workshops are held on the bills this year, and finally, there will be another opportunity during public hearings in parliament. 

As it is, there are a number of thorny unresolved issues. One of these problems which Treasury has been trying to solve is how the two-pot system will apply to legacy or old generation retirement annuities (RAs), which have members contracted to stay invested for a specific term. Altering those terms results in penalties for these policyholders.

Thela said three financial institutions still have legacy RAs and the policy proposal is to allow them to apply for an exemption from the two-pot laws.  

Another sticky issue is to what extent the two-pot system will apply to defined benefit funds. Thela said Treasury’s thinking is that these funds should reduce the period of service that is used in the benefit calculation, to take account of any withdrawals from the savings pot.

However, she said, Treasury understands that there are some closed defined benefit funds that may not be able to do this. In that case, Treasury will propose that these funds be allowed to choose a methodology that is acceptable to the Financial Sector Conduct Authority. 

Thela did surprise the conference delegates by announcing that on their resignation, members who have within the past 12 months withdrawn from a savings pot will not be able to withdraw again. 

Equally, retrenchment is another tricky subject. Thela said that Treasury is parking the policy on how members who are retrenched will access money in their retirement pot. It will come up with proposals to allow retrenched people to tap into the retirement pot in phase two, in the year following the implementation of the first phase of the two-pot system, she said.

In a separate presentation on the two-pot system, Leanne van Wyk, a director at ICTS Legal Services, and Nicolette van Vuuren, senior associate at Webber Wentzel, raised a number of issues that still need clarifying. These include: 

  • A proposal to give provident fund members who were over the age of 55 in 2021 (when provident funds were harmonised with pension funds) the choice to opt in to the two-pots system;
  • How much of the savings which members have already accumulated will be used to “seed” the savings pot when the system is implemented;
  • Whether transfers from the savings pot to the retirement pot would require a section 14 transfer;
  • What access members who emigrate will have to their savings pots;
  • The impact of possible changes to the Divorce Act to this system;
  • How benefits withheld in terms of section 37D – for repayment of housing loans, maintenance or amounts owed to employers —  will be dealt with when benefits are divided between the two pots.

Van Wyk pointed out that the new system involved a lot of changes to systems and processes for administrators, who need to consult, test, approve, and finally communicate to the industry. 

The training alone that will be needed for administrators, consultants, fund trustees, participating employers and members will be considerable. And that’s besides doing their day jobs of dealing with section 14 transfers, queries, complaints, exemptions, payments, tax processes, deductions and retirement benefits counselling. “It’s a lot,” she noted.