LEGAL NOTE: Update on the Two Pot system

The so-called two pot system, which was included in the 2022 Draft Revenue Laws Amendment Bill (“the Bill”), was published for public comment on 29 July 2022. The period for comment has expired, and National Treasury has submitted their draft responses to comments received as follows:

• The implementation date of the two-pot system will be postponed from 1 March 2023 to 1 March 2024, as a result of submissions made by the retirement fund industry regarding the feasibility of the proposed implementation date of 1 March 2023, given, amongst others, the system changes required to administer the two-pot system as well as rule amendments to Funds rules etc.

• The lack of immediate access to their retirement savings will result in members resigning to get such access. In response to this comment, National Treasury has said that Government is open to allowing once-off seeding capital from the vested pot into the savings pot to provide members with immediate access to a portion of their retirement savings; providing that immediate access should not adversely affect liquidity, and that the costs of such immediate withdrawals is not imposed on members choosing not to withdraw. More consultation is required on the mechanism to enable this process.

• Defined benefit funds poses a challenge in that a member’s benefit in such a fund is determined based on a defined formula, without reference to contributions and investment performance. Consultation is required with the defined benefit funds and stakeholders to consider how the two-pot system should apply to defined benefit funds.

• The Bill will be amended to make it clear that members will be required to contribute a third of their contributions into the savings pot, and will therefore not be able to contribute less than a third into the savings pot.

• Stipulated in the Bill, is that a member may not make more than one withdrawal from the savings pot in any 12-month period. However, it is not clear how the 12-month period is to be calculated. National Treasury has confirmed that the 12-month period is intended to be a rolling 12-month period, and that the Bill will be amended to make this clear.

• The Bill stipulates that the minimum withdrawal amount from the savings pot is R2 000. A member must therefore have an amount of at least R2 000 in the savings pot before being allowed to make a withdrawal. It is not clear whether the R2 000 is a gross or net amount. The Bill will be amended to clarify the policy intent that the R2 000 is to be a gross amount.

• The Bill will also be amended to allow a member to withdraw the balance in the savings pot if such balance is less than R2 000 when the member exits the fund.

• The Bill will be amended to reflect the policy intent that the commutation threshold of R165 000 is to apply on a cumulative basis to amounts subject to annuitization. This includes the retirement pot and two thirds of the vested pot.

• The Bill will be amended to reflect the policy intent that the two pots system will be mandatory for all funds.

• National Treasury clarifies the policy intent for provident fund members who were 55 years or older as at 1 March 2021 to be given a choice between one of the following:

1. to continue contributing to their vested pot i.e. 100% of the contributions will be allocated to the vested pot, provided that the member remains in the same fund that he/she was a member of pre-1 March 2021.

2. to participate in the two-pot system, with one third of contributions allocated to the savings pot and two thirds to the retirement pot.

• All vested rights asper the T- day annuitization rules, will remain as is. The vested pot under the two-pot system will accordingly consist of the T-day vested and non-vested pots as at the implementation date of the two-pot system.

• It is acknowledged that Section 37D of the Pension Funds Act will have to be amended to cater for the two-pot retirement system, and to ensure that section 37D deductions are catered for from the vested and retirement pots when membership of the fund is terminated, or when divorce order settlements become due and payable. The Financial Sector Conduct Authority (FSCA) will consult with stakeholders to assess the merits of this.

• In the case of retrenchment which is not within the member’s control, Government proposes that limited income-based withdrawals be permitted from the retirement pot in the case of retrenchment. These withdrawals will be subject to the following conditions:

• the vested and savings pots must have been fully utilised, and access to UIF benefits have been exhausted. The member will therefore be required to prove that he/she has no other alternative income source; and

• access to the retirement pot will be provided for a limited period and as a form of annuity, with a maximum per year.

• Arrear contributions that relate to a post-implementation period will be allocated to the respective savings and retirement pots. If the arrear contribution relates to a pre-implementation period, the current pre-implementation dispensation will apply.

• The provision that all contributions above the tax-deductible limit, being 27,5% of remuneration up to a maximum of R350 000 per annum, will fall into the retirement pot, as stipulated in the Bill, will be withdrawn as the administrative constraints in this regard are too onerous. Fund administrators do not have sufficient information to monitor the member’s position relative to the limit, especially with regard to members who contribute to more than one fund.

• Changes will, be made in the Bill, with regard to tax withholding by fund administrators in respect of withdrawals from the savings pot, to allow for a similar administrative process to the effective tax rates that are communicated by the South African Revenue Service (SARS) to administrators in the case of taxpayers who receive more than one pension income.

• National Treasury confirms that term “pots” in the Bill are for all intents and purposes components within the respective funds, and will consider a change to the names of the different pots to reflect their component nature.

• The definitions of “savings pot”, “savings withdrawal benefit” and “retirement pot” will be clarified so as to ensure that the policy intent is correctly reflected in the legislation.

The next step is that Parliament’s Standing Committee on Finance will consider National Treasury’s responses, as highlighted above. Thereafter, the amended Bill will be tabled in Parliament by the Minister of Finance. National Treasury has further indicated that they are unable to confirm when the amendments to the Bill will be finalised as this is dependent on further consultation with the retirement fund industry and the required amendments to the Pension Funds Act.