The ‘two-pot’ system

In our August 2022 issue, entitled The proposed ‘two-pot’ system’, we discussed the National Treasury’s proposal to allow members of retirement funds access to a portion of their retirement savings. The proposal essentially comprised ‘two pots’, a ‘savings pot’, to which members could have access with qualifying criteria, and a ‘retirement pot’, which could only be accessed at retirement. Note, there is a third pot, the vested amount (comprising the member’s accumulated amount as at 1 March 2023 plus investment returns) at implementation date. The intended implementation date was to be 1 March 2023; however, as expected, the date had to be moved, with the new date for implementation being 1 March 2024. Following comments from industry and the public, Joon Chong, partner and legal specialist, Webber Wentzel, lists the following amendments/clarifications to the initial proposal:

• The implementation date will be postponed from 1 March 2023 to 1 March 2024, (industry is of the opinion that this date, too, may still be optimistic).
• Members must contribute one-third to the savings pot and do not have the ability to contribute less.
• The 12-month period in which one withdrawal will be allowed will be a rolling 12 months.
• The minimum withdrawal amount of R2 000 per rolling 12-month period is gross, not net.
• Members exiting a fund with less than R2 000 in the savings pot will be allowed to withdraw that sum or ask for it to be transferred into their retirement pot.
• The R165 000 de minimis will apply on a cumulative basis to amounts that are subject to annuitisation, i.e., full withdrawal is possible if the total of (i) two-thirds of the vested pot value; and (ii) value in the retirement pot, is less than R165 000.
• Seed funding from the implementation date into the savings pot is possible, with further consultation required on the risks and benefits of this approach, methods to minimise the adverse impact on liquidity, and possible trade-offs on vested rights.
• There will be more consultation with the public sector defined benefit funds stakeholders to explore how the new regime will affect these funds and their members, given that members’ benefits are based on a defined formula without reference to contributions and investment performance.
• Section 37D of the Pension Funds Act (relating to deductions for pension-backed housing loans, divorce settlements, etc.) will have to be amended to cater for the two-pot system and to provide that such deductions must be made from the vested and retirement pots.
• The two-pot system will be mandatory for all retirement funds, although Treasury is still considering a request to exempt certain legacy retirement annuity fund products.
• The scope and nature of charges levied on transfers from another fund and fund values will be clarified, as the draft bill provided for costs to be deducted from contributions, and fund values arising from transfers from another fund have no contributions by members.
• In the event of a member’s retrenchment, the government will allow limited income-based withdrawals, subject to conditions, from the retirement pot.

Keystone Actuarial Solutions (Pty) Ltd made the following observation: The proposed changes have many hurdles to overcome, and it may be some time before retirement funds can make cash payments as:

• The implementation date of the Bill may be delayed.
• There are likely to be changes required to the Pension Funds Act, and these have not yet been drafted and circulated for comment.
• Retirement Funds will need to amend their rules appropriately.
• Members will need to accumulate sufficient assets in their savings pot after the implementation date before they can request a cash withdrawal.

Conduct Standard on “Requirements related to the payment of pension fund contributions”.

Previously section 13A and Regulation 33 of the PFA set out the requirements relating to the payment of contributions by employers to funds. Regulation 33 has now been repealed with effect from 27 January 2023 and replaced by the Conduct Standard (Alexander Forbes). The Financial Sector Conduct Authority (FSCA) identified several challenges with the current legislation, which resulted in the issuing of the Conduct Standard.

The Conduct Standard, which will become mandatory for all retirement funds from 20 February 2023, specifies the following:

• The minimum fund and member information that must be provided by the employer to the fund each month. The required information includes each member’s contact details and must highlight any changes in the member’s salary, contributions, and personal information from the previous month.
• Onerous reporting requirements to the Board, affected members and the FSCA if the contributions are not paid timeously or if the contributions do not reconcile to the contribution schedule.
• Material contraventions that persist for more than 90 days must be reported to the South African Police Service.
• Late payment interest must be charged on late contributions at a prescribed rate of the prime rate plus 2%.
• Various requirements where the trustee board outsources the recovery of arrear contributions to an attorney, for example, conflicts of interest.

Laws are important. But they can only be effective if the people know about the particular laws (Waris Dirie)