Global Courant
The Ministry of Finance has published draft laws for the new two-pot pension system, which it plans to take effect from 1 March 2024.
The new pension system allows members to access a small portion of their pension fund in an emergency, while preserving the majority of the pension fund.
A piggy bank can pay one-third of all contributions, which a member can access before retirement. This is to help people in emergency situations, such as the Covid-19 pandemic.
A second pension pot is only accessible upon retirement and requires a minimum allocation of two-thirds.
There will also be a vested pot, in which the accrued pension savings from before the introduction of the two-pot system will be kept.
The new draft legislation contains the following key proposals:
Implementation date: It is proposed that the legislative amendments to the two-pot pension system take effect on 1 March 2024. Start-up capital proposal: This provides access for the participant of the pension fund to part of the available balance in the pension fund on the effective date of the “two-pot” pension system , i.e. March 1, 2024. To limit the adverse effect on liquidity, it is proposed to calculate the initial capital as ten percent of the accrued benefit in the “vested component” as of February 29, 2024, capped at R25,000 subject to which of the two is the lower. It is important to note that when the pension fund participant withdraws the initial capital, it will be subject to the normal tax rates in the hands of the participant. Legislative changes to include defined benefit funds in an equitable manner: Defined benefit funds do not refer to contributions made by a participant to the defined benefit fund to determine benefits, but rather use a defined formula to calculate benefits due to a participant upon retirement. In order to treat benefit funds fairly, it is proposed that amendments be made to the revised bill so that benefit funds can calculate the premium for one third of the “savings component” based on one third of the participant’s pensionable service increase, and contribute two thirds to the “pension part” based on two-thirds of the participant’s pensionable service increase as of March 1, 2024. Treatment of old retirement annuity funds: It is proposed that amendments be made to the revised draft bill to provide for the exemption of old pension policies for annuity funds from the provisions of the “two pot” pension system, as the inclusion of old pension annuity fund policies in the “two pot” pension system would require a redesign of these historically inherited old pension fund policies.
National Treasury said changes to the law to deal with withdrawals from a member’s pension pool that has been cut and has no alternative source of income will be considered in the second phase of implementation.
It added that further additional measures will also be considered in the second phase to ensure that retirement savings are not compromised and to protect the liquidity of funds at all stages.
“Mutual funds should be encouraged to exercise the withdrawal option only as a last resort and to try to save their retirement savings for when they retire,” Treasury added.
Opinions of experts and fund members
Although Robert Driman and Armand Swart from Workman’s Lawyers said the new system should have a positive effect on fund members by giving them the best of both worlds, they stressed that the new legislation will hurt funds.
Driman and Swart said the new legislation will require funds to change their rules, train their staff, educate fund members about the changes and introduce complicated systems.
While industry associations have expressed concerns that there will not be enough time for the changes to be implemented, Sanlam said the legislation is likely to be passed in 2024 as it is an election year.
Moreover, South Africans are divided about the new pension system.
According to Sanlam’s 42nd Benchmark Report, 57% of respondents said they were skeptical of the new two-pot system, with many concerned that the new system will have a long-term effect on their retirement savings.
21% of respondents said they would consider drawing emergency funds in case of an emergency, while 13% said they would be willing to use some of their benefit outside of that.
Only 8% of respondents said they would use the new two-pot system.
Interestingly, only 23% of respondents said they would not withdraw their savings.
Below you will find the bill for the new “two-pot system”. Public comments must be submitted by July 15, 2023:
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