Time running out for retirement funds

South Africa’s new two-pot retirement system has crossed its last hurdle to implementation, and now the pressure’s on for asset managers to submit their rule amendments before 1 September.

On 21 July 2024, President Cyril Ramaphosa signed the Pension Funds Amendment Bill into law, following his signing of the Revenue Laws Amendment Bill on 1 June 2024. 

This means that all prerequisites for South Africa’s new Two-Pot retirement system, which will take effect on 1 September 2024, have been successfully concluded.

According to the SA Government News Agency, the law provides for the introduction of the savings withdrawal benefit, the appropriate account of a member’s interest in the savings, retirement and vested components, and the deductions that may be made.

“In just over six weeks, members of South African retirement funds will be able to access a portion of their retirement savings before they retire,” said Chief Commercial Officer of Discovery Corporate and Employee Benefits Guy Chennells.

The new two-pot system divides past and future retirement contributions into three components. 

One-third will be allocated to the savings component, which members can withdraw from at any point before retirement. Two-thirds will go to the retirement component, which cannot be touched until retirement. 

Chennells said many South Africans under financial pressure will be relieved to be able to dip into a portion of their retirement savings in times of crisis.

However, he warned that retirement funds that have not submitted their rules amendments by 31 July cannot be certain that their withdrawal rules will be registered and approved by the Financial Sector Conduct Authority (FSCA) before 1 September.

According to recent communication from the FSCA, only 30% of anticipated submissions for rule amendments have been received before the initial deadline, which was 15 July. 

The authority is still waiting for more than 350 retirement funds to submit their respective rule amendments and has, therefore, extended the deadline to 31 July. 

Chennells said rules submitted after the 31 July extension date will not be prioritised and will be subject to normal FSCA service level agreements, and so may well not be registered by September.

The communication further confirmed that rule amendments remain invalid unless they are registered and approved by the FSCA, and funds or administrators may not act on unapproved rules. 

In addition, funds and administrators will take responsibility for any consequences resulting from changes that are not in compliance with these legislative changes.

He said Discovery submitted its rules amendments for its pension and provident umbrella funds and retail funds in April and May 2024, and queries were quickly resolved. 

With no outstanding issues on any Discovery fund rules amendments, “we are confident that members of all our funds will be able to access their retirement savings under the new two-pot system from September 2024”, he said.

However, he warned that some retirement funds may face delays and run the risk of not being ready by the 1 September deadline.

The 350 retirement funds that have not registered their rule amendments yet have until 31 July. 

“Funds that miss that deadline may not be able to pay over withdrawals to members until their rules are finally registered,” he warned. 

“This means that some South Africans may experience a delay in accessing their retirement savings under the new two-pot system.”

He further warned that delays resulting from funds failing to submit their new rules to the FSCA by 31 July could also impact the tax approval status of retirement funds during South African Revenue Services (SARS) assessments. 

“Any contributions to retirement funds that are not tax approved will not be tax deductible. This will present a significant challenge for the members of unregistered funds,” he said.

Another important consideration is whether your employee benefits provider can process claims on what is termed a ‘straight-through process’. Straight-through is an automated electronic payment process which does not need manual intervention.

Chennells said the Minister of Finance is on record anticipating a R5 billion revenue windfall from taxing two-pot withdrawals in the next financial year. 

“Government clearly expects many hundreds of thousands of South Africans to access the savings component of their retirement funds as soon as two-pot goes live,” he said.

“One could easily see claims volumes in September 50 to 80 times higher than a normal month of exit claims. It would not be possible to increase staffing adequately for this.” 

“Without a straight-through payments process, some providers could have very long payment turnaround times before savings withdrawal claims can be paid.”

Discovery Employee Benefits anticipates that about half of their fund members will make withdrawals from September. 

“With our straight-through automated process in place, even if 100% of our fund members make withdrawals, we will be ready”, he said.