Treasury and pension funds are racing to meet the three-pot system deadline

The National Treasury has acknowledged that the upcoming changes to the retirement system, which will allow members to access one third of their pension funds before retirement, may encounter initial challenges that need to be addressed post the 1st of September implementation date.

During a comprehensive two-hour workshop focused on the introduction of the “two-pot system,” National Treasury officials fielded numerous inquiries from the media regarding the technical and administrative intricacies of the reforms.

A significant concern arises from the fact that retirement fund administrators are tasked with drafting rules for the new system despite the absence of finalized legislation.

With South Africa boasting just under 900 active pension funds, the Financial Sector Conduct Authority (FSCA) is tasked with evaluating and approving the rules for each fund prior to the implementation deadline.

The FSCA said pension funds will need to submit their draft rules between the beginning of May and mid-July so that it can give “in principle” approval of the rules, even though the legislation will not have been finalised.

It was previously mentioned on Moneyweb that funds may also need to adjust service level agreements with service providers, which could require negotiations and fee changes.

National Treasury acknowledged that some challenges and complexities will not have been completely addressed before the implementation date. “We are trying our level best to stick to the date and then make tweaks going forward,” one official said.

Legislation pending

Fiona Rollason, head of legal at Alexforbes, informed Moneyweb that the necessary legislation to enact the new system is in varying stages of development.

“The Revenue Laws Amendment Bill 2023, which serves as the foundation for the new system, awaits the president’s signature. While this lays the groundwork, not all the details are finalized,” she explained. “There will inevitably be oversights as we proceed without all the finer points clarified.”

The second piece of legislation, the Pension Funds Amendment Bill, underwent public hearings in parliament on Tuesday, April 16th.

Both bills await promulgation before the new system can be rolled out.

National Treasury reiterated that the initially proposed implementation date of March 1, 2025, would have been preferable. Despite industry members and Treasury advocating for this date, parliament, in late 2023, mandated March 1, 2024, as the implementation date. Finance Minister Enoch Godongwana later announced a compromise, pushing the implementation to September 1st.

Two pots are, in fact, three

Although the new regime is called a two-pot system, it will in reality consist of three components:

1. A vested pot containing all the retirement savings up until 31 August 2024;
2. A savings pot for one third of retirement contributions, to which members will have access once a year; and
3. A retirement component for two thirds of contributions that will remain untouched until retirement.

“The so-called ‘two pots’ are only relevant for people who get a job at the beginning of September 2024 and join a retirement fund for the first time,” said Rollason, adding that for those who are already in the system, there will be three pots.

Rollason emphasized the necessity for extensive consumer education, as some key messages are not being effectively communicated.

One crucial message is the costly nature of withdrawing retirement savings from the savings pot. Withdrawals incur taxation at a marginal rate, resulting in the forfeiture of numerous benefits, including the compounding interest value, tax advantages of contributing to a retirement fund, and investment returns.

Rollason highlighted that recovering from these losses and catching up will be a lengthy process for retirement fund members.